Bridging the Gap: How the Combined Form Market Can Bring Pollution Coverage to Almost Every Industry

Pairing general liability with environmental impairment liability may be the solution for business owners looking to cover their pollution exposures.

By: Autumn Demberger | January 4, 2021

Every year, pollution exclusions in general liability policies are expanding, making it harder and harder for insureds to remain protected.

According to the courts the following can be considered pollutants and be excluded under a CGL policy: odor, carbon monoxide, dust, foundry sand, cooking grease in sewer drain, ammonia, manure, salt water, skunk spray, welding fumes…

The list goes on.

“When a pollution incident occurs or there is an allegation by a third-party, most companies are not prepared with defense counsel or disaster response contractors that understand how to mitigate the event or allegations,” said Alexander Beganie, vice president of the environmental division at Allied World.

Luckily, “this is what environmental insurance carriers do every day,” he said.

One such product that has emerged over the years is environmental impairment liability insurance, which is designed to cover liability and cleanup costs associated with pollution. It arose out of the necessity to fill in the gaps left by the standard CGL form.

“While these EIL policies are highly functional, they are often not purchased,” Beganie said. “The coverage is often viewed as necessary only to cover obvious pollution/toxic tort type exposures.”

For insureds looking to fill their pollution gaps, then, Beganie said there was another way: combining general liability with EIL.

What Is the Combined Form Market?

Established in the 1990s, the combined form market aimed to eliminate confusion and help businesses respond to a growing environmental protection legal landscape. It combines the environmental impairment liability policy with general liability and gives insureds a leg-up on environmental risk.

Alexander Beganie, vice president of the environmental division, Allied World

Beganie explained, “The introduction of the combined form gave businesses the opportunity to simply purchase one policy to cover their general liabilities and pollution related liabilities, filling many of the pollution gaps left in the standard CGL form.”

It is designed to provide policyholders an option to cover general liability and pollution liability, including product pollution, waste disposal site, transportation and site pollution.

“Pollution events are typically infrequent but high profile, expensive and complex to manage,” Beganie said.

“The benefits of the combined form product include limiting potential coverage gaps that may result from having multiple policies and/or multiple insurers and the convenience of a single policy form.”

Common Misconceptions Surrounding the Combined Form

Yet, with the simplicity and convenience of having one form to address pollution coverage gaps, insureds may be a little hazy on the details. As with all newer products, certain misconceptions have formed over time regarding the combined form market.

Beganie has relayed four to help bring clarity.

Misconception #1: The combined form product is only for small/middle market risks.

In fact, the combined form can be for all business sizes, according to Beganie.

Misconception #2: The combined form product is limited to “traditional” pollution-generating industries, such as chemical manufacturers, companies with hazardous waste exposures or other risks with obvious ‘toxic tort’ exposures.

In actuality, Beganie said, the combined form product is for any company that has some type of environmental exposure and is looking to protect itself.

Misconception #3: It can be difficult to build large towers of coverage.

“The combined form market has sufficient capital to structure programs in excess of $300M,” Beganie said.

Misconception #4: The combined form is limited pollution.

The combined form can be structured to provide pollution coverage for owned and leased locations, contractor pollution for offsite services, transportation pollution and non-owned waste disposal liability.

Filling the Gap

So, what exactly is the combined form looking to cover?

“Subject to underwriting and the exact terms and conditions of the policy, there could be several pollution extensions offered by combined form products,” Beganie said.

The pollution exclusion in the standard CGL policy is broad and has few narrowly defined givebacks. These pollution exclusions may exclude odors, sewage, hydraulic oils, fumes, fuels and other common materials used to maintain buildings.

But the combined form policy can involve a wide range of potential exposures. It can offer pollution coverage, including affirmative coverage for some potentially significant exposures such as mold, legionella and medical waste.

“It can cover product pollution liability for manufacturers, contractor pollution liability for services provided to a client off your premises, transportation and non-owned disposal site coverage for third-party bodily injury and property damage from a pollution incident,” Beganie continued. “And professional liability for environmental consultants and contractors.”

From third-party tort liability of bodily injury and property damage to cleanup of hazardous material, the combined form may offer protection.

A Few Examples of the Combined Form in Action

To help paint the picture on how beneficial the combined form policy is, Beganie gave a few illustrative claims examples. In these examples, he added, we see the differences that a combined form can make.

Example #1

A company that manufactures pipes used to transport oil and gas produces a defective batch. The defects within the pipes cause them to crack when exposed to low temperatures, thus releasing hundreds of gallons of oil into the ground, running off into a nearby waterway.

“While in some cases there are limited bodily injury/property damage givebacks for losses caused by products/completed operations in the CGL pollution exclusion,” Beganie said, “these would not apply to clean up costs, which in this example would be very high.”

Example #2

In this example, a service representative of a machinery manufacturer is dispatched to perform maintenance on their product at a customer’s site, a manufacturing plant. While servicing the equipment, the representative causes a malfunction of the customer’s equipment allowing hydraulic fluid to be released and causing ground water contamination and noxious gases to escape. This leads to bodily injury to the customer’s workers at the facility.

“This is a great example because it is the type of event many insureds can foresee and is the type of scenario for which the ISO CGL pollution exclusion carries significant uncertainty,” said Beganie.

Example #3

A manufacturer that discharged contaminated wastewater to a wastewater treatment plant is alleged to be a potentially responsible party after the plant is sued when that contamination is found in local groundwater.

The non-owned waste disposal liability coverage offered in the combined form could potentially mitigate extensive claims costs.

Who’s the Right Fit?

When brokers and insurance buyers think of the combined form option, they often believe it applies mainly to chemical manufacturers or contractors that specialize in environmental services.

However, the combined form market can have an appetite for a variety of commercial insurance risks, said Beganie.

“Any company that offers a product or service that could result in a pollution incident should consider using the combined form to protect their assets,” Beganie said. “Examples range from companies that use hydraulic fluids in their machinery to companies that apply paints and finishes to their products.

“Really, any company with an exposure that could be considered a pollutant can find coverage through a combined form,” he said, “and not just those with obvious risks.” &

Autumn Demberger is a freelance writer and can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.