A Guide to CPL Insurance
September 1, 2006
Contractors Pollution Liability was invented for hazardous waste contractors working on Superfund sites in the mid 1980s. This insurance is necessary to fill the gap in liability insurance coverage created by the Absolute Pollution Exclusion in everybody's Commercial General Liability insurance. For reasons much too lengthy to discuss here, water and mold do not fit within the Absolute Pollution exclusion, so contractors had liability insurance for mold damages prior to the introduction of universal mold exclusions in 2004.
The mold exclusion in a General Liability policy is essentially a total pollution exclusion for the specific pollutant mold. The mold exclusion on the GL policy eliminates insurance coverage for liability claims arising from the contractor's premise, operations, products and completed operations. Mold exclusions may even eliminate the insurance for defense costs, which can be hundreds of thousands of dollars in a toxic mold case. CPL is designed to fill the gaps in the GL insurance policy created by the introduction of the mold exclusion the same way an automobile policy is needed to fill the gaps in liability insurance created by the automobile exclusion in the GL policy. The same could be said about workers compensation insurance and the necessity of buying a separate insurance policy to cover that loss exposure.
It is important to recognize a good CPL policy gets you back to where you were on mold losses prior to the introduction of universal mold exclusions in the GL insurance policy. The CPL policy also provides coverage that was not covered in the General Liability policy because of the pollution exclusion on that policy.
With the core CPL policy form having its roots in Superfund hazardous waste contractors, some of the common policy provisions in CPL insurance turn out to be totally inappropriate for the insurance needs of restoration contractors. Some of the material coverage flaws in CPL policies sold to restoration contractors today include:
Property damage to your work. This is a very common exclusion in CPL policies. It basically says your liability insurance will not pay for damage to the work you do. If you are a Superfund contractor incinerating solvent contaminated soil, excluding damage to the dirt you are burning is not important.
Now apply the exclusion to a drying job. Water and high humidity in the walls and flooring of a building can be ambient throughout the entire structure. A poorly performed drying job will result in mold and the damage is likely to be to the entire building which may need to be demolished. Although it was not the original intent of the exclusion to eliminate property damage liability coverage on the entire job a contractor is working on, by default that is how most "Damage to Your Work" exclusions read within the context of mold and drying work.
To evaluate the ramifications of this exclusion, it helps to know that 90 percent of all paid mold claims are property damage and clean-up claims; they are not bodily injury claims. It also is interesting to note some CPL polices do not have a "Damage to Your Work" exclusion at all, while others modify the exclusion to provide insurance on the property you are working on if you damage it. A CPL policy without a "Damage to Your Work" exclusion could cover literally five times more claims scenarios for a drying contractor than a CPL policy with this exclusion, and the premiums are likely to be very similar.
Product liability arising from or as a consequence of products sold or supplied by the insured. These exclusions are also very common in CPL policies. The problem with this exclusion on the CPL policy is mold exclusions and total pollution exclusions on the GL policy now eliminate the products liability coverage that was normally covered in the GL policy. Claims arising from the use of biocides for example could be excluded under the GL and CPL policy leaving the firm uninsured if this exclusion is not corrected on the CPL policy. The only way to fix the products liability coverage gap for mold and pollution claims is usually on the CPL policy. For general contractors, the wording of some of these exclusions is sufficiently broad to exclude the entire project, since all the building materials are "supplied" by the insured. Although this was not the intent of the exclusion when it was crafted for Superfund contractors a literal reading of it leads you to the excluded project scenario.
Limiting coverage for completed operations. In other words, the only insured claims are those that arise when the contractor is actively working at the job site. This is also a remnant exclusion that has no effect on contractors burning dirt. Usually these exclusions only apply to clean-up expenses, but remember, most mold claims are for clean up and property damage, not bodily injury. Since mold takes days to grow and the contractor is unlikely to be there when the mold is discovered, a CPL policy with a limitation on completed operations is considerably less valuable than one that does not have the restriction of coverage. A good rule of thumb would be at least five times less valuable if the concern is mold losses.
Excluding all claims arising from work performed by subcontractors. This exclusion usually appears as an endorsement on the CPL policy. For firms that subcontract work, an exclusion of this type can be very onerous. Remember, a drywall screw into a pipe can cause a mold loss that takes months to discover. The effect of this exclusion goes well beyond mold remediation jobs and applies to any liability claim under the CPL policy. For a firm subbing out 50 percent of its work, a policy with this exclusion would cover half as many claims as a policy without this exclusion. If subcontractors are used on every job this exclusion may be the coverage equivalent of an "all-the-jobs-you-do" exclusion. Hard to believe, yes, but it is true and it is legal to sell.
In contrast, if the insurance buyer does not use subcontractors, this exclusion is irrelevant and the policy may be a good insurance value.
Excluding claims arising from the preparation or approval of opinions, reports, specifications, change orders, or designs. This exclusion will normally be entitled Professional Liability in the policy form. These exclusions are common in all GL and CPL insurance policies sold to contractors. The exclusions are also not standardized. When performing a mold remediation job under a work plan prepared by a CIH or other qualified person, when does a loss that is a result of an "opinion" to request a "change order," for example, become an excluded claim under the policy? The answer is, it depends on the facts of the claim, and that is not the time to find out the policy will not respond to the loss. Since IICRC S520 refers to "Professional Remediators" who actually take courses to render valuable professional opinions, an un-amended Professional
Liability exclusion is less than desirable in a restoration contractor's CPL policy.
