United States: Insurance Coverage For Pollution: An Important Part Of The Picture

Last Updated: July 31 2015
Article by Erin L. Webb

Many companies face pollution risks, either through liability to other parties or due to property contamination. Insurance policies can be an important asset to protect the company against these types of liabilities. These policies can provide coverage for the costs of cleanup efforts, as well as the costs of lawsuits and related legal fees from third parties. Emergency response costs and business interruption costs can also be covered, depending on the policy, as well as coverage for contractor costs, cleanup of specific sites, and remediation related to storage tanks. Not only does insurance serve as an important part of the larger risk management picture for a company, it is also often required by state or federal regulators, by lenders, or by business partners.

Decades ago, pollution coverage often could be found under general or "all-risk" policies. For example, commercial general liability (CGL) coverage did not absolutely exclude coverage for pollution liabilities until the late 1980s. Modern CGL policies, however, tend to have very broad "pollution exclusions" stating that most pollution related risks will not be covered. The same is true for modern "all-risk" first-party property policies. Other key types of insurance coverage for companies, such as directors and officers (D&O) and errors and omissions (E&O) policies, also usually contain exclusions for pollution liabilities. Thus, to obtain coverage for pollution, companies usually must purchase a separate policy. There are several types of policies available to cover pollution risks. This article will summarize some of the most common.

Pollution Legal Liability

Pollution legal liability (PLL) insurance can cover third-party and fi rst-party risks. In other words, these policies can cover a company's liabilities based on pollution claims made by third parties, as well as costs that the company itself incurs for cleanup or similar costs. Some examples of insurance that can be provided under a PLL policy are coverage for bodily injury, property damage, or cleanup costs that happen both on and off the insured company's property. Emergency response costs can also be included. This coverage is also referred to as environmental impairment liability (EIL) insurance.

There are several important factors to consider when purchasing or reviewing a PLL policy. For example, the geographic scope of the policy is an important consideration. Many policies specifically cover or exclude specific locations or sites.

Another important consideration is timing. A prospective insured will want to ask: What time period is covered by the policy? Policies have differing requirements concerning (1) when a claim must be made against the policyholder to be covered under the policy, and (2) when a policyholder must ask its insurer to provide coverage. Extended "reporting periods" can sometimes be purchased for an additional cost.

Finally, the definition of what constitutes a "covered event" is critical, and must match the company's specific risks and exposure. Whether the risks relate to leaks, spills, fumes, a specific factory, or surrounding geographic features like bodies of water, they should be carefully analyzed and compared to the language in the policy.

Contractors Pollution Liability

Contractors pollution liability (CPL) insurance is available to contractors who wish to protect themselves from environmental claims relating to their activities at job sites. Like PLL insurance, it can cover both third-party liability claims and first party claims to remediate on-site conditions, and has the benefit of providing insurance for pollution risks at sites that the policyholder may not own.

Construction projects are usually associated with this type of coverage, but companies working on other types of projects can benefit as well, such as those that regularly deliver or install materials at various locations. CPL insurance usually terminates once a defined project is finished, unless special "completed operations" coverage is also purchased.

Site-Specific Liability Insurance

For property not owned by a policyholder, such as a waste disposal site, site-specific pollution liability insurance is available. This type of insurance can also be beneficial to companies that regularly buy and sell property as part of their business, or companies involved in a merger or acquisition.

Again, first-party and third-party coverage can be purchased, as well as business interruption coverage.

Storage Tank Pollution Liability Insurance

As the name would suggest, these policies are designed to cover risks associated with storage tanks, both aboveground and underground, which contain hazardous materials or other materials of special concern. Storage tanks are frequently regulated by the Environmental Protection Agency and state environmental authorities, and insurance is required in many jurisdictions. This insurance can be part of a larger PLL policy or stand-alone.

Gas stations are the most frequently cited example of companies facing this risk, but several types of manufacturers and distributors may have aboveground or underground tanks as well. Insurance options include third-party bodily injury and property damage claims resulting from events involving covered storage tanks. Companies can also purchase coverage for cleanup costs relating to leaks or other covered events.

Industry-Specific Pollution Insurance

Certain businesses, such as asbestos and lead paint abatement companies, have very specific environmental risks that are usually addressed by "general liability" insurance policies customized to their activities. Similarly, environmental engineers and consultants often purchase E&O coverage to protect themselves against third party claims alleging deficiencies in performing their professional duties. In addition, remediation stop-loss insurance is a specific type of first-party coverage, designed to insure against the risk that an environmental cleanup at a specific location will exceed cost estimates.

In sum, a wide variety of insurance products are available on the market to help companies manage their environmental risks. Policyholders should always carefully review the policy language and be familiar with its requirements. Experienced coverage counsel should be retained and notice should be provided to the insurer immediately in the event of a claim.

Originally published in the In-House Counsel Committee Newsletter of the American Bar Association Section of Environment, Energy, and Resources, Volume 16, Number 2, July 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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