Daniel Frazee, Executive Vice President of Rancho Mesa Insurance, and Vice President of the Construction Group, Sam Clayton discuss pollution liability.

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Director: Alyssa Burley

Producer/Editor: Lauren Stumpf

Host: Daniel Frazee

Guest: Sam Clayton

Music: "Home" by JHS Pedals, "Movin' Up" by Dan Lebowitz

© Copyright 2023. Rancho Mesa Insurance Services, Inc. All rights reserved.

Transcript

[Introduction Music]

Daniel Frazee: Welcome, everyone, and thanks for joining us. My name is Daniel Frazee, the Vice President at Rancho Mesa, co-manager of our Construction Department. We're here with fellow agency principal, Sam Clayton, who helps me manage the construction group. Welcome, Sam, and thanks for being in StudioOne™ today.

Sam Clayton: Good morning, Daniel. Happy to be here.

DF: We've had an opportunity to talk to some clients, to talk to some industry people, and I think more recently we've had really an opportunity to start talking about coverages and particularly, coverages within the construction realm. And, I think today I'm excited to talk, as excited as we can be, to talk about insurance, really to have some conversation on general liability policies and delve deeper into some key exclusions that we often see as we negotiate terms and conditions with underwriters for our clients. Walk the listeners through, Sam, maybe a real key exclusion that we often see and come across as we see quotes from various carriers.

SC: Well, one of the key coverages we see is a pollution exclusion on the policy, and that's going to cover third party property damage and bodily injury. Most contractors think of that as mold, and so they have to secure a separate policy for that. And we're seeing more and more general contractors require the subcontractors to carry a monoline, stand-alone, pollution policy. And, you know, I’m dating myself five or six years ago, typically we would see the GCEs require million dollar limits. In the last couple of years, we see that increased to five-million dollar limits.

DF:  Okay. And, you mentioned two things. You know, third party. I think it's important that we talk with and share with our listeners the difference, let's say, between a first party issue and a third party issue as it relates to pollution liability. So can you kind of expand on that a little bit?

SC: Sure. Third party is the damage that you cause to a customer or clients property. And, you know, first party would be something that you did to yourself.

DF: Got it. So, like a site pollution incident at one of our client's locations.

SC: Correct, site pollution or, you know, you're working on a commercial building and you're the drywall contractor and you punch a hole through a pipe. That pipe leaks over time, creating mold. And all of a sudden there's the building needs to be remediated to clean up that mold.

DF: Got it. Okay. Appreciate you kind of clarifying that. So, as we talk more about the coverage itself, you alluded to subcontractors that obviously are working for general contractors and are required to, in some cases, carry this coverage for pollution for contractual reasons. What type of contractors typically might be required to have pollution liability?

SC: Well, you know, typically we see the MEP trades, the mechanical, electrical, plumbing, but it also is anybody who's working on the building envelope, whether that's a glazier or you're working on the curtain wall, roofer, someone that could penetrate the roof in any kind of way. So, really, it's all trades pretty much have some sort of pollution exposure, it really depends on how much.

DF: Okay. Okay. And, I know I know from my experience, I've seen claims name many different subcontractors, whether they were actually working on the building or they were around the building and they get brought in. And the challenge, I think, and we've both seen this is, if they don't have a standalone pollution liability policy, to your earlier point, the coverage is going to be excluded on their general liability. And then what? Are they just representing themselves and hoping to remove themselves from the claim itself?

SC: That's correct. So, in addition to the remediation costs that the pollution policy would cover, but would also cover the defense costs as well.

DF:  Okay. Got it. So filling the gap, right. So, let's assume that one of our current clients is looking to secure pollution liability coverage. You know, what types of options are out there? You mentioned million dollar limits. What do pollution policies look like in the marketplace? And you know, what drives the premium for them?

SC: The rating basis for a pollution policy would be your total gross sales. This would include both your non-OCIP as well as CCIP work.

DF: Okay.

SC: So, you know, if you're a trade contractor and you’re doing $10 million in sales and 50% of your work is covered under OCIP, your general liability policy would be covered under 5 million of that, 10 million. But, your pollution policy would cover both your non-OCIP and CCIP. So, it would be based off the 10 million exposure.

DF: Okay. And then just backtracking a little bit, when you're saying, OCIP, CCIP, you're talking about project specific policies where the owner, developer, or the contractor is purchasing the insurance and then kind of bringing in the sub trades under that particular policy.

SC: Correct. Those trades are enrolling in those OCIP’s, and those OCIP’s are only providing, you know, general liability, sometimes worker's comp, builder's risk, and then an excess policy.

DF: Okay.

SC: So, typically, those policies will exclude the pollution coverage, which would mean the subcontractor would have to get that on a standalone basis.

DF:  Got it. You just answered my question, which I think was, you know, would pollution be covered in in kind of the scope of that policy? And the answer is no. So, our clients that are the subs are likely still going to need that pollution maybe by contractual requirement and maybe because it's a good way to transfer the risk.

SC: Exactly.

