April 2019 — Property owners and managers expose themselves to potential liability any time they engage a third party to perform work on their premises. If the third party causes injury to a building occupant, tenant, or employee, the owner or manager is a target for liability actions. For example, during asbestos abatement operations, there is the potential for asbestos fibers to be released. This causes elevated airborne asbestos levels, which may create health hazards and, consequently, may precipitate claims alleging bodily injury or property damage.
Various types of insurance can be purchased to cover exposures resulting from the work of environmental consultants and contractors. Environmental consultants should have professional liability insurance. Contractors hired to do remediation work should carry some other form of liability coverage, such as asbestos or lead-based paint abatement liability insurance or contractors’ pollution legal liability insurance. Finally, cost overrun insurance is available to provide owners with protection when a remediation project exceeds its estimated costs.
In addition to insurance, property owners may use a standard contract when they hire contractors. Such contracts generally include insurance requirements and may contain indemnification or hold-harmless agreements. The contract requirements are intended to protect the property owner against liability for events caused by the activities of the contractor.
Professional Liability Insurance
Environmental consultants are often hired to identify and evaluate the presence of contamination or to design an abatement or remediation program and evaluate its implementation. When hiring any environmental consultant, the owner should require that the consultant show evidence of professional liability insurance without any pollution exclusions that would adversely affect claims recovery for the specific work being performed. For example, an asbestos abatement consultant’s professional liability policy should not have an asbestos exclusion. Professional liability policies are written on a claims-made basis and should cover losses arising out of the acts, errors, and omissions of the consultant when rendering professional services.
Property owners may request that the consultant and its hired contractors provide limits of liability dedicated to the owner’s projects only. This prevents limits of liability from being shared and impaired by all the other work performed by the consultant or contractor. Liability limits are chosen based on the size and risk of the project. Since the insurance is provided on a claims-made basis, the owner should require the consultant to maintain coverage for several years beyond the end of the contract to address completed operations claims.
Asbestos Abatement Liability Insurance
Property owners should require an asbestos abatement contractor to carry asbestos abatement liability insurance to protect against claims of third-party bodily injury and property damage arising from asbestos abatement projects. Depending on the contractor, this requirement will generally be met using one of three different types of policies:
- Asbestos abatement liability insurance, combined with a standard CGL policy
- Stand-alone asbestos abatement liability insurance
- Contractors’ pollution legal liability (CPL) insurance, without asbestos exclusions
These policies are generally written on an occurrence basis. As with professional liability insurance, completed operations coverage should be obtained to allow coverage to extend beyond the completion of the contract. With the occurrence trigger, the actual occurrence must happen during the policy period, regardless of when the claim is reported. Some courts have deemed that the occurrence happens when the claimant’s disease first appears, which, with the latency problem of toxic tort claims (including asbestos-related claims), can be years after the project has been completed. If the policy has not been extended to the time of the occurrence, or renewed, coverage may be excluded.
Lead-Based Paint Abatement Liability Insurance
During lead-based paint abatement operations, lead dust can cause health hazards. The adverse effects of this exposure can be diagnosed almost immediately.
As in asbestos abatement coverage, there are at least three types of insurance policies available to protect contractors against claims of third-party bodily injury or property damage arising from lead-based paint incidents at abatement projects. These are:
- Lead-based paint abatement liability insurance, combined with a standard CGL policy
- Stand-alone lead- based paint abatement liability insurance
- CPL insurance, without lead exclusions
Contractors’ Pollution Legal Liability Insurance
As mentioned above, contractors who perform asbestos or lead remediation projects may choose to purchase contractors’ pollution legal liability (CPL) insurance. This type of insurance is also appropriate for other types of remediation projects, such as underground storage tank removal, and for other types of contractors, such as HVAC contractors or contractors applying sealant to a parking lot.
CPL insurance provides coverage for third-party bodily injury and property damage claims, cleanup costs, and defense costs at the project site or on a blanket basis for all of the insured’s operations. The specific physical operations being performed at the site must be identified in the policy, which should respond to liability claims for pollutants brought onto the site, created at the site, or exacerbated by the work being performed at the site.
If a contractor performs both physical operations and professional services, such as design and implementation of a remedial system, its insurance policy could combine both CPL coverage on an occurrence basis and professional liability coverage on a claims-made basis. It is important to note that under these combined policy forms, a loss under either coverage erodes the same liability limit. This type of combined form can also be used by an environmental consulting firm that either performs or subcontracts its physical remediation activities. Because the two coverages share one set of liability limits, the cost for such insurance is theoretically lower than if two separate policies were purchased.
Owner-Controlled Environmental Insurance Programs
Property owners have the option to control the insurance of their hired consultants and contractors under an owner-controlled environmental insurance program (OCEIP). In the case of large-scale asbestos abatement or other substance remediation projects, OCEIPs are typically used by owners who have multiple contractors due to their logistics, size, and project phases. The main advantage is that the property owner controls one policy insuring multiple parties at the site. When an OCEIP is used, owners can more readily decide what limits are adequate for their projects and ensure that the insurance underwriters understand and cover the scope of operations, so that there are no limited gaps or overlaps between contractors’ coverage forms.
The OCEIP can include coverages for professional liability, asbestos abatement liability, CPL, transportation either by the insured contractors or by third-party common carriers, loss of income due to business interruption for project development, and nonowned disposal sites. Nonowned disposal site insurance protects the property owner against future liability arising from the disposal of waste at a nonowned location, such as a landfill, recycling center, or transfer station. It can cover bodily injury, property damage, or cleanup costs beyond the boundaries of the nonowned location resulting from the insured’s contribution of waste to that location. It can also cover on-site cleanup costs on, within, or under the nonowned location resulting from pollution conditions originating from the nonowned location.
Cost Overrun Insurance
When environmental remediation projects exceed their projected costs, cost overrun insurance (also referred to as cleanup cost cap and remediation stop loss) helps to pay for the excess costs. This stop loss insurance program limits the financial loss exposure of environmental remediation projects for owners who are cleaning up nonoperational assets (such as closed manufacturing facilities), investors purchasing contaminated properties, and those who have been identified as potentially responsible parties (PRPs).
Cost overrun insurance policies usually require a large (10 to 50 percent) self-insured retention or buffer layer. This means the policy does not begin to pay until the project exceeds the estimated remediation costs plus a percentage of those costs, which is the amount of the buffer layer.
Cost overrun policies do not provide liability coverages, such as bodily injury, property damage, or defense costs. Some will not cover overruns that occur during the monitoring phase, after the actual remediation is complete. All contain restrictions and exclusions that limit the causes of the overruns that will be covered. Examples of situations that these policies typically will cover include failure of the remediation, unknown or new pollution conditions within the defined area, regulatory change orders, and errors in estimated remediation costs.
The term of a policy is typically written to equal the term of the project plus several additional years. Average policy terms are 10 years.
The premiums, limits, and self- insured retention available for cost overrun insurance depend on the type of project, the specific technology being applied (proven or unproved), and the underwriter’s confidence in the numbers provided as estimated cleanup costs. The standard basis for underwriting is the remedial action plan (RAP), which is prepared by an independent environmental consultant. At a minimum the RAP details the type of contaminants, the remedy to be applied, the estimated costs of implementation, and, if applicable, continued monitoring. Some states require a special sign-off prior to implementation for certain remediation activities.
This article is adapted from BOMI International’s Law and Risk Management course, part of the RPA designation program. More information regarding this course or BOMI International’s new High-Performance Sustainable Buildings credential (BOMI-HP™) is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.