Plugging the Holes: A look at traps in your company’s insurance policy
In the September 2015 issue of Cleanfax, we discussed some of the different major lines of insurance coverage available to the cleaning and restoration industry — property insurance, liability insurance and workers’ compensation.Let’s now dive into the pollution coverage traps insurance companies set when insuring cleaning and restoration contractors.
Unlike property insurance and workers’ compensation, liability insurance varies a great deal. It is not only possible to buy liability insurance that does not fit the needs of your company; it is very likely. How is this possible? You can blame this on the common misunderstanding of pollution exclusions and how they apply to the cleaning and restoration industry.
The most common trap I see comes in the form of the Commercial General Liability (CGL) policy. CGL policies are intended to cover your general liability as a business owner for general incidents while operating your company. Those general incidents could be burning down a house or a customer tripping over your cleaning wand and breaking an ankle.
Furthermore, the CGL policy includes exclusionary wording for pollution-related losses. This exclusionary wording greatly affects insurance coverage of what you do for a living, especially if you are a restoration contractor or perform any water extraction operations. These exclusions are standard in CGL polices and have been for many years. I guarantee, if you were to pick up your CGL policy right now, you would find a pollution exclusion.
The big, bad exclusion
The infamous pollution exclusion is the most misunderstood and misinterpreted exclusion within the CGL policy. It is also the longest standard exclusion in a General Liability policy, totaling over a page in length. The biggest misconception by people is this exclusion only applies to hazardous waste. Never does the exclusion mention that it only applies to hazardous waste. This assumption is something that has been made up and passed along for years. If you were to read the pollution exclusion in your current CGL policy, you would not find the words “hazardous waste,” or even “hazardous” for that matter.
The reality is the pollution exclusion applies to any loss resulting from an irritant or contaminant which results in bodily injury or property damage.
What I learned fairly quickly when I started as an insurance broker is virtually anything could be an irritant or contaminant in the right setting and the right quantity. It is up to the insurance company or the judicial court system to determine what is and isn’t excluded by the pollution exclusion.
Here is a great example of this. There was a recent incident where the cheese powder from boxed macaroni and cheese was released from the intended containment. The costs to clean up the multiple tons of cheese powder fell under the environmental liability policy and was excluded on the CGL policy. It could be up for debate, but I would not think a food item such as cheese powder would be categorized as “hazardous waste.”
Now let us apply an example to restoration professionals: If you were to accidentally blow asbestos fibers throughout the jobsite, the pollution exclusion on your General Liability policy would trigger automatically, and you would be left with no insurance. Virtually every CGL policy and judicial court system in the United States applies the pollution exclusion on asbestos and lead cases.
For carpet cleaners, imagine you have to file a claim because a customer is upset over the smell of the cleaning solution you used to clean the carpet, and you find your claim is denied. Unfortunately, I have seen this scenario firsthand with one of my insureds. The occupants of the office building claimed the smell of the organic cleaning solution made them ill. Luckily, the cleaning company was properly insured, so their claim was covered; however, it was paid out of a coverage line you would least expect.
The CGL policy denied the claim due to the pollution exclusion. At that time, we filed a claim on the Contractors Environmental Liability policy the insured had in place. Because the released vapor affected the indoor air quality and caused bodily injury to the customer, we were able to get the claim paid for, minus the cost to the replace the carpet.
The bigger, badder exclusion
The second trap to touch on is the separate fungi and bacteria exclusion also found on the CGL policy. This exclusion is much more of an issue than the pollution exclusion. Insurers refer to this as the “you can’t be in the business” exclusion when applied to cleaning and restoration contractors. Carriers will add this fungi and bacteria exclusion in addition to the pollution exclusion in order to ensure the CGL policy will not respond to bacteria claims that cause bodily injury and property damage — and to eliminate any possibility for debate.
One of the many takeaways from the IICRC S500 Standard and Reference Guide for Professional Water Damage Restoration is Category 3 water is grossly contaminated with bacteria and other pollutants. Some state court systems have been successful in deeming bacteria a pollutant; however, it is not the same in every state. If your state court systems haven’t deemed bacteria a pollutant yet, it doesn’t mean you have security on Category 3 water jobs.
