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Expanded pollution coverage soon will be available through three new endorsements to the absolute pollution exclusion in general liability insurance policies, but the endorsements will stop far short of solving policyholders' pollution coverage needs, brokers and attorneys say.
Most notably, the endorsements, which the New York-based Insurance Services Office Inc. drafted, do not cover pollution cleanup costs. The expanded coverage is restricted to third-party property damage and bodily injury claims caused by pollutants.
The endorsements also do not narrow the pollution exclusion's broad definition of substances insurers consider pollutants.
As a result, policyholders who obtain the endorsements likely will continue to have pollution coverage gaps unless they purchase environmental impairment liability insurance, brokers and policyholder attorneys warn.
"The three new endorsements solve only a very minuscule problem with the pollution exclusion," said policyholder attorney John A. MacDonald, a partner with Anderson Kill & Olick P.C. in New York.
But, Mr. MacDonald and others agree that any expanded pollution coverage under the commercial general liability insurance policy is a positive development for policyholders.
Indeed, the endorsements provide coverage regardless of whether an accident that involves a pollutant, as defined by the absolute pollution exclusion, has caused environmental damage.
Policyholders long have complained that insurers have abused the exclusion by denying claims for accidents that involved chemicals but did not damage the environment.
According to the Louisiana Insurance Department, which played a vital role in the development of the endorsements, a typical example of the problem is a claim that a municipality faced but its insurer refused to pay after invoking the exclusion. The claim was filed by a swimmer who allegedly suffered an allergic reaction to the chlorine used in a public pool.
All three new endorsements cover third-party property damage and bodily injury claims caused by pollution releases at a policyholder's premises or at an insured contractor's job site.
One new endorsement would cover such losses if the pollution event ended within 48 hours after it began and the policyholder reported it within 14 days. The endorsement would not apply to underground storage tanks.
Another new endorsement would cover the same losses under the same constraints as long as a loss resulted from a named peril. Named perils could include lightning; windstorm; earthquake; and the explosion, implosion, puncture or collision of equipment, as long as equipment deterioration did not trigger the loss.
An additional constraint under that endorsement is the pollution event cannot be identical to or the resumption of another event that occurred within the previous 12 months.
The third new endorsement would provide coverage if losses were caused by a specified pollutant.
That endorsement would not impose either the 48-hour pollution duration limitation or the 14-day reporting requirement found in the other endorsements.
However, it would bar coverage if a loss resulted when a substance was being transported, disposed, treated or stored as waste or if the policyholder had been transporting or storing the substance for another entity.
Regulators in 43 jurisdictions have approved the endorsements. Only regulators in Hawaii, Illinois, Minnesota, New York, Puerto Rico and the District of Columbia have not ruled on them. ISO also has not yet filed the endorsements in California, Texas and Virginia, where regulators are behind in ruling on other policy amendments ISO submitted earlier, an ISO spokeswoman said.
The endorsements will be available for use in most jurisdictions beginning Sept. 1, the spokeswoman said. It's not clear how much or whether insurers will charge for the endorsements.
The Louisiana Insurance Department, which approved the endorsements April 9, became the driving force behind them after problems developed with a stunning policyholder victory in the state's Supreme Court. The court in 1994 ruled the absolute pollution exclusion does not bar coverage for non-environmental claims (BI, June 12, 1994).
But, the insurer in the case then raised questions over whether the Insurance Department had approved the use of a pollution exclusion endorsement at issue in the case by the time the policy was issued. The policy began in early 1986, the year most insurers began using the ISO-drafted absolute pollution exclusion.
The court vacated its decision a few months later and remanded the case. The litigating parties now are trying to settle.
Louisiana regulators stepped into the scene when the insurer raised the exclusion endorsement issue. The department determined it would not have approved the endorsement if it had known insurers would use it to deny coverage of non-environmental losses, said C. Noel Wertz, a senior attorney with the department.
The department first shared its concerns with ISO in 1994. After two years of stop-and-go discussion between the department and ISO, ISO last year unveiled endorsements designed to better protect Louisiana policyholders that do not pose pollution risks.
A departmental task force continues to work on a directive designed to ensure both that insurers make the endorsements available to policyholders that pose little pollution risk and that insurers invoke the absolute pollution exclusion properly, Ms. Wertz said.
Louisiana Insurance Commissioner James Brown and his staff "are on the cutting edge in trying to redress the insurance industry's abuse of the absolution pollution exclusion," said Mr. MacDonald, the policyholder attorney.
