The insurance industry calls them "pollution incidents," and they could mean financial devastation for your company. The reason? Your property and general liability insurance policies probably contain a pollution exclusion, which means "any damage that results from a pollution incident, either gradual leakage or sudden release of chemicals, or anything between those extremes, is an excluded cause of loss," says Robert Rosenfeld, director of the environmental risk management practice at Canon Insurance Service in Beverly Hills, California.
Of course, any coverage that insurance companies exclude from one policy, they'll offer in another-hence the introduction of pollution liability insurance. Rosenfeld says the coverage evolved soon after the tremendous amount of asbestos litigation in the 1970s. At that time, insurers decided to remove pollution liability from basic commercial policies and instead offer it separately. "This meant they could draft contracts that address pollution, and develop underwriting and rating models that specifically consider those issues," Rosenfeld says.
The most common use of pollution insurance is to protect buyers, sellers and lenders in commercial property transactions. Traditionally, buyers have hired environmental consultants to conduct site assessments, which usually take three to four weeks to complete at a typical cost of $3,000 to $5,000. In addition to the delay involved, another drawback of site assessments is they express the consultant's opinion of the condition of the site at the present time and do not consider future discoveries or incidents.
By contrast, pollution liability insurance protects the policyholder for the term of the policy (typically up to 10 years and renewable) for any future incident or discovery of previous damage. And it's generally less expensive than performing a site assessment. For example, Rosenfeld says, environmental liability insurance on a $2 million office building will cost approximately $2,500 for $1 million of coverage for a five-year term.
"This is such a useful, flexible, economically advantageous way to manage environmental risks that I expect that within a few years it will become as common as title insurance in real estate transactions," Rosenfeld says. It's also an inexpensive way to manage pollution liability in other circumstances, he adds. "Any business whose ongoing operations involve the storage, handling or transportation of materials that, should they be released into the environment, would be considered pollutants should look into this type of coverage."
The insurance protects you when the pollution event occurs on your property, as well as when you suffer damages because of pollution at a nearby property. So if your neighbor's chemical spill migrates to your property, your insurer takes care of the cleanup and then takes the responsibility for recovering costs from the party that caused the problem. By the same token, if you cause damage to other property, your policy pays. Policies also cover bodily injury caused by pollution and may even be written to cover loss of business income due to a pollution incident.
Environmental coverage is a relatively new product, so check with your insurance agent for details on coverage in your area.
- Canon Insurance Service, firstname.lastname@example.org