In all cases, the coverage flaws mentioned here are inadvertent errors that are made by well-intentioned vendors. Most of the flaws are a direct result of taking an insurance policy designed for Superfund hazardous waste contractors and using it to insure contractors working in the indoor environment with water. CPL policies are not standardized so there is a wide degree of variation in the coverage provided by individual policy forms. It takes a considerable amount of expertise to evaluate the coverage differences in CPL policies. Virtually all CPL policies sold to restoration contractors in 2005 have at least two of the above flaws, and some contain all five. Interestingly, in 2006 all of these coverage deficiencies can be fixed for restoration contractors for the first time in the history of the CPL product line.
Finding Quality CPL CoverageThe environmental insurance market is relatively small and accounts for much less than 1 percent of all of the insurance sold in the U.S. Unlike general liability or automobile liability insurance, environmental insurance is not standardized. Although the environmental insurance market is relatively small, it is very complex with over 100 different customized policy forms available with thousands of endorsements available to modify those policies.
The complexity of environmental insurance leads to coverage errors by insurance agents. In environmental insurance it is entirely possible to choose an inappropriate environmental insurance policy, pay top dollar for it and have the policy exclude everything you do for a living. For example, a policy sold to a firm that subcontracts all of its work would not have insurance for anything if the CPL policy has a subcontracted-work exclusion. To make the challenge of obtaining good quality and appropriate CPL insurance even more complex, training courses for insurance agents are virtually devoid of any mention of environmental insurance. Further difficulty results from the fact that only a few environmental underwriters even work in the restoration contracting business sector. Superimpose on this background that mold has created a new need for environmental insurance with a new set of customers (restoration contractors), and the number of qualified and experienced insurance practitioners even gets even smaller. There are fewer than 25 insurance practitioners that are proficient in restoration contractors today, and that number includes the underwriting community.
There is a small group of environmental insurance brokers that has developed expertise in the restoration contracting market place. Searching for "mold insurance" on the Internet pulls up a number of firms that specialize in environmental insurance covering mold. Some of these firms act as your retail insurance agent and some are wholesale insurance brokers who work through local insurance agents. CPL insurance is written on an Excess & Surplus lines basis. It requires a special type of insurance license to sell these polices and to pay the premium taxes on the policies to the state insurance commissioners office. Most retail insurance agents do not hold an E&S license, and also may not be authorized by the insurance companies that offer the best CPL policies.
Accessing a wholesale environmental insurance broker who specializes in restoration contactors and mold insurance solves both problems, and assures the contractor will obtain quality insurance coverage, as well as the value inherent in working with a knowledgeable environmental insurance professional. Another benefit of utilizing a wholesale insurance broker is that the contractor can retain its current insurance agent to service all of its business insurance needs while still accessing expertise in CPL insurance.
Generalist insurance agents will often attempt to get quotes from all the insurance companies, which may be the only alternative to benchmark the proposed premium for reasonableness if the agent does not have a working knowledge of the restoration contractor insurance market. If this strategy is followed, each insurance company's CPL applications should be completed to avoid prejudicing the underwriters against you as soon as they open the underwriting file on your company and see their competitor's application. A complete CPL insurance application with supporting documentation on a restoration contractor will often be thirty or more pages. There are six environmental insurance companies providing CPL coverage to restoration contractors today. A complete insurance submission to each one would create close to two hundred pages of applications in order to properly present the contractor to each underwriter. However, there is no reason to go through the wasteful exercise of blanketing the insurance market with applications on your company.
It should be noted that an insurance agent's access to one or more of the insurance companies that sell CPL insurance does not in any way qualify him or her to manage your CPL insurance. Properly structuring CPL insurance on restoration contractors is a complex task requiring knowledge of the restoration business and specialized expertise in environmental insurance. Retail insurance agents are right behind restoration contractors on the plaintiff's lawyers easy target list because insurance agent's lack of specific training in pollution insurance results in so many mistakes. The vast majority of CPL policies sold to restoration contractors today actually have more than one of the material coverage flaws noted earlier; it will be interesting to see how insurance agents' professional liability insurance is affected by these errors and omissions.
Mold created new opportunities and risks for restoration contractors. The insurance companies did not see surging mold claims as a new business opportunity and implemented their own risk management strategy of risk avoidance. This risk avoidance strategy was achieved, and is maintained, by issuing over 100 million mold exclusions on an annual basis.
But mold exclusions did not cause mold damage losses to go away. Mold loss costs were simply shifted in the economy. Today restoration contractors and insurance agents are sitting at the top of the plaintiffs lawyers target lists. Active risk management including risk avoidance and properly written CPL insurance will allow restoration contractors to participate in this potentially lucrative business sector without risking all their personal and corporate assets on a daily basis. Restoration contractors are well advised to seek out expert risk management advice and assistance in finding appropriate CPL insurance to effectively manage the new risks associated with mold.