Environmental Liability Insurance: Securing the Optimal Solution for Your Construction Project

A subcontractor is excavating, grading and preparing the site for foundation work on a fifteen-story condominium tower in a suburban area.

During the course of this work, the contractor unearths what appear to be metal drums.  Further investigations reveal these drums to contain a multitude of hazardous waste and chemicals of unknown origin, which are later found to have leaked into subsurface soils, causing contamination throughout the project site.

To exacerbate the situation, the drums appear to have been abandoned by other parties some time ago and were never identified by the environmental consulting firms during their Phase I assessment. In this case, it was also determined that the contractor merely identified the condition but did not cause additional environmental harm.

Stories like these constantly emerge and in many instances include parties that lack the proper form of insurance to cover their loss or reclamation efforts. As a result, many owners undertaking construction projects are continually educating themselves about the impact of environmental issues, as well as the associated liabilities. They usually do one of two things. The first includes performing some type of environmental assessment on the site before purchase or development of the property.

In many cases, if there are no issues identified, the majority of owners forego the purchase of proper environmental liability insurance for real estate risk, which often leaves them uninsured for preexisting, unidentified environmental risk (see the example story above).  The other involves carrying some type of environmental insurance, predominantly Contractors Pollution Liability (CPL) insurance, either as part of a Contractor or Owner Controlled Insurance Program (CCIP/OCIP) or straightforward project CPL insurance.

For those that do purchase CPL insurance, the trick then is to thoroughly understand the coverage benefits and pitfalls-attempting to secure the optimal coverage afforded in the marketplace. CPL policies provide coverage for third-party liability claims arising from pollution conditions caused by a contractor’s physical construction activities.  In other words, the contractor has to cause, in whole or in part, the pollution condition via their work.

CPL carriers offer both occurrence and claims-made insuring agreements that provide coverage for third-party bodily injury, property damage, cleanup costs and defense of such claims.  Of course, everything else being equal, an occurrence-based, CPL is best for any project.

However, even though CPL insurance has become a bit more “standardized” over the past five years, what still makes the purchase of CPL fairly difficult is the fact that all twenty-plus carriers offer the coverage with different terms and conditions.  (Different exclusions, definitions, appetite, capacity, insuring agreements) all contribute to what some consider a painful process-when you truly understand the potential implications of the varying terms and conditions.

Even if the proper CPL insurance is purchased, one thing is certain-the coverage will not extend to liability associated with environmental conditions found by the contractor, as cited above. While it will protect the contractor, and the owner, against the liability associated with the contractor causing a pollution condition or worsening contamination, no further coverage will be afforded.  So, even if requiring the general contractor (GC) and/or all subcontractors to carry CPL insurance is prudent for protecting the owner against environmental liability caused by the contractor, it can be a bit short-sighted when looking at the bigger picture.

Essentially, the CPL coverage is only one half of the equation.  Owners looking to secure the optimal environmental liability insurance program for their project must also look at securing Pollution Legal Liability (PLL) insurance.  PLL insurance provides coverage for pollution conditions or events on, at, under or emanating from a designated location or project site.

Coverage is afforded for third-party bodily injury, property damage, cleanup costs and defense costs resulting from the existence of environmental conditions. A unique feature of many PLL policies is their ability to offer various and different coverage parts under one policy. Such coverage parts include, but are not limited to:

• New pollution conditions, if looking for future operational coverage
• Existing pollution conditions, could be known or unknown
• On-site cleanup coverage
• Transportation coverage for material leaving the site
• Non-Owned Disposal Site (NODS) coverage for the owner’s legal liability at a disposal site
• Mold liability coverage for operational and maintenance exposures

Another important aspect of coverage offered under PLL is that if a known environmental condition exists at a site, the policy may be structured to provide some type of environmental coverage for that existing contamination. Coverage is based on the type and extent of the site’s existing contamination. Lastly, coverage can be purchased for a period of ten years, typically.  On occasion, longer terms have also been purchased.

Today, some carriers even offer both CPL and PLL under both one policy form. Others can offer two separate policies and “link” the limits.  Sharing the limit between both coverages is a simple way of managing costs versus buying two separate policies with separate limits, although many project owners take that route because they do not want one policy impacting the other or diluting their limits.

Construction Business Owner, October 2008