Three types of exposures threaten the profitability of today’s remediation contractors...unless they judiciously select appropriate coverage for their unique risks.

Estimated revenues from remediation activities now range up to $15 billion annually. Not surprisingly, as contractors have become aware of this profitable market, the number of firms offering remediation and related environmental services has grown dramatically.

Initially, many contractors see only dollar signs when they consider expanding their activities to include remediation. They soon realize, however, that operating profitably in the remediation marketplace requires considerable technical expertise and involves more stringent regulatory oversight than that associated with conventional construction projects. In addition, the potential liabilities that may be imposed upon remediation contractors are substantially greater than non-environmental contractors.

Courts hold remediation contractors to a very high standard of care because their work can have dramatic impact on people, property and the environment. Despite careful performance of his operations, a remediation contractor may face operational, professional or pollution liability from his activities or those of his employees and subcontractors. If unprotected, liabilities can lead to daunting financial losses.

Operational Liability Coverage

Usually, non-environmental contractors only incur losses that arise from the operational hazards of their work. On the other hand, remediation contractors face more complex risks which fall into three main categories: operational, pollution and professional. Operational hazards, such as job site accidents, are the most common. Traditionally, the standard Commercial General Liability insurance policy has been the sole protection against liabilities associated with these hazards. This policy provides coverage for bodily injury, property damage, personal and advertising injury to third parties due to the negligence of a contractor, its employees or subcontractors working on its behalf.

The following is an example of a typical operational claim that could be covered under the Commercial General Liability policy:

A gas station hired ABC Environmental to remove two underground storage tanks (USTs). The job contract contained an agreement whereby ABC agreed to indemnify the owner. In the course of removing the USTs, a backhoe operated by an ABC employee disturbed a natural gas pipeline which caused an explosion and fire in a nearby building. Claimants suffering bodily injury as a result of the explosion and the owner whose building was destroyed filed claims against ABC and the gas station owner.

In this example, ABC Environmental is responsible for damages because it failed to use reasonable care in removing the tanks and as a result of its contractual obligations to indemnify the gas station owner. A Commercial General Liability policy should cover these claims—a standard form normally provides coverage for bodily injury and property damage resulting from an explosion, along with contractual protection.

However, the loss exposures of remediation contractors go beyond purely operational hazards. That’s why the Commercial General Liability policy is inadequate for protecting against all the losses that may result from remediation activities. General liability policies are insufficient because they normally contain professional and pollution liability exclusions. The pollution exclusion states:

This insurance does not apply to bodily injury or property damage arising out of the actual, alleged, or threatened discharge, disposal, seepage, migration, release or escape of pollutants at or from any premise, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to or access the effects of pollutants (ISO CG 00 01 10 93).

An Insurance Marketplace Is Born

This exclusion, or coverage gap, spurred the emergence of a separate Environmental Insurance marketplace over the past decade. These insurers have developed unique coverages that specifically address remediation contractors’ pollution and professional liability exposures. Underwriters with both insurance and technical expertise who fully understand the unique hazards of remediation contractors offer these coverages.

Pollution Liability Coverage

To obtain coverage which standard general liability policies don’t provide, remediation contractors should purchase a Contractor’s Pollution Legal Liability policy. This policy normally provides coverage for third-party liability, including cleanup expenses, that arise from sudden and gradual pollution conditions resulting from the contractor’s covered operations.

What losses does a Contractor’s Pollution Legal Liability policy cover that a Commercial General Liability policy excludes? The following claim scenario provides an example:

A major petroleum company hired XYZ Industrial to perform cleaning and remediation activities at one of their refineries. While working with a backhoe, an XYZ employee accidentally hit a pipeline resulting in the release of 5,000 gallons of fuel oil. A claim was filed against XYZ for spill cleanup and resulting contingent business loss due to the shutdown of the refinery.

Since the damages arose from the “discharge of pollutants” the Commercial General Liability policy’s pollution exclusion would deny coverage. To avoid this type of financially devastating loss, a company like XYZ would be well advised to purchase Contractors Pollution Legal Liability coverage. Only then can a company be certain that its loss exposures are adequately protected.

Combined Liability Coverage

As more companies enter the environmental field, customers are demanding that remediation contractors offer a broader range of services. In fact, many large contracting firms that once provided only hands-on contracting now offer a full range of environmental services. This evolution has resulted from mergers between remediation contractors and environmental consulting firms, as well as from remediation contractors who have established their own environmental engineering departments.

In response to the proliferation of environmental services companies, a few environmental insurance carriers offer a combination coverage form that links Professional Liability coverage (also known as Errors and Omissions) with Contractors Pollution Legal Liability coverage. This combination makes it possible for insurers to address the unique pollution and professional loss exposures of remediation contractors that also provide consulting services. Consider this scenario:

A remediation contractor hired to identify and delineate contamination from a leaking UST removed the tank and associated soil. Six months later, the site was still found to be contaminated. Depending on the actual circumstances of this claim, damages may have arisen either of two ways: from the contractor’s error to fully identify the extent of contamination (professional liability) or from the contractor’s failure to remove all of the identified contaminated soil (pollution liability).

What’s the value in purchasing combined pollution and professional liability coverage? It eliminates a contractor’s financial concerns over having adequate coverage to respond to a claim—whether the damages arise from a professional error or hands-on pollution mistake. One caution, however. If your Professional Liability coverage is with one carrier and your Contractors Pollution Legal Liability with another, this type of situation could lead to a dispute among the carriers as to whether the damages arose from a professional or hands-on error. Therefore, it makes good business sense to consolidate your coverage with one underwriter.

Choosing Your Coverage

Regardless of the services remediation contractors provide, their future profitability depends on recognizing the range of exposures they face and their need for a comprehensive insurance program. For this reason, look to those insurance carriers that can provide coverage against operational, pollution and professional liability exposures on a program basis. As your remediation services continue to evolve and expand, evaluate the potential liabilities associated with your activities. To safeguard your profitability, it pays to explore the insurance available which can provide an adequate and affordable mechanism of protection against potential risks and exposures.