Source: http://www.propertycasualty360.com, February 1, 2013
By: Geoff Haver, New Day Underwriting Managers LLC
Contractors’ pollution liability insurance began as a way to indemnify contractors against Superfund cleanup exposures. Today’s CPL coverage is broad and affordable. Learn how to work with insurers on this essential coverage.
Contractors’ pollution liability, or CPL insurance, has been offered by the insurance industry for nearly 25 years. Today, construction firms consider CPL an integral part of their overall insurance portfolios Take a look back at the coverage, structure and cost of CPL policies in their infancy as well as the product, price and marketplace advancements that have occurred over the past 25 years.
In this time, we have gone from two or three insurers offering expensive and limiting coverage to more than two dozen insurers providing contractors pollution insurance, with overall market capacity exceeding $300 million.
But know first: There has never been a better time to transfer contractors’ pollution risk. CPL has never been as broad or as inexpensive as it is today. It simply offers an extremely effective method for alleviating the business risks associated with one-sided contracts and the indemnities for any and all claims associated with severe pollution exclusions.
Beginning with Superfund
My personal roots with insurance specialization started in the late 1980s, when I worked with a national broker to solve Superfund contractor indemnification. I was not the brains behind the project, but part of a team that assessed whether the private insurance industry could cover the operational environmental insurance risk of contractors working on Superfund sites. In conjunction, we sought to provide a private-market solution to the introduction of the 1986 absolute pollution exclusion introduced into many general and excess liability policies.
At the time, there were only two prominent insurance companies that served this marketplace. CPL coverage was expensive and not very comprehensive. In fact, it was claims-made coverage that responded to sudden/accidental events at a job site and did not include many of the enhancements found in current policies. That’s because the first policies were primarily director & officer coverages that bewildered many insureds in terms of what was covered and what wasn’t. Far too often I hear contractors lament, “I sought coverage years ago—it was too expensive and I could not figure out what was covered.” To this I concur, but that should not preclude a fresh look based on the evolution of the product line over the past few decades.
Because I am not an attorney or regulator, I won’t expound on federal, state and local authorities, which further increased the possibility of contractors becoming embroiled in pollution claims purely through regulatory orders. Emissions from operations, batch plants, silica, regulatory safe work practices and protection of the public are just a few. Short of writing several claim examples available in the public domain, the regulatory/legal impacts are profound reasons to consider environmental risk transfer. The construction project is a visual, its operations causing impacts to surroundings and always under regulatory scrutiny.
Throughout the 1990s, more insurance companies came into the market, improving coverage and lowering prices through competition. Concurrently, attorneys became savvy about environmental insurance policies, while the largest insurance brokers created environmental insurance specialty departments that spawned similar specialties among midsized brokers. Even so, a lot of tailoring had to be done to construct appropriate environmental risk transfer, which included policies containing more than a dozen amendatory endorsements. In fact, you lost if you secured an “off the shelf” policy from the offering insurance companies.
Nearing the end of the decade, environmental insurance policies started to mature, with more competition entering the field. Companies such as Kemper, Reliance and Home made bold entrances. Those companies do not remain, but have been replaced by a more robust environmental marketplace. During the same period, CPL policies could be amended to include transportation to/from job sites, non-owned disposal site coverage, and the offering of a combined contractors pollution/professional liability coverage form.
During the late ‘90s, remediation cost caps (“poor man’s cost caps”) came into play with the development of guaranteed fixed price remediation contracts when contractors were permitted to transfer remediation cost overrun risk. The underwriting community also started down a slippery path of modifying the CPL with a high retention offering some protection for cost overrun. This was even more prevalent with combined professional/contractors’ pollution policies.
This trend, coupled with poor underwriting, led to CPL becoming an unprofitable line of business for insurers offering “poor man’s cost caps.” Even today, loss escalation of cost cap-type coverage affects the market leaders.
Also in the late ‘90s came the concept of combined general liability along with professional and pollution liability. Initially, the combined product was meant for environmental consultants and remediation firms. The policy concept is excellent, but as the insurers built the market and received premiums with favorable loss ratios, they did not learn from past behaviors and began to expand the coverage to non-environmental contractors such as excavation and demolition.
Around the time of the Y2K threat, the construction defect craze began taking off, with mold being one of the biggest exposures. The standard insurance industry responded by introducing mold, exterior finish insulation system (EFIS) and residential and construction defect exclusions on most general and excess liability policies. The environmental insurance marketplace sought to provide a remedy by offering an endorsement for claims-made mold coverage, while charging extremely high premiums based primarily on historical claim perspectives for pricing development–and leveraging the opportunity to act opportunistically.
Initially, it was difficult for residential contractors to secure mold coverage but common for commercial contractors. However, as part of the underwriting criteria, contractors had to submit a water intrusion management plan (WIMP). I increasingly observed the submission of two-page WIMPs to 12-page plans written by industrial hygienists. Then, like the safety programs of yesteryear, contractors began submitting the plans of other contractors from the Internet, sometimes even forgetting to change the company name. It became a joke, but the plans are still requested today, with many engineering news record (ENR) contractors actually formalizing such plans as part of their best practices efforts.
CPL Today
The 21st century has been a boom for CPL policy improvements, new entrants and robust competition. Because of this, policy forms have vastly improved, with minimum premiums for new policies falling well below $50,000 and easily obtained for less than $20,000. CPL claims-made policies have rapidly been replaced by occurrence forms. Mold, while still underwritten, is nearly a throw-in. Coverage enhancements for transportation, non-owned disposal sites and even premise liability for batch plants and contractor yards can now also be endorsed. In addition, policy forms can be amended to include professional liability and the requirement of at least 25 percent professional design fees has been relaxed.
Other advances include:

• Contractor pollution project programs, which can now be written to cover the owner, prime contractor and all trades
• Coverage extensions for emergency response costs to mitigate sudden pollution incidents
• Crisis management for pollution events to offer contractors additional image and public relations support
• Multi-year policies, from 1 to 5 years
• Combined form for general, professional and pollution liability
• Excess coverage that will follow the aforementioned.

The emergency response cost coverage is a wonderful enhancement for risk mitigation, both from the insured and the insurer perspective. Some insurers offer it as part of their policy language, while others provide it as a sublimit upon request. It is similar to sudden and accidental coverage in which the coverage responds to a distinct period of commencement, end and reporting to the insurer. It is then essential for the insured to also understand that this coverage, if offered, can include an obligation to either report emergency clean-up actions before they are initiated or within specific time frames.
Although competition usually serves the market well, the CPL market is beginning to harden. The environmental insurers that have sustained the market for the past two decades are backing off project CPL and other opportunities for fear the market has become commoditized. This is important because it supports risk transfer best practices. This includes thoroughly understanding the insurer, the length of time they have served this specialty market, their capacity and use of tried/true forms and the provision of a claim division that specializes in construction and construction pollution. Here is the gut check: How does the insured feel about jumping sureties for insurers without a long history of quality support? The same case can be made for CPL.
Although the market has matured, it is still important to understand that coverages can be customized with the appropriate endorsements requested from the underwriters.
While insurers won’t volunteer such enhancements, they are often there for the asking and without additional cost. Hopefully, the brokers who invest in specialty verticals will recognize the benefits provided through the direct return of new business premiums and account retention. Indirectly, the experience should even improve agency balance sheets and E&O mitigation.
A calling to all agents and brokers: If you are not offering the pollution solution, your competition will. You also have likely exposed yourself to potential professional liability claims for a coverage form that is both affordable and easy to secure.