by Jeffrey W. Cavignac, CPCU, RPLU
Most contractors who are not directly involved with environmental remediation work feel that they have very little, if any, pollution liability exposure. Certainly those contractors realize that they might have potential liability for damages caused by sub- stances that they bring onto a site, but few realize that the hidden contaminants already on the site, such as contaminated fill dirt, underground storage tanks, utility lines, buried wastes, asbestos and lead paint, present just as much, if not more, potential liability for an unwary contractor.
Because a contractor’s work might entail the use and disposal of certain types of solvents, fuels, and other chemicals of wastes, general and trade contractors can easily find themselves liable for damages that fall within the pollution exclusions of their commercial general liability and commercial automobile policies.
Commercial General Liability (CGL) Pollution Exclusion
The current version of the standard commercial general liability (CGL) policy drafted by the Insurance Services Office (ISO) contains what is commonly referred to as an “absolute pollution exclusion.” Despite the title of the exclusion, however, the policy does provide some limited pollution coverage. Specifically, under certain circumstances, it extends to third party bodily injury and property damage caused by pollutants and arising out of the contractor’s operations. It also extends to completed operations and smoke or fumes from a hostile fire. It specifically excludes coverage for clean up costs if the contractor is found liable under CERCLA.
Unfortunately, CGL policies written for contractors more and more frequently include a “total pollution exclusion” endorsement that effectively re- moves any coverage for damages and expenses that would otherwise be covered under the CGL policy. Because of this, many contractors have a signifi- cant environmental liability coverage gap in their general and umbrella liability insurance policies.
Fortunately, several insurance companies have made available contractors pollution liability (CPL) policies, which are designed to cover the gap cre- ated by the “total pollution exclusion.” Because these are non-standard policies, each form is different.
Occasionally, these policies are written in con- junction with a contractors professional liability policy (another issue entirely).
Contractors pollution liability insurance can be purchased on an occurrence or a claims-made basis. With an occurrence-based form, the policy in force at the time an accident occurs is the policy that will respond. With a claims-made policy, the policy in force at the time the claim is actually made is the policy that will respond, regardless of the date of occurrence.
Contractors are most familiar with occurrence- based policies, since their commercial general li- ability policies are typically written on this basis. Generally, occurrence coverage is preferred to claims-made, since the protection it affords never expires. As long as the applicable policy limits have not been exhausted by other claims, the policy will respond to covered occurrences, regardless of when the claim is made.
Claims-made coverage, on the other hand, will not respond unless the claim is made within the policy period. If there is an accident within the pol- icy period, but the claim is made after policy expiration, the claims-made policy would not cover the claim, but an occurrence-based policy would.
Covered Pollution Incidents
Pollution liability forms differ in regard to the types of pollution incidents that are covered. Al- though a few CPL policies attempt to dovetail coverage with that provided in the CGL, most do not.
Two key elements of pollution liability cover- age are whether or not the policy will respond to gradual releases of pollutants (as opposed to sudden and accidental releases), and what types of substances are considered to be pollutants. Obviously, a policy that covers gradual releases of pollutants in addition to sudden releases provides a contractor with broader coverage. In addition, a policy form that provides a broad definition of pollutants is con- sidered superior to one that contains a nar- row definition.
The majority of CPL forms available provide coverage for bodily injury and property damage, whether by settlement or by verdict, and for claims expenses incurred in investigating, defending, or settling the claim. In addition, most also include clean up costs as covered damages. “Clean up costs” are generally defined as “amount spent to remove or neutralize pollutants and restore the damaged property to an uncontaminated condition.”
It should be noted that most claim expenses are generally payable within the policy limit. In other words, the payment of any claim expenses will reduce the limit available to pay judgments or settlements.
Some policies provide true worldwide cover- age. In other words, these policies cover work done anywhere in the world, as well as litigation brought anywhere in the world. Some companies, however, provide modified worldwide coverage, which re- quires that the suit be brought in the United States of America. Finally, some companies provide domestic coverage only, which generally extends only to work done and suits brought within the United States of America, its territories, possessions, and Canada.
The definition of “covered operations” is critical. The broader the definition, the broader the coverage. While some companies provide blanket coverage for all of the contractor’s operations, others specifically outline specific operations they will cover. Needless to say, the former approach is preferred over the latter.
Covered Persons or Entities
Generally speaking, the named insured is covered as well as any individuals (corporate officers, partners, or employees) working by or on behalf of the named insured. It is critical that you specifically schedule any entities for which coverage is desired.