But, ISO representatives and insurer attorney Laura Foggan, a partner with Wiley Rein & Fielding in Washington, said the endorsements are as much the result of the market's concern about meeting policyholder demand.
"These endorsements are very good options for insurers," said Robert Miller, a vp with ISO in Atlanta, who was involved in the discussions with the Louisiana department. "It permits them to handle pollution exposures in a new and different way in a manner that was not available under the pollution exclusion. It should open up the market."
Policyholders, though, should not rely on the endorsements for broad pollution coverage, brokers and attorneys warn.
"It's better than nothing at all, but you still would have big gaps" in pollution coverage with the endorsements, said Dave Dybdahl, managing director-environmental risk management services at Willis Corroon Group P.L.C.'s operation in Nashville, Tenn.
Brokers will have to make sure policyholders understand what the new endorsements do and do not provide, said John J. Theiss, vp-director of environmental risk management services with Sedgwick of California Inc. in Orange.
Most notably, the endorsements continue to exclude cleanup costs.
"Cleanup costs are where the action is under pollution claims," Mr. Dybdahl observed.
He also is concerned that policyholders will expect too much protection from the named-pollutant endorsement. That could lead to increased errors and omissions claims against brokers who do not advise policyholders about all the substances that insurers can classify as pollutants, he said.
"There will be a lot of mistakes made in this one," he predicted.
The problem is that even the most innocuous substances can be considered pollutants under the pollution exclusion if they are disposed improperly, he noted.
Mr. MacDonald agreed. "All three of these endorsements suffer from the same fundamental defect as the original absolute pollution exclusion and its progeny. The definition of pollution that is the heart of these exclusions is so over-broad that it can be manipulated by insurance companies to exclude insurance coverage for virtually any type of injury" caused by a substance.
The named-pollutant endorsement is particularly grating to Mr. MacDonald, given insurer testimony 12 years ago about how the pollution exclusion was supposed to work. Mr. MacDonald said insurer representatives testified at Texas regulatory hearings in 1985 that insurers should exclude coverage for losses caused by pollutants by adding policy endorsements that specifically identify those pollutants.
"This new version actually reverses that and puts the ball on the other foot. Everything is excluded unless it is mentioned in a specific endorsement," he said.
"What they need to do is start out with a definition that accurately encompasses what they intend to exclude," he said.
The endorsements also continue to exclude coverage for bodily injury and property damage caused by a malfunctioning heating unit.
The ISO spokeswoman said that is because that coverage is available under the CGL policy.
But, Mr. MacDonald said tapping that coverage is difficult. The buyback policy under which the coverage is available will not respond unless the heating unit malfunction results in environmental damage. That rarely occurs, he explained.
The event-duration and claim-reporting requirements in two of the endorsements also pose coverage hurdles not found in the remainder of the policy, Mr. Dybdahl said.
Regardless of the endorsements' limitations, Mr. Dybdahl recommended that risk managers obtain them to broaden their CGL coverage as much as possible, as long as the endorsements are free or are inexpensive. "But don't make that your complete risk management strategy, because there are holes in each one of these endorsements."
Responding to criticisms that the definition of pollutants remains too broad, Ms. Foggan, the insurer attorney, said the new endorsements have to be viewed in a historical context.
Insurers would not have developed the absolute pollution exclusion if policyholder advocates had not persuaded some courts to rule that pre-1986 CGL policies covered policyholders' recurring toxic waste dumping activities because each incident was a separate sudden and accidental event, she said.
In addition, insurers never intended that CGL policies would cover cleanup costs, Ms. Foggan said. "That's what has to be maintained," she said.
"So now, insurers are moving back and creating some pollution coverage. If the criticism is, 'Gee, that's not enough,' you have to look at how we got here," she said.
Pointing to the environmental impairment liability insurance market, Ms. Foggan said, "It's not appropriate for environmental claims to be tossed in with general liability." If they were, CGL coverage would be more expensive for all policyholders, including those without environmental risks, she said.
Some brokers agree that policyholders have to realize that they cannot expect CGL insurers to protect them from environmental pollution exposures, because many are not able to properly underwrite the risk.
"There now exists environmental insurance policies that do buy back the absolute pollution exclusion as well as cover other environmental exposures," Mr. Theiss said.
At least $100 million of EIL insurance limits and 140 different EIL products are available to U.S. risk managers, but less than 1% of operations that would benefit from the coverage purchase it, according to Mr. Dybdahl (BI, Nov. 11, 1996)