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Digital EditionGradual Pollution Risks May be Insurable
The phrase “sudden and accidental” in pollution insurance is similar to “overnight success” in the arts, sports or business. Both terms have been accepted in the vernacular, but neither is quite accurate. Just as most breakout celebrities earn their acclaim after years of trying, pollution might have started long before it attracts notice. For this reason, a more accurate term is “time element insurance.”
This misconception derives from the pollution exclusion historically used in general liability policies, which included an exception for certain “sudden and accidental” events. Today, pollution coverage is generally addressed through specialized policy forms, and the scope of coverage depends on the particular policy language. “Sudden and accidental” is an archaic term that may be better understood in the context of applicable time-element requirements, depending on the policy form. It might also surprise retail agents and property owners to know that insurers today may be willing to cover gradual pollution events.
Obtaining coverage for new pollution conditions that happen gradually without conducting site assessments is possible, but buyers must request it, and an environmental insurance specialist can help assist them in evaluating available coverage options. This coverage is generally available for additional premium compared to more limited time element cover.
Coverage for gradual pollution under defined periods of time better aligns with how pollution losses occur in the real world. Here are three different scenarios to which Pollution Legal Liability (PLL) policies may or may not respond:
- Pre-existing pollution conditions (known). In this scenario, pollution conditions have already caused or are likely to cause loss. PLL policies typically will not cover cleanup or remediation of known pre-existing pollution conditions, though some may offer coverage for bodily injury and property damage. Cleanup costs for contaminants that are above actionable levels identified in environmental site assessments would be similar to placing property insurance on a building that’s on fire and, therefore, may be difficult to insure for remediation costs.
- Pre-existing pollution conditions (unknown). A release has already happened but isn’t discovered during environmental site assessments and no party is aware of such contamination issues that happened in the past. PLL policies may cover these losses if claims are made and reported during the policy period or extended reporting period, subject to the applicable policy terms, conditions, and exclusions (for example, an abandoned underground storage tank).
- New pollution conditions. A release that happens on or after the retroactive date in the policy (i.e., spill or release). A condition that is not known to exist may be eligible for coverage, subject to the applicable policy terms, conditions, and exclusions.
Coverage Triggers
Various triggers exist for Pollution Legal Liability, and the scope and operation of those triggers vary by policy form. Depending on the policy, coverage may be triggered by first-party discovery of a pollution condition, third-party claims, government-mandated cleanup or remediation, or specified time-element requirements. Finally, an indemnity trigger involves sitting excess or Difference in Conditions around an Indemnification agreement in a Purchase and Sale agreement.
Policies with time element triggers may require that the pollution condition be discovered and reported within specified periods, which vary by policy. For example, certain policies may require discovery within 15 days of occurrence and reporting within 30 days. Time element triggers mean that the burden of proof and timely reporting fall on the insured. PLL policies offering a gradual release trigger can respond to conditions that occur over months or years, though a retroactive date may apply that could restrict coverage. The applicable policy language will determine the parties’ respective obligations in establishing whether a condition falls within coverage.
For PLL policies, it’s important to note that coverage is commonly written on a claims-made basis, meaning the applicable claims generally must be made and reported in accordance with the requirements of the policy. PLL policies are premises or site-specific, and they typically respond to pollution that happens on, at, or under the site, or that migrates from the covered location to third-party property.
What is Potentially Covered?
Available coverages vary by carrier and policy form and may be subject to applicable limits, sublimits, retentions, exclusions and other policy terms and conditions. PLL policies generally provide coverage for the following losses related to sites the insured owns, leases or operates:
- Bodily injury
- Property damage, including damage to natural resources
- Cleanup/remediation expense
- Defense costs, usually within the policy limit though additional coverage may be available
Additional coverages are available in the marketplace, and these can be especially valuable to property owners. These extra coverages include:
- Business interruption. If a site’s business operations are disrupted by a pollution condition, this coverage may provide coverage for lost earnings, subject to a time deductible.
- Extra expense. Additional expenses incurred during the period of business interruption, such as the installation of temporary structures on the site, may be covered, subject to applicable policy terms.
- Contingent Business Interruption. May provide coverage for financial loss resulting from a Pollution Condition at a property you do not own that impacts your property. The trigger may be tied to a government mandate.
- Mortgagee protection. For mortgaged properties, if an insured borrower goes bankrupt from a pollution incident, this coverage may respond on behalf of the lender, or mortgagee.
- First-party diminution of value. This coverage may be available for site owners whose property incurs stigma associated with contamination, subject to applicable policy terms.
Transactional PLL
Operational pollution risks are the bread and butter of Pollution Legal Liability, but PLL also is a valuable tool for protecting developers as well as buyers and sellers in property transactions. Both the buyer and seller may, depending on the structure and policy terms, be included in a PLL policy, which in certain transactions may be considered as an alternative or supplement to an escrow arrangement for specified environmental liabilities.
Depending on the transaction and coverage obtained, this structure may allow the parties to avoid placing some funds in escrow. Using a PLL in this situation may provide near-term and longer-term financial benefits. Developers also consider using PLL in the course of developing unused tracts of land or repurposing built-out parcels.
PLL policies offer valuable coverages for pollution risks and can apply to a wide variety of situations. Because coverage terms and availability vary, working with a wholesale specialist with extensive environmental insurance experience can help agents evaluate available options.