Additional Insureds – If you are commonly asked to provide additional insured status to your owners, you should make certain that your CPL carrier will agree to this. Not all of them will.
Consent to Settle – Most CPL policies contain what is known in the insurance industry as a “hammer clause.” What this means is, in order for the insurance company to settle a claim, it must get the insured’s consent. If, however, the contractor elects to fight rather than settle a claim, the insur- ance company’s liability for damages and claims expenses is limited to no more than it would have paid had the proposed settlement been approved by the contractor. As you can imagine, most insureds elect to settle when the insurance company recom- mends this approach.
Deductibles – Deductibles are usually written on a “per claim” or “per pollution incident” (i.e., per occurrence) basis. Since conceivably there could be several claims arising out of one pollution incident, and hence the requirement to pay several deductibles, a “per pollution incident” basis is preferred. It is also possible to obtain aggregate deductibles.
Notice of Claim – Most CPL policies require the contractor to notify the insurer of a claim as soon as possible. You should avoid provisions that require “immediate” notice. If a contractor’s delay in noti- fying the insurance company prejudices the in- surer’s ability to properly defend or settle a claim, most jurisdictions will support an insurer’s denial of coverage for delayed notice.
Waivers of Subrogation – Many CPL policies preclude the insured from waiving rights of subrogation. Ideally, the contractor should be able to waive subrogation rights in writing before a claim occurs.
Exclusions – As is typical with most liability insurance policies, everything is covered except that which is excluded, and there can be numerous exclusions. Although this article does not lend itself to a discussion of all the exclusions, following is a summary of the most common:
- Expected or Intended Injury or Damage – Con- tractors should make sure that this exclusion applies only to damages or pollution conditions that are expected or intended from the stand- point of “the insured.” Assuming the policy contains a separation of insureds (severability of interests) provision, this will preserve cover- age for claims against “other insureds” that did not intend or expect the damages.
- Innocent Insureds Provision – Contactors should ensure that the policy does not exclude coverage for all insureds based on the dishonest or illegal acts of other insureds.
- Known Conditions – Most CPL policies exclude coverage with respect to claims or conditions that the insured was aware of at the time cover- age was put in force. As with the “notice” provision discussed earlier, contractors should have their policies modified to clarify what constitutes “knowledge of a condition that is likely to produce a claim.”
- Transportation Exposures – Most CPL policies exclude liability arising out of the ownership, maintenance or use of autos, watercraft or air- craft. The primary purpose of this exclusion is to remove coverage with respect to spills, wastes, and other materials during transporta- tion. This coverage can often be added by endorsement.
- Contractual Liability – Many CPL policies pro- vide limited contractual liability coverage. In other words, you can agree to hold harmless and indemnify a third party for the conse- quences of your negligent acts. However, if you are asked to further indemnify the third party (typically the concurrent negligence of the third party), any indemnification that goes beyond your own negligence would not be covered. Ideally, the policy would provide broad form contractual liability similar to that in the contractors commercial general liability policy. Under broad form contractual liability, it is ac- ceptable to agree to hold harmless and indem- nify a third party from the consequences of that third party’s concurrent negligence.
- Employers Liability – The standard CGL policy form has an exception to the employers liability exclusion in the contractual liability portion of the policy. This is done intentionally in order to provide coverage for “third party over” actions. Under a typical third party over action, the insured worker files a claim against the project owner alleging failure to warn of hazardous conditions, failure to adequately supervise the contractor’s operations, or some other form of negligence. However, because the contractor has agreed to indemnify the project owner for such liabilities, the owner normally tenders the claim to the contractor’s CGL insurer for de- fense and coverage. Because of the previously mentioned em- ployers liability exception to the contractual li- ability coverage, the contractor has protection for these types of situations. Unfortunately, not all CPL policies provide this exception. It is recommended that this be included in any CPL policy that you consider.
Most contractors have a pollution liability exposure of some type. Whether it’s direct or vicarious, the exposure exists. We recommend that all contractors consider carrying pollution liability insurance, and go through the application process. Even if the coverage is not purchased, you will have evaluated the exposure, and made the conscious decision to retain the risk.
Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.
Contractors Pollution Liability Case Studies
All of the following examples may be excluded under a Contractors General Liability (CGL) policy
Case histories provided by ECS, Inc.
Fungus Infects Patients
A general contractor was responsible for overseeing the renovation of a hospital wing. When two patients died in the intensive care unit adjacent to the construction zone, the contractor was sued for inadequate monitoring and containment of the construction zone.