In operation, fungi and bacteria exclusions are a variation of the pollution exclusion and apply specifically to losses that are associated with mold, fungi and bacteria. The exclusions for fungus and bacteria are by far the most onerous pollution exclusions ever conceived in the insurance industry.
If a loss involves a bit of Category 3 water, the entire loss is likely excluded through the effects of universal fungi and bacteria exclusions in liability policies. The term “loss” in the CGL policy includes defense costs. By default, “mold exclusions” apply to Category 3 water as well, and there is more Category 3 water in the built environment than there is mold.
The actual exclusions for fungi and bacteria in CGL insurance policies do vary, but the exclusions for these contaminants usually have common elements. Those elements include application to fungi, mold and bacteria, as they are often found living together. The exclusion will have an anti-concurrent causation section that eliminates coverage for some other covered causes of loss, like Category 1 water if it was the proximate cause of the loss — that is, the fungi/ bacteria was in fact ensuing damage arising from an otherwise covered loss. The “covered, proximate cause of loss and ensuing damages” argument is totally neutralized by the anti-concurrent causation language that is common in fungi and bacteria exclusions.
There usually will be two parts of the exclusion endorsement. Part A of the exclusion addresses damages associated with actual or perceived exposure to fungi, mold and bacteria. Part B of the exclusion eliminates all insurance coverage in the policy, including the duty to defend any loss arising from an operation that has any involvement whatsoever in remediating or accessing fungi, mold or bacteria.
By definition, this would include Category 3 water. The exclusions never limit their scope to any particular species or measurable amount of fungi, mold or bacteria; therefore, a microscopic speck of any species of these materials technically triggers the full effect of the exclusion on the entire claim.
So what does a “you can’t be in the business” exclusion look like? A common exclusion for use in CGL insurance policies will read:
This insurance does not apply to:
a. “Bodily injury” or “property damage” which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any “fungi” or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.
b. Any loss, cost or expenses arising out of the testing for, abating, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to or assessing the effects of, “fungi” or bacteria by any insured or by any other person or entity.
Right about now you are probably thinking your insurance carrier is lying, cheating and deceiving you. Chances are your insurance carrier’s underwriter and your insurance agent have never been trained on the extent of the various pollution and fungi exclusions.
The degree of the pollution exclusions should not be taken lightly. They are traps set to kill your business if you aren’t ready for them. The insurance coverage gaps for losses associated with Category 3 water must be filled using the same risk management tools and environmental insurance products created for fungi/mold risks in 2003.
Utilizing insurance agents who have experience assisting various contractors with insurance solutions will help. Most importantly utilizing a wholesale insurance broker who specializes in your industry could be the determining factor for keeping your company doors open when you have a loss on your hands. My suggestion would be to pick your wholesale insurance broker first and then the insurance agent who has experience assisting contractors with their insurance needs.
The good news is there are many wholesale insurance brokers eager to help you and your insurance agent avoid the traps of pollution exclusions. If you are properly utilizing the services of your insurance agent and wholesale insurance broker, the chances of an uncovered claim due to an environmental condition is greatly reduced, ensuring the longevity of your company.
Kari Dybdahl, BA, has over nine years of experience in the environmental insurance industry assisting clients from carpet cleaners to municipalities. Dybdahl recently was named number three in Insurance Business America’s Top Insurance Producers list, along with being recognized with Elite Women in Business, Young Gun in Insurance and Hot 100 awards. Her true passion is assisting carpet cleaners and restoration contractors place comprehensive insurance to protect the longevity of their businesses for years to come. Dybdahl’s daily tasks include placing compliant insurance for Crawford Contractor Connection members, ICRA members, Alacrity members, various third-party network members, independent contractors and several more. She also designs memberand franchise-specific insurance programs alongside Dave Dybdahl. Reach Dybdahl’s team at (608) 824-1192 or reach her directly at [email protected].