DF: Okay. Let's kind of move on to, more so that the way in which the pollution policies can be structured and, you know, I know I get asked a lot the difference between claims made policy and an occurrence form. Right? Walk the listeners through the difference between those as it relates to pollution liability and maybe which is better for our clients as they're going through that comparison point.

SC: Okay. Yeah. So, pollution policies can be written on a claims made basis as well as an occurrence basis. Typically, we see the form written on an occurrence basis and the key differences is kind of like, when the coverage is triggered. So, on an occurrence form, the claim is triggered when the bodily injury or property damage happened, versus a claims made form is, it's when the claim is actually made against the insurance company. So, let's just use a quick example. Let's say you're building a project and there was some sort of property damage that was done and, you know, a claim was to be made three or four years down the road and an occurrence form, that claim would be covered, versus a claims made form because the claim wasn't made during the policy period or potentially the extended reporting period, there could be no coverage.

DF: Okay. All right. So, good distinction. Then, are pollution liabilities are on- I mean, they can be on both forms?

SC: They can be on both forms. You know, we've seen them either. But, if we had our preference, obviously, we would lean towards an occurrence form.

DF: Okay.

SC: Just because it's broader coverage.

DF: Right. And, I know that typically, as we build out the specifications for our underwriters, we're not asking but requiring those underwriters to provide occurrence based options or occurrence form options, correct?

SC: Correct.

DF: Okay. Sounds good. So, you talked about an earlier claim example. Talk about like, a mold situation. When a lot of people think of pollution, you get to inside of a building and you get to the potential for mold, mold being discovered over a period of time. And then oftentimes, that mold kind of impacted individuals that were in the building. With that in mind, kind of walk through that bodily injury piece and what that claim might look like.

SC: Okay. So, I had an example a few years ago. One of my clients is on a project and for whatever reason, the concrete wasn’t allowed to cure over the time necessary needed and the building was enclosed and it was just so happened- it happened during one of those Santa Ana freak weeks in September or October when it's high nineties and, you know, unbelievably hot. Over the weekend, because the concrete wasn't cured, the entire floor of the building developed black mold throughout the hotel rooms. So, you know, obviously nobody was staying there. So, there was no long term bodily injury effect to, you know, the occupant of that hotel room. But, you know, that room needed to be remediated immediately. And there was a loss of income for the hotel. So, the claim had a lot of lag.

DF: Got it. Meaning there were- well, it was costly, I assume, across a lot of different sections.

SC: Correct.

DF: Okay. All right. Makes sense. And similarly, I can share an example. We had an HVAC contractor, right. Plumbing and HVAC contractor, who inadvertently installed an air conditioner improperly. And, over time, water leaked into the walls of a commercial office building and the building was sold a few years later. And after the work was performed and mold had developed inside the walls of several, several spaces within the building. And then over time, there were multiple tenants that were having issues with their lungs. And it was- it ended up being a very serious issue with multiple people who filed a suit at that time, against the building owner, who then, ended up tendering the general contractor who performed the work. And then, it all it got all the way to our subcontractor. Thankfully, they had a pollution policy in place and were able to draw from that to do the remediation and address the medical needs of those folks that were impacted by the mold. So, I think as we're kind of sharing this information, it reminds me how critical pollution liability is as, again, something to transfer that risk to an insurance company for what oftentimes, I think you probably agree, is a pretty reasonable or fair premium relative to the exposure. Would you agree with that?

SC: Totally agree. And, you know, pollution is one of those lines of coverage. It's low frequency, but high severity. So, you know, you may never see a pollution claim or incident, but if you do, it will more than likely be pretty significant.

DF:  Right. Right. And so, I think my maybe call to action in kind of leaving this this conversation is to those existing clients and potential new clients of Rancho Mesa moving forward, if this is a coverage that has been in conversation, I think playing through it… Too many of our clients secure this coverage as a result of contractual requirements as opposed to maybe purchasing it, again, because it's good business practice.

SC: I would 100% agree.

DF: Right.

SC: Really, it's transferring balance sheet risk.

DF: Right.

SC: You know, because if you don't have the coverage, then you're self-insuring that exposure.

DF: Right. And you've said that before, just as we talked in the office, a balance sheet risk, as I understand it, and I, I use that in conversation with people is really, you know, can your balance sheet absorb, let's call it a several hundred thousand dollar loss from something where insurance is not something you can draw from?

SC: Right. And defend yourself.

DF: And defend yourself.

SC: And you may not even cause a loss, but, you know, you may have to- you're going to have to defend yourself to get out of it.

DF: Right. That's, I think, a missed point. I think a lot of people, as they look at their insurance portfolio, they can miss. So, good information, Sam. I think we've covered a lot of different pieces to pollution liability. I know we're going to get an opportunity to talk about professional liability, which is another common exclusion on general liability policies but that will be in a different podcast and we'll kind of continue the conversation and kind of peel that apart and explore that together in in a few weeks. So, I appreciate you taking time and sharing your thoughts. And as always, thanks for being in StudioOne™.

SC: Thank you, Daniel. Looking forward to our next podcast.

[Outro Music]

AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by StudioOne™. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.