Canadian Underwriter
Feature

Pollution Solution


December 1, 2014   by Canadian Underwriter


Print this page Share

Most construction contractors carry commercial general liability (CGL) insurance to protect them from third-party claims for bodily injury or property damage. It is a mainstay insurance policy that has provided a sturdy coverage model for commercial operations.

However, the CGL policy is not without potentially serious gaps and limitations for some contractors. One key area of risk involves pollution claims. While standard insurance products include limited coverage for environmental losses, relying on a CGL policy to fully cover these exposures is not prudent risk management.

Contractors rely on brokers for sound risk assessment and coverage review. Knowing the exposures that their clients face and finding the right insurance to address those risks is crucial for today’s intermediaries. This is particularly important given the complex legal issues, regulatory provisions and contractual requirements facing contracting firms today.

GAPS AND BENEFITS

Below are five key potential gaps in CGL coverage, and reasons why brokers should consider pollution liability insurance for contractors.

1. Most CGL policies contain a pollution exclusion

The majority of CGL policies contain a pollution exclusion. Notably, claims resulting from the escape of pollutants brought to the job site by the contractor are typically excluded. Most CGL policies also exclude losses arising from the release of pollutants on a site that has been used to handle, store or process waste.

This common exclusion is often referred to as an “absolute pollution exclusion,” although there are two exceptions whereby contractors may find some coverage under their CGL policies:

a) if the environmental contamination is consequent to bodily injury or property damage covered by the CGL policy; or

b) if the environmental damage occurs during the completed operations period.

Some CGL policies contain an even more restrictive exclusion, often referred to as the “total pollution exclusion.” This eliminates the coverage provided in the two exceptions above.

For example, if a contractor hits an existing oil pipe and causes environmental contamination, only damage to the pipe itself would be covered – the policy would not indemnify the contractor for any costs to clean up the oil spill.

Moreover, there is no longer any completed operations coverage for environmental spills.

2. Limited value in sudden and accidental pollution coverage endorsement

Some insurers provide limited pollution coverage on the CGL policy under the Insurance Bureau of Canada’s endorsement 2313, or the more recent endorsement 2336, commonly referred to as “sudden and accidental pollution coverage.”

This endorsement is intended to restore coverage for pollutants that the contractor brings to the job site. For coverage to apply, the pollutants must be detected within 120 hours (in some cases, 240 hours) of the commencement of discharge and must be reported to the insurer within specified timeframes.

While this endorsement provides limited coverage, brokers and contractors should consider that many pollution losses occur over a much longer period and the sudden and accidental pollution endorsement solely covers events that are sudden in nature.

When there is uncertainty or disagreement between the insurer and insured, delays or even denials of coverage often ensue. There have been real-life cases where disputes arise from these time limitations.

Consider the loss scenario of a contractor that installed a tack coat (a thin layer of protectant) between two layers of asphalt. Shortly after installation, there was a violent rainstorm and some contaminants from the tack coat washed into a roadside ditch. Two months later, the contaminants reached a nearby stream. Clean-up costs exceeded $150,000.

In this case, no coverage would apply under a CGL policy with the sudden and accidental pollution endorsement.

3. Most CGL policies exclude claims involving asbestos and fungi

Asbestos is a risk excluded by most CGL policies. Contractors performing renovation projects in older buildings should be aware of the potential for asbestos.

Moreover, Canada is one of the few developed countries that has never banned the use of asbestos, and continues to import and export asbestos-containing materials such as pipes and tiles that are used in new construction. Demolition operations, in particular, can result in the accidental spreading of asbestos particles throughout an existing building.

Similarly, mould and fungi are also risks not covered by most CGL policies. In rare cases where coverage is provided, it is typically subject to a very low sub-limit.

The growth of mould in buildings can lead to several health problems. Some moulds, referred to as “toxic mould,” even produce mycotoxins. Virtually all building projects have mould exposure given that water can infiltrate structures in many ways.

Often, only specialized remediation contractors recognize they have asbestos or mould exposures. While these operations are more susceptible to risk, any contractor can be exposed to an asbestos or mould claim, particularly if they are involved in renovation projects.

4. Excavation work poses specific risk exposures

Excavation can be unpredictable – contractors never really know what lies below the surface, and the locates can be inaccurate or miss an old, or forgotten, utility.

For instance, consider a recent project in a major Canadian city for construction of a new office tower. During excavation, the contractor struck an oil-heating reservoir. The investigation later revealed the tank was more than 100 years old and had not been in use for over 60 years.

Had the tank contained a substantial amount of product, a significant environmental loss could have ensued. For contractors with a total pollution exclusion in their CGL policies, this represents a significant coverage gap.

Another Canadian case involving excavation work was the Burnaby, British Columbia crude oil spill, where an excavator digging a sewer trench pierced an oil pipeline. The rupture released more than 250,000 litres of crude oil into surrounding areas, including Burrard Inlet. The resulting clean-up operations cost more than $15 million.

5. Pollution-related fines, punitive damages can be substantial

CGL policies typically cover the insured for compensatory damages – those that are due or awarded in payment for actual injury or economic loss. Compensatory damages do not include court-ordered fines, punitive or exemplary damages, or the multiple portion of any multiplied damage award.

Amidst growing public concern for the natural environment, legislation has been introduced at all levels of government in Canada. Businesses that fail to comply with these regulations may face fines and penalties from each level of government. In some cases, assessments have been as high as $300,000.

In one example, a building firm in Alberta was hired to construct a new aquatic centre. During construction, a drilling subcontractor struck and ruptured a watermain, leading to the discharge of 12 million litres of chlorinated water into the North Saskatchewan River.

Testing of the river water showed chlorine content was 3,900 times greater than permissible. The building firm was charged under the provincial Fisheries Act and ordered to pay a total fine of $285,000.

Contractors are held to a very high standard of care when working in and around potential pollutants or when handling substances that could contaminate the environment. Fines, legal defence costs and the cost of clean-up from just one loss can be financially devastating to a company.

ROLE OF POLLUTION LIABILITY INSURANCE

Accidents do happen. And when they involve pollution or environmental damages, these accidents tend
to have significant repercussions. The fact is that the CGL policy was never designed to address the complex and long-term nature of environmental exposures.

Brokers who understand these risks can ensure contractors are protected through tailored pollution liability insurance. Many policies provide coverage for pollution incidents both of a gradual and sudden or accidental nature – without the need to prove that the discharge was detected within 120 hours.

Both the asbestos and fungi/mould risks are exposures covered by virtue of pollution liability insurance for contractors, either in standard wordings or through endorsement. And this form of coverage provides additional protection for pollution incidents resulting from excavation work.

In most cases, pollution liability insurance will include coverage for exemplary or multiplied damages, as well as for civil fines, penalties or assessments in the definition of loss. Brokers should check carefully when researching pollution liability insurance products to ensure key risks and exposures are covered.

Contractors are involved in a wide variety of construction projects, with most firms focused on the day-to-day tasks of organizing materials and labour under tight timeframes and strict budgets. In many cases, it is the role of the insurance broker to identify exposures, discuss current and emerging risks with clients and find appropriate coverage solutions.

Knowing the difference between standard commercial coverage and specialized pollution liability insurance can protect clients from serious exposures, potentially saving them a great deal of money and frustration.


Print this page Share

Have your say:

Your email address will not be published. Required fields are marked *

*