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Pollution liability insurance lowers commercial contractor risks

Pollution liability insurance lowers commercial contractor risks

As the commercial real estate market begins to rebound, risks from environmental exposures remain a threat, says Jeffrey M. Slivka, executive vice president and chief operating officer of New Day Underwriting Managers L.L.C. in Hamilton, New Jersey. Contractors pollution liability is available and premium rates are falling, he says.

After a long period of doubt, frustration and uncertainty, numerous studies say the commercial real estate marketplace in the United States is apparently undergoing a revival.

For instance, the second-quarter survey by the National Association of Realtors revealed that “sales volumes rose 7% from a year ago,” while year-over year prices increased 3%. Furthermore, a study, “Emerging Trends in Real Estate 2014,” conducted by PricewaterhouseCoopers L.L.P. and the Urban Land Institute, also stated that “2014 may well be the year that the real estate markets recovers” due to the “consistent and growing demand for commercial real estate across all property types.”

Unfortunately, there are still many obstacles to the industry's growth. Included among these is the ongoing potential for environmental exposures, which have been known to derail the closure of commercial transactions, building new structures or renovation of old ones based on suspicion alone.

This is in large part due to the introduction and strict enforcement of stringent regulations demanding a higher level of transparency among owners and investors as well as the costly cleanup or remediation of any number of environmental threats ranging from the contamination of groundwater to the poor storage of hazardous waste to the identification of mold, bacteria and fungus in ventilation systems.

As a result, contractors pollution liability insurance has become an increasingly viable option for covering bodily injury, property damage, defense and cleanup as a result of pollution conditions caused by contracting operations performed by or on behalf of the contractor or named policyholder. Purchased on a “blanket” or “project” basis, the insurance can include coverage for transportation of waste and materials and the policyholder's legal liability at nonowned disposal facilities, as well as some level of coverage for the policyholder's owned/leased locations and “base” job site activities.

In the marketplace, it is estimated that approximately 40 insurers offer some form of contractor pollution liability coverage. The expansion is expected to continue due to the low frequency of claims and the modest loss ratios over the products' lifetime. As indicated by the “2014 Market Update” developed by New Day Underwriting Managers earlier this year, nearly all insurers also will likely modify or update current policy forms, making it “fun” for even the most experienced insurance professionals to analyze the differences.

With the large number of competitors in the market, the pricing for contractors pollution liability has remained relatively soft over the past five years. Subsequently, contractors that renew their coverage can expect a flat to a slight 2% to 3% rate decrease — provided that revenue, project type and claims remain static. If significant fluctuations occur with any one of the aforementioned factors, rate increases could exceed 10%. In contrast, the pricing for individual projects will remain aggressive, with limits in excess of $5 million tending to be erratic among different insurers.

Capacity is not an issue and can be as much as $50 million for a single company, although most companies normally top out between $10 million and $25 million. Excess limits typically are available if needed, for both project/practice and project policies.

In addition, contract specifications requiring pollution insurance will be the biggest buying motivator for such coverage among contractors going forward. This will extend to public entity owners, which will increasingly require contractors to purchase pollution legal liability insurance for the real estate risk on which projects sit.

For many insurers offering contractor pollution liability as a package of basic jobsite coverages, the usual expansion of insurance will include:

• Coverage of pollution conditions as a result of claims associated with transportation — either by or on behalf of the named policyholder.

• Coverage of pollution conditions as a result of the named policyholder's disposal of waste at disposal facilities.

• Coverage of emergency response expenses — or costs incurred by the named policyholder to prevent further damage.

• Some level of pollution coverage associated with the named policyholder's owned/leased locations, such as maintenance shops/facilities, offices and warehouses related to the construction business.

At this stage, most contractor pollution liability policies are written on an occurrence basis with claims-made triggers, such as pollution legal liability for covering a policyholder's location.

Mold, microbial matter/bacteria or bacteria are typically insured on a claims-made basis, although some insurers are increasingly offering this insurance on an occurrence basis. Other coverage also is becoming more available for exposures such as low-level radioactive waste, electromagnetic fields and medical/ infectious/pathological wastes.

Furthermore, supplemental coverage that range from $100,000 to unlimited for defense expenses are available from some insurers, with additional enhancements offered as a supplementary limit or a sublimit. These can include:

• Emergency remediation expense: assists with expenses associated with a pollution condition's cleanup prior to notifying their insurer.

• Crisis management expense: assists with expenses associated with managing the media by providing public relations assistance and media management as a result of a pollution condition.

• Litigation and subpoena expense: assists with the expenses associated with loss of earnings and reasonable expenses, for example attendance at depositions.

• Green building materials: assists with increased expenses for remediation if using such materials to replace standard materials.

• Mediation credit: uses an approved mediator to settle claims disputes, which then could result in a reduced retention for the policyholder.

In the future, the trend toward the migration of only contractor pollution liability insurance to a combined professional and contractor coverage will continue to evolve in relation to the ever-changing professional liability risks of contractors. This alone may significantly affect premium writings/volume. Consequently, as the number of insurers offering contractor pollution liability coverage expands, the number of experienced underwriters per company will decrease, leading to the use of underwriters with little experience as the expansion outruns the talent pool. This, in turn, will have a direct effect on responsiveness, as most insurers commonly rely on experienced, in-house contractor pollution liability staff and/or vetted claims providers rather than “generic” professionals to promptly and appropriately fulfill claims.

Despite these challenges, the availability of contractor pollution liability insurance will remain plentiful with soft and competitive premiums. This also will include enhancements and supplementary coverage that are likely to continue well into the future.

Jeffrey M. Slivka is executive vice president and chief operating officer of New Day Underwriting Managers L.L.C. in Hamilton, New Jersey. New Day is a specialty intermediary with expertise in environmental insurance, environmental risk management and construction-related professional liability. Mr. Slivka can be reached at 609-298-3516, ext. 102, or at

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