From mold to Legionella bacteria outbreaks, environmental- and pollution-related losses on commercial properties are on the rise, and these types of claims will only increase in the wake of Hurricanes Harvey and Irma. As a result, closer attention is being paid to pollution exclusions on property and liability policies.
This reality is changing the game as far as which coverage forms respond to losses and how claims are approached. For example, water grossly contaminated with bacteria is now handled as an environmental claim instead of being covered as a water loss under property policies. Mold losses that once fell under property policies as water losses are now either excluded or subject to significant sub-limits. More publicly known, Legionella claims are triggering pollution exclusions found in general liability and property policies.
As risk managers witness the change in how claims professionals read and apply pollution exclusions, insurance professionals have a great opportunity to offer environmental liability products to their commercial-property clients—and to protect themselves from errors and omissions claims.
For hospitality and high-rise condominiums—the traditional buyers of environmental impairment liability (EIL) policies—claims related to mold outnumbered all other claims even before Hurricanes Harvey and Irma. However, we have found that fewer than one percent of commercial building owners purchase EIL coverage. This means 99 percent of commercial buildings are underinsured for claims associated with contamination, including mold.
Recent flooding—especially from Hurricane Harvey—will compound this issue. According to the Institute of Inspection Cleaning and Restoration Center’s (IICRC) Standard and Reference Guide for Professional Mold Remediation, mold needs three things to grow: a food source, heat, and water. Depending on the amount of saturated organic matter, mold spores can colonize within 72 hours. If relative humidity is 60 percent or over for an extended period of time, there will be environmental losses. Furthermore, bacteria can reproduce their colonies by 100 percent every 20 minutes in an ideal situation, and Hurricane Harvey created ideal situations for both mold and bacteria growth. Hurricane Irma may well have created such conditions in certain areas, as well.
The poor take-up rate of EIL insurance in the commercial property space can be explained by the general breakdown in the insurance distribution channel for environmental insurance products. Most commercial property insurance agents and brokers are not trained in pollution, fungi, and bacteria exclusions, so they cannot effectively convey the need for environmental insurance to their customers. Insurance buyers, therefore, do not see a need to purchase environmental coverage for their loss exposures. We believe this, rather than price, is the main reason for low EIL insurance market penetration.
Historic Inconsistencies in Applying Exclusions
The current influx of mold claims under EIL policies began in 2005 when insurance companies began including exclusions for fungi, mold, and bacteria losses into virtually all personal and commercial insurance policies. The anti-concurrent causation clauses eliminate coverage for ensuing losses from an otherwise covered cause of loss. Once any amount or type of mold or bacteria becomes involved in a loss scenario, the entire loss falls under the anti-concurrent causation exclusion. Claims professionals are very skilled at the use of anti-concurrent causation provisions found in flood exclusions, and this same skill should be applied to the anti-concurrent causation provisions for fungi and bacteria.
In addition to these specific policy exclusions, bacteria contamination has been determined by case law in many states to be a “pollutant” in insurance policies for decades. Therefore, damages from leaking drains and sewage (Category 3 water, which is the IICRC’s classification for water considered “grossly unsanitary”), or any water you wouldn’t drink, can be excluded by both fungi/bacteria exclusions and a pollution exclusion on the same policy.
These double exclusions for Category 3 water-related losses should have driven many claims to high-quality EIL policies over a decade ago. But it never happened.
Essentially, most claims professionals were unaware of how these new anti-concurrent fungi, mold, and bacteria exclusions were designed to operate, and, as a result, fungi, mold, and bacteria claims were paid as ensuing losses from covered water damages rather than excluded when the water was grossly contaminated with bacteria. Ignoring these anti-concurrent causation provisions played a significant role in delaying the migration of claims to, and the customer demand for, EIL polices.
Rising Application of Exclusions Leads to More EIL Claims
Increasingly, claims professionals are discovering the intent of fungus, mold, and bacteria exclusions in water damage losses, and they are figuring out how mold and bacteria exclusions and sub-limits operate to limit insurance recoveries under standard property and liability policies. Environmental loss exposures to commercial properties can be applied in a broad sense. We have heard and seen environmental claims on commercial properties varying from a banana peel shutting down the ICU of a hospital to an elementary school condemned due to mold, resulting in the school being shut down for an extended period.
Now, more denied mold claims in the standard property and liability insurance policies are spilling over to the EIL polices, if an EIL policy has been purchased. This, more than changes in weather patterns or increased take-up of EIL policies, is driving the recent rise in EIL claims. More Category 3 water losses are being shut off at the $25,000 sub-limits commonly found in property insurance policies for bacteria and mold-related losses.
The good news for insurance purchasers is that bacteria can be an insured pollutant in specifically designed EIL polices. EIL policies provide broader coverage for mold- and bacteria-related losses than traditional property and liability insurance policies, even if those policies do not have anti-concurrent causation fungi and bacteria coverage restrictions. EIL policies cover first-party property damage (cleanup and restoration expenses, loss of rents, and extra expense) as well as third-party liability and defense costs that may also be incurred by the owners of commercial properties.
Considering the frequency of mold-related damages in commercial properties due to wet drywall, broader coverage under EIL policies combined with more excluded fungi and bacteria claims under traditional property and liability insurance policies would logically explain how mold became the cause of so many EIL claims in 2016.
We should ask ourselves, where did the other 99 percent of mold- and bacteria-related losses not covered by commercial property policies end up? My educated guess is these incurred losses are festering and looking for a home for cost recovery. If the insurance buyer has not already declared bankruptcy from an uninsured fungi-, mold-, or bacteria-related loss, then cost-recovery efforts usually end up in court, in a search of responsible parties.
For example, there is a commercial office building in the middle of an environmental loss due to a fiber optics contractor drilling into the main water line and sewer line. Recently, a rainstorm caused a flood of water grossly contaminated with bacteria, which closed a dentist’s office down for two weeks. This most recent flood resulted in human waste sitting stagnant in the parking garage for over two days. The property owner was aware of the specially designed EIL policy and how it would be applied, but declined to purchase the coverage. That property owner will ultimately be funding this loss out of his own pocket when an EIL policy could have been triggered.
The use of EIL policies is no longer limited to hazardous material manufacturers or facilities. The need for EIL policies should be applied to commercial buildings and managers more than ever. The frequency of mold-related losses in commercial buildings occur more than we might think.
Based on the loss results in EIL policies, it appears that the anti-concurrent causation exclusions for losses related to fungi and bacteria in property and liability policies are finally taking hold in claims settlement practices on commercial properties. The big question is, when will EIL insurance become an accepted and necessary line of insurance in the commercial property space?