The patients’ cause of death was determined to be an organic fungus found in the ventilation system and traced back to dusts generated during demolition activities in the construction zone. The contractor apparently misinterpreted construction drawings with regard to the connection of the duct system for the renovation zone and the intensive care unit. The general contractor was responsible for $10 million in damages.
A residential contractor disposed of sealants and solvents containing toluene in a covered, enclosed dumpster after performing routine finish work. Acting as a confined space, the dumpster trapped the toluene fumes. These fumes depleted the oxygen levels in the dumpster.
After climbing into the dumpster for unknown reasons, two 10-year-old children were overcome by fumes and died. The contractor faced a claim in excess of $2 million for inadequate disposal of the waste toluene.
Raw Sewage Contaminates Wells
A residential contractor was subject to defense costs exceeding $25,000, in addition to property dam- age and bodily injury claims exceeding $400,000 from a residential community. During sewage pipe installation, a subcontractor improperly tied in piping. This caused raw sewage to migrate into the underlying groundwater and contaminate residential wells.
Roofing Material Causes Chemical Reaction
At a 250,000 s/f office building and shopping center, a general contractor was overseeing the installation of a new roof. The roofing material decomposed and caused a chemical reaction, emitting fumes into an office building. The contractor faced a $400,000 property damage and loss of use claim.
A subcontractor working for a street/road contractor performed abrasive sandblasting on a bridge. The bridge was located near a residential area. Lead paint chips and dust from the sandblasting became airborne and migrated onto residential properties, requiring clean up.
The residents filed property damage claims against the street/road contractor for the dust generated by the subcontractor. The claims totaled $400,000.
Mold Growth in HVAC System
A mechanical contractor installed a heating, ventilation, and air conditioning (HVAC) system in a new commercial office building. After three years, mold and mildew growth caused the release of air- borne bacteria throughout the entire building resulting in poor air quality.
Claims against the contractor for bodily injury and loss of property use exceeded $500,000. In addition, the contractor was responsible for decontaminating the HVAC system.
A street/road contractor was subcontracted to pave a parking lot for a new commercial structure. At the end of the day, the tack coat was sprayed onto the sub-base prior to paving. During the evening, a major thunderstorm caused the tack coat to wash off and flow into a nearby stream.
The general contractor was responsible for cleanup costs, which exceeded $200,000. To recoup these costs, the general contractor withheld the sub- contractor’s payment. In turn, the subcontractor filed a claim with its insurance company to recover lost revenue. The insurance company denied reimburse- ment based on the absolute pollution exclusion under the general liability policy.
Common Environmental Exposures for General Business Contractors Provided by ECS, Inc.
This list is intended only to outline some typical en- vironmental exposures common to the construction in- dustry and is not all-encompassing.
- Completed operations exposures from incomplete HVAC system hook-up, including incomplete line hook-up, improper system construction, improper balancing, etc.
- Fumes, emissions and spills from chemicals (volatile organic compounds) applied during con- struction (finishers, sealants, curing compounds, floor coatings, adhesives, etc.) which could lead to release of airborne bacteria and fungus
- Disturbance of asbestos-containing materials
- Disturbance of naturally-occurring asbestos
- Disturbance of lead paint
- Lubricant oils and other fluids from equipment
- Release of oils/fuels as a result of vandalism
- Site preparation/excavation work through pre- existing contaminated soil (e.g., unknown residual contamination such as petroleum contamination from leaking underground tanks)
- Spills from application of asphalt from
- site operations
- Impacting underground utility lines and other un- derground structures
Owned Premises Exposures (batch plants, maintenance garages, fabrication shops, etc.)
- Leaking underground/aboveground storage tanks
- Residual contamination from minor spills of oils, fuel, lubricants, etc., and poor housekeeping
- Surface contamination from fuels and lubricants stored improperly (without secondary containment)
- Improper disposal of waste materials
- Unidentified, pre-existing contamination from past owners of the premises
- Inadvertent transport and subsequent disposal of un- known contaminated soil
- Spills of contents (e.g., fuel, asphaltic cement, etc.) during transport
- Resulting pollution from collisions with various structures (e.g., pole mounted transformers, above- ground tanks, etc.)
- Fuel/oil spills/leaks from vandalism!
P ublished b y
Cavignac & Associates
I N S U R A N C E B R O K E R S
License No. OA99520
1230 Co lu mb ia Street, Su i te 850 San Die go, CA 92101-3547
Web Site www.cavignac.com