SPECIAL REPORT AM I COVERED FOR THE CLEANUP OF POLLUTANTS FOLLOWING A MAJOR CLAIM SUCH AS A FIRE?

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1 SPECIAL REPORT AM I COVERED FOR THE CLEANUP OF POLLUTANTS FOLLOWING A MAJOR CLAIM SUCH AS A FIRE? ( ) This Special Report was written by Daniel P. Hale, J.D., CPCU, ARM, CRM, LIC, AIC, AIS, API of Marsh & McLennan Agency LLC. Mr. Dan Hale can be contacted at or dhale@mma-mi.com. More Special Reports are available at Have you ever considered whether your insurance policy would cover you for a regulatory action brought by a government agency mandating that you cleanup your land following a major claim? Exhibit A to this Special Report is an actual letter from the Michigan Department of Environmental Quality which was sent to a property owner following a major fire at their warehouse. The insured was a manufacturer but was not involved in any highly toxic operations nor did they store any dangerous chemicals. The total cost to complete the cleanup was significant and very little insurance coverage was available. The following is an explanation of the pollutant clean-up coverage which is available under the standard property insurance policy. As always, no two insurance companies or policies are created equal. The actual language of these provisions will vary on a caseby-case basis. Property Insurance Policy The standard property insurance policy provides very little coverage, if any, for the cleanup of pollutants following a covered cause of loss. First, where coverage does exist, the cleanup is limited to the insured premises described in the policy and does not extend to adjacent or non-owned properties. Second, the cleanup must be the direct result of a covered cause of loss, such as a fire. For example, an accidental chemical spill in the parking lot would not be covered since it is not a covered cause of loss. Third, the condition must be reported to the insurance company within 180

2 days of the date of the original cause of loss. The exact words of the policy are as follows: Pollutant Cleanup and Removal We will pay your expense to extract pollutants from land or water at the described premises if the discharge, dispersal, seepage, migration, release or escape of the pollutants is caused by or results from a Covered Cause of Loss that occurs during the policy period. The expenses will be paid only if they are reported to us in writing within 180 days of the date on which the Covered Cause of Loss occurs. This Additional Coverage does not apply to costs to test for, monitor or assess the existence, concentration or effects of pollutants. But we will pay for testing which is performed in the course of extracting the pollutants from the land or water. The most we will pay under this Additional Coverage for each described premises is $10,000 for the sum of all covered expenses arising out of Covered Causes of Loss occurring during each separate 12-month period of this policy. Isn t this covered under Debris Removal? The standard property policy provides limited coverage to cleanup debris after a major loss. Many insureds are surprised when they discover that the property policy specifically states that debris removal coverage will not apply to any pollution claims, regardless of the cause. The language of the policy is as follows: Debris Removal does not apply to costs to: (a) Extract pollutants from land or water; or (b) Remove, restore or replace polluted land or water. Isn t this covered under Ordinance or Law coverage? Some policies include an optional ordinance or law coverage which is intended to cover the increased costs of construction associated with the Environmental: Am I Covered For The Cleanup of Pollutants Following A Major Claim ( )/hr.np (Rev ) 2 of 11

3 enforcement of building codes and regulations following a covered cause of loss. Some insureds are under the false impression that this would include the enforcement of any environ-mental regulations; however, the policy specifically states that ordinance or law coverage does not apply to any pollution related damages. Ordinance or law coverage does not cover: (a) The enforcement of any ordinance or law which requires demolition, repair, replacement, reconstruction, remodeling or remediation of property due to contamination by pollutants or due to the presence, growth, proliferation, spread or any activity of fungus, wet or dry rot or bacteria; or (b) Any costs associated with the enforcement of an ordinance or law which requires any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants, fungus, wet or dry rot or bacteria. Liability Insurance Policy A general liability policy covers bodily injury or property damage to third parties. Most general policies will exclude coverage for all liability claims related to a pollutant, regardless of the cause. This is referred to as the Total Pollution Exclusion. As a general rule, policyholders should always begin with the assumption that their liability policy includes a total pollution exclusion and that no coverage would apply. In some cases, the insurance company might be willing to revise the pollution exclusion (prior to a loss) in order to allow for a few limited exceptions where coverage would apply. One exception is for heat, smoke or fumes from a hostile fire. The specific language is as follows: This pollution exclusion shall not apply to * * * iii) Bodily injury or property damage arising out of heat, smoke or fumes from a hostile fire ; In this case, the hostile fire would have to cause bodily injury or property damage to a third party who then brought a lawsuit against you for damages. Environmental: Am I Covered For The Cleanup of Pollutants Following A Major Claim ( )/hr.np (Rev ) 3 of 11

4 Regardless of the hostile fire exception, regulatory actions would not be covered under the liability policy. For example, if the Environmental Protection Agency or Department of Environmental Quality brought a regulatory action against the owner or operator or a parcel of land to enforce cleanup, the liability policy would not respond. In order for the hostile fire exception to the pollution exclusion to apply, a nongovernmental third party would have to bring a tort claim against the insured alleging either property damage or bodily injury. A mere regulatory action does not quality. The specific language of the regulatory action exclusion is as follows: This insurance does not apply to any loss, cost or expense arising out of any: (a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, con-tain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, pollutants ; or (b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of, pollutants. Even if liability coverage does apply under one of the narrow exceptions to the pollution exclusion, the liability policy will not cover any damage to the insured s own property bodily injury or property damage to a third party property is always necessary. Conclusions and Solutions As a general rule, insurance programs are only as good as the insurance agent who is negotiating the coverage. Some of the coverages mentioned in this report are available for the asking and would result in little if any additional premium. The bottom line here is that most insurance policies do not provide sufficient coverage to address the cleanup of pollutants following a major loss. Environmental: Am I Covered For The Cleanup of Pollutants Following A Major Claim ( )/hr.np (Rev ) 4 of 11

5 Policyholders should consider purchasing higher limits of pollution cleanup coverage on their property insurance. Some carriers offer increased limits for pollutant cleanup as high $250,000 for a mere $300 in premium per year. Policyholders with significant exposures should consider purchasing a separate pollution legal liability policy which is specifically designed to address the bodily injury, property damage, and pollutant cleanup exposures. Environmental: Am I Covered For The Cleanup of Pollutants Following A Major Claim ( )/hr.np (Rev ) 5 of 11

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11 This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change. Environmental: Am I Covered For The Cleanup of Pollutants Following A Major Claim ( )/hr.np (Rev ) 11 of 11