We recently had the chance to analyze one of the leading Contractors Pollution Liability forms in the market. Here are some of the highlights of their special policy form that was designed for remodelers:

Basic Underwriting And Policy Information

* Carrier Financial Rating (Best’s Rated A IX)

* Eligible risks: remodeling, renovations, trade contractors that are impacted by EPA RRP regulation.

* Required: Lead Safe Work Practices Training Certificate for firm and individual renovators

* Ineligible risks: demo only contractors and pure abatement contractors (separate policy form is available for these contractors that includes higher rates and narrower coverages).

* Limits available: $1,000,000 to $10,000,000

* Occurrence policy form (superior to claims made policy form).

* Deductible: standard deductible is $5,000 per claim

Special Endorsements Adding Enhanced Coverages

* Lead Abatement: always make sure that all CPL policies include coverage for lead paint abatement as many don’t.

* Fines / Penalties: a reduced sublimit is available on a claims made for to cover certain EPA fines and violations.

* Lead Testing / Sampling: covers errors made in incidental lead testing and sampling per the EPA regulations. Coverage is on a claim made form.

* Transportation Including Loading and Unloading; covers exposure incidents resulting from auto accidents and loading and unloading if lead dust is released.

* Non Owned Disposal Site: covers remodeler if shot gunned into lawsuit due to use of non owned dump.

* Additional Insureds can be added

* Waiver Of Subrogation can be added

* Mold Coverage

Contractor Pollution Liability Sample Pricing (based on test ratings of remodelers in SC)

* Minimum premiums: around $2500 for $1,000,000 limit of coverage

* Rates based on per $1,000 of total revenues for both lead and non lead jobs.

* Sample $1,000,000 limit rates per $1,000,000 of revenue

   – Less than $1M in revenue: $2.55

   – $1M to $2M in revenue: $1.20

   – $3M plus in revenue: $1.11

Are Many Remodelers Currently Purchasing CPL policies?

Not yet, but demand is expected to increase as word spreads about high profile lawsuits with large settlements or jury awards. The EPA RRP regulation which will create liability for failure to comply with standards is approximately one year old and it takes time for claims to work their way through the legal system. In addition, attorneys specializing in lead paint will begin to educate the public and advertise for clients.

If you are interested in a quote, please contact Sadler & Company, Inc. via the contact information on our home page which can be found on this blog.

Source: John Sadler

The answer as to whether or not a contractor’s General Liability policy will respond to claims under this act or to lead paint exposure claims in general requires a disciplined analysis of the policy form. However, in the vast majority of cases, General Liability policies won’t respond to these claims.

The most likely types of lead based claims or lawsuits are as follows:

* Allegations of bodily injury or property damage arising out of a lead paint dust contamination incident where a remodeler fails to follow safe workplace practices.

* The costs to clean up after an exposure incident.

* EPA fines resulting from an incident or failure to comply with the regulation.

The Standard General Liability Policy Form And Absolute Pollution Exclusion

Exclusion F. (2004 CG 0001) is commonly known as the “absolute pollution exclusion” and the highlights are summarized as follows:

No coverage for “bodily injury” or “property damage” arising out of … the discharge, dispersal, seepage, migration, release, or escape of “pollutants”… at or from the premises of the insured … or at or from any site on which the insured or contractors are performing operations if the pollutants are brought onto site in connection with operations….

The phrase “if the pollutants are brought onto site in connection with operations” excepts remodelers from the absolute pollution exclusion since they don’t bring the lead paint dust to the worksite.

Exclusion F. also addresses that coverage does not apply to operations to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. In addition, there is no coverage for demands by government for testing or clean up.

Based on the above, it is possible for remodelers to have coverage for “bodily injury” and “property damage claims” under the standard General Liability policy form.  However, endorsements to the General Liability policy must be analyzed as well.

Total Pollution Exclusion Endorsement

This endorsement is found on most contractor General Liability policies. It removes all exceptions to the “absolute pollution exclusion” including when pollutants are not brought to the jobsite by the remodeler. 

If this endorsement is present on the policy, remodelers can no longer depend on the exception under the standard policy form.

But Wait, About Half Of State Courts Rule That Lead Paint Is Not A “Pollutant”

“Pollutants” are defined as any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, soot, vapor, fumes, acids, alkalis, chemicals, and waste.

Some courts have a broad interpretation of the definition of “pollutants” and rule that lead paint falls under the definition since it is a contaminant.

Other courts have a narrow interpretation of the definition of “pollutants” and rule that it does not specifically list lead paint and that the reasonable expectations of the policyholder is that “pollutants” only apply to traditional environmental or industrial pollution and not to other contaminants such as those found inside a house.

The narrow interpretation which is prevalent in states with large metropolitan populations such as NY and CA can have the effect of defeating both the “absolute pollution exclusion” and the “Total Pollution Endorsement” and thus paving the way for coverage for a lead paint incident.

Absolute Lead Exclusion Endorsement

As would be expected, the insurance industry created a specific endorsement to address those courts that rule that lead paint dust is not a “pollutant”. The Absolute Lead Exclusion Endorsement and similar endorsements remove all questions that the General Liability policy does not respond to lead paint claims.

The majority of all contractor General Liability policies have included this endorsement for many years.

If you have this endorsement, don’t expect to have coverage under your General Liability policy; however, you should always turn a claim in and let the claims adjusters decide on the issue of coverage.

