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Green Construction Purchasing Story Archives |
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Stuff happens Contractors can manage a wide range of pollution risks with a Contractors Pollution Liability insurance policy. by Tim Farrell Superfund. Remediation. Landfills. Toxic chemicals. Environmental consultants. These terms are typically associated with pollution. As a result, many contractors far removed from these terms believe they are in the clear. They think if their work has nothing to do with pollution, they have minimal exposure to these problems. They are incorrect. Here are several common examples that demonstrate the potential financial impact of pollution. While performing building renovations, a general contractor based in the southeast U.S. used gas-powered generators and equipment without properly venting emissions. Employees in a nearby area complained of headaches, nausea and respiratory problems. The results of an air quality study concluded that the increased carbon dioxide levels in the building resulted from the construction equipment. The contractor was liable for causing building-related illnesses that resulted in 30 bodily injury claims totaling more than $500,000. A street and road contractor in New Jersey was lifting barriers when a crane overturned and spilled hydraulic oil into wetlands adjacent to the highway. The New Jersey Department of Environmental Protection responded to complaints of oil on the water as well as waterfowl coated with oil. The contractor was responsible for paying more than $650,000 in response costs and wetlands restoration. A general building contractor in California installed a new roof at a 250,000-square-foot office building and shopping center. The roofing material decomposed and caused a chemical reaction, emitting fumes into the office building. The contractor faced a $400,000 property damage and loss-of-use claim. All contractors know that exposures like those described above are part of doing business. Nearly every contractor faces environmental exposure to some degree. Experienced field personnel could have prevented or at least limited these problems. Expenses like those described above never seem to fit into the budget. As contractors well know, there are times when unbudgeted problems can occur. Operational or job site exposures include, but
are not limited to: All of the exposures above are not blatantly “environmental.” They can result from normal, everyday construction activities. Using Contractors Pollution Liability insurance With this in mind, contractors that want to protect their assets – and their livelihoods – can use several methods to limit their exposure. One method of financing environmental loss is through Contractors Pollution Liability (CPL) insurance. CPL provides coverage for third-party liability resulting from bodily injury, property damage, defense and clean-up as a result of pollution conditions (sudden/accidental and gradual) caused by contracting operations performed by or on behalf of the contractor. CPL evolved in the late 1980s as a result of the insurance industry adding an absolute pollution exclusion to the Commercial General Liability (CGL) policy. Today, CPL has become a viable financing option for environmental loss because it provides insurance for large or even catastrophic loss scenarios at a reasonable premium. The capacity available for CPL in the current marketplace exceeds $200 million. The most any single carrier can offer is $50 million. There are nearly 25 insurance carriers offering some type of CPL coverage today, compared to two or three in the early 1990s. Forms can be written with either deductibles or self-insured retentions, the amount of which is determined by the financial strength of the insured. Contractors can also structure CPL insurance for all operations on an annual basis using blanket coverage, part of a wrap-up or project insurance. The policy term for blanket coverage is typically limited to one year, while the term for projects or wrap-ups is 10 years, with longer terms negotiated on a case-by-case basis. Why do contractors buy CPL coverage? Typically, a contractor’s buying decision is driven by contractual requirement and/or asset protection and the fear of an event resulting in substantial financial loss. For many contractors, contractual requirements have always been and continue to be the primary drivers in purchasing a CPL program. Frequently, these requirements are generic, unclear and drafted as part of a standard insurance package. Contractors should carefully review the language in the contract to determine the true intent of requested coverage. In some cases, these requirements can be negotiated out of the contract if an entity demonstrates its operations do not pose a significant potential for environmental incidents. While this may be wise in some cases, negotiating the requirement out of the contract may actually expose the contractor to greater risk without a financing tool in place. Every project needs to be assessed for potential risk, because even if the scope of work does not include remediation or other environmental work, environmental exposures may exist and CPL coverage may be required. Like other environmental insurance, CPL is catastrophic coverage protecting contractors from infrequent but potentially large financial losses. The CPL also provides legal defense for these claims. The defense to protect a contractor in an environmental claim requires experienced specialists that insurers of this type of coverage can provide. A large percentage of all contractors do not buy blanket CPL. They self-insure these risks by funding 100 percent of any potential defense and loss. Contractors need to decide which is the proper policy: blanket or project-specific. Because pollution insurance is not typically required, contractors don’t consider the coverage until it’s a necessary contractual requirement. If contractors begin to see pollution requirements in the insurance specs of contracts more frequently, it might be a lot easier and economical to buy a blanket CPL. With this blanket coverage, a contractor could become more aggressive on bidding for jobs that require pollution insurance. Additionally, the cost for the blanket coverage can be spread among all jobs throughout the year, which would potentially enable a contractor to bid work less expensively than a contractor that has to build in the entire cost of a project-specific policy. Everyone has environmental exposures. The CPL helps contractors address these exposures. However, with numerous insurance companies from which to choose – all with their unique policy forms and hundreds of endorsements – a few hints will help construct a policy that provides the solution needed. Looking for the right CPL Hundreds of insurance companies sell insurance to contractors. Contractors should consider policies from a company that offers CPL as stand-alone coverage and not from a company that tacks on limited coverage to other policies. Mold is another important coverage item. Insurance companies offer this coverage in the CPL policy. They can work with a contractor to initiate and implement a mold awareness/prevention plan, normally at little or no extra cost. In addition to covering the contractor’s work, a good CPL policy should also cover the work done by hired subcontractors. There is typically a definition for “covered operations” in the policy. This basically describes what the contractor does and uses information taken directly from the insurance application. The general rule calls for this definition to be as broad as possible, which will not limit the scope of coverage. In some cases, contractors rent a parcel of land near the job site for staging and storage purposes. The CPL policy should cover work done at third-party job sites and should be modified to apply to these rented parcels of land. For example, contractors occasionally fall victim to vandalism. Claims can involve diesel fuel spills and chemical spills from mobile fuel tanks, other vehicles and stored materials. These claims can occur on the job site as well as on rented parcels of land in conjunction with the covered operations. Transportation should also be addressed in the CPL. Contractors constantly move equipment, vehicles, chemicals and materials on and off the job site. Additionally, others working on behalf of the contractor do the same. In the course of doing business, contractors may need to haul materials to a disposal site. If contamination develops at these non-owned disposal sites, contractors can become involved in litigation that necessitates the payment of funds to remediate the site. The CPL can help contractors address this exposure as well. Because of the litigious environment that exists in the U.S., contractors need to be aware of the mechanisms available to them as well as the steps that can help protect their assets and businesses. Like other risks, contractors can manage pollution exposures in a variety of ways. Unlike other risks, pollution claims tend to be severe, expensive and complicated. There are no fender benders in pollution. Claims are never simply resolved. The investigation of these claims, scientific research and lab work, the defense costs and the potentially large settlements and claim payouts make a compelling case for contractors to consider purchasing CPL insurance. Tim Farrell is vice president of New Day Underwriting Managers in Bordentown, New Jersey. New Day Underwriting Managers is a specialty intermediary for insurance agents and brokers with expertise in environmental insurance, environmental risk management and construction-related professional liability. Tim can be reached at (609) 298-3516, ext. 103, or at tim.farrell@newdayunderwriting.com. Learn more about environmental and construction-related professional liability at www.newdayunderwriting.com. Published in the October 2007 issue of Construction Purchasing magazine. |
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