Summary

If the General Liability policy does not cover lead paint claims, what policy can be purchased to provide this coverage? Stay tuned for a future blog on Contractors Pollution Liability (CPL).

Source: John Sadler

However, due to the impact of little known policy exclusions, and evolving case law in many states, General Liability carriers may escape liability for all or a significant percentage of claims leaving builders and trade subs facing huge uninsured losses and potential bankruptcy.

From the point of view of the homeowner, these claims will not likely be covered by Homeowners Property Insurance. And, to the extent that the damages are not covered by the General Liability policies of builders, subs, and distributors, home owners will incur devastating out of pocket losses.

Per House Damage Could Be Astronomical

There is a lot at stake for all parties because the damages on a per house basis are likely to be astronomical. The lawsuit papers will allege that the fumes from the defective Chinese drywall have resulted in corrosion damages to all metal parts of the house including electrical systems, copper piping, HVAC and other metal fixtures. In addition, it will be alleged that the non metal parts of the house have been damaged by foul smelling and noxious sulfur dioxide fumes.

Some experts may claim that the drywall can be sealed, but this approach is questionable and unlikely to be accepted by home owners. Most lawsuits will likely ask for the total removal and replacement of all drywall and electrical systems as well as other building materials that may have been contaminated by the fumes.

Next, add damages for remediation or replacement to household contents for exposure to corrosive and foul smelling fumes. Top this off with the possibility of bodily injury claims due to adverse health consequences to occupants due to exposure.

Pollution Liability Exclusions

All Contractor General Liability policies include a standard exclusion for liability arising from the “actual, alleged or threatened discharge, seepage, release or escape of pollutants’,” “Pollutants” are defined as any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. “Based on this broad definition, the carriers will take the position that the fumes released from Chinese drywall fall under the policy definition of “pollution.”

Fortunately, the standard policy language includes an exception to the exclusion for pollution that results from the products or completed operations of an insured. In other words, the insurance carrier can’t use the pollution exclusion to deny a claim when the pollution arises after the house has been sold.

Unfortunately, many General Liability policies that are sold to contractors include a Total Pollution Exclusion that does not allow the exception that is mentioned in the above paragraph. The presence of the Total Pollution Exclusion (or similar exclusion) on a policy will allow the insurance carrier to take the position of denial of all damages and legal defense. The success of such a position will be determined by the allegations in a specific lawsuit as well as case law. The successful use of the Total Pollution exclusion, if upheld by the courts, will have a devastating impact on all defendants.

Property Damage Exclusions And Emerging Case Law

In the event that the Total Pollution Exclusion is not present on the General Liability policy or if it is not ultimately upheld by the courts, the claims adjusters will have a fallback position in their quest to deny a significant percentage of Chinese drywall claims.

As a result of the construction defect crisis, most General Liability carriers specializing in builders insurance began to insert special policy exclusions around five years ago to escape liability for construction defect claims. The most common exclusion entitled “Exclusion: Damage To Work Performed By Subcontractors On Your Behalf” (CG2294), virtually eliminates all property damage liability for damage to the builder’s faulty work itself (drywall) and resulting damage to the builder’s non faulty work (corrosion to electrical systems, copper piping, HVAC, and other metal fixtures).

Existing case law in many states has resulted in claim denials for construction defect under the theory that property damage to a builder’s work is not considered to be an “occurrence” or accident and thus the policy should not act as a warranty. Therefore, the end result in these states is the same as the application of exclusion CG2294.

However, General Liability coverage under the builder’s insurance policy will still likely apply to property damage to contents and bodily injury claims by occupants. Since most lawsuit papers are likely to allege at least some covered damages, coverage will still be triggered for the entire legal defense for all claims at the expense of the insurance carrier.

As concerns drywall subcontractors, their General Liability policies will not cover property damage to their work (drywall) but will cover resulting property damage to other parts of the house and contents. Their policy will also cover bodily injury to occupants. In addition, their policy will likely trigger a full legal defense of all claims.

Assuming that both the builder and drywall sub have General Liability insurance in force continuously from the completion of the job to the filing of the lawsuit papers, their combined policies won’t likely cover the cost to tear out and replace the drywall. Such a repair job represents a huge undertaking and will be very expensive.

US Suppliers And Chinese Manufacturers

US suppliers of Chinese drywall will undoubtedly participate in these lawsuits with both builders and drywall subs. Plans for class action lawsuits are already under way. Under a worst case scenario, some US suppliers may run out of general aggregate limits under their General Liability policies and it is unlikely that Chinese manufacturers will share in these claims due to the difficulties in enforcing judgments against foreign manufacturers.

Builders can protect themselves from future construction defect and pollution claims by implementing the following practices:

* Implement mandatory subcontractor agreements with all subs including insurance requirements for General Liability, hold harmless/indemnification provision, and a requirement for all subs to participate in arbitration proceedings.

* If the builder’s General Liability policy includes the Exclusion-Damage To Your Work Performed By Subcontractors On Your Behalf (CG2294) or a similar exclusion, find out if the insurance carrier provides a buyback for an additional premium charge.

* Ask the insurance agent if any insurance carriers are available that don’t use exclusion CG2294 or have a less severe version that covers resulting property damage to the builder’s non faulty work.

* Purchase a Pollution Liability policy.

Source: John Sadler