Something in the air

Part 1 of our feature on how indoor air quality is driving the new environmental insurance market

Something in the air

Business strategy

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Environmental insurance has always been associated with stuff that happens outside – chemical spills, Superfund sites, overturned oil tanker trucks. But there is also an urgent and growing need for coverage indoors – largely due to pollution, fungus, mold and bacteria exclusions on sublimit property and general liability policies.
 
“The biggest mistake made by sellers and buyers of insurance in general is that they operate under the assumption that pollution exclusions only apply to hazardous waste,” says David Dybdahl, president of American Risk Management Resources Network. “That has never been the case.”
 
Over the past 10 years, new exclusions on contamination claims have hit the property and liability insurance market very quietly, leaving building owners and vendors twisting in the wind with significant indoor air quality exposures that they and their insurance agents might not even be aware of.
 
“A lot of things could be excluded as contamination claims, in both property and environmental policies,” Dybdahl says. “The effects of these new exclusions are very underappreciated by buyers and sellers of insurance. The need for coverage expanded a lot, and the buyers never responded – not because it was so expensive, but because they never looked for environmental insurance in the first place. They never knew they needed to.”
 
The wild world of indoor airborne contaminants
Claims from indoor air quality loss exposures generally fall into two categories on liability policies: bodily injury and property damage.
 
Bodily injury claims frequently arise when people are exposed to airborne irritants emanating from building itself. Building materials – contaminated drywall, furniture finishes, composite wood flooring, carpet glue, paint – can give off toxic fumes that sicken the building’s inhabitants, triggering allergies, asthma and a host of other health problems.
 
Making matters worse, “there is no natural ventilation in a modern office building, so unless an air exchange system is taking care of it, the building is probably not venting properly, and the concentration builds up,” says Bill Pritchard, founder and president of Beacon Hill Associates.
 
There might also be outside pollutants getting into a building, which can lead to bodily injury of a building’s inhabitants.
 
“Any number of things can get into the lower extremities of a building,” Pritchard says. “We saw one claim where a contractor put a gas generator near an air intake, and the fumes were getting sucked into the building.”
 
Other external culprits include radon, methane leaks, a fuel spill on a neighboring property that was not properly cleaned up, or even an old abandoned tank no one knew was there that is venting into the building.
 
Then there are organic problems, such as mold growing in the ducts of a building’s HVAC system. Moisture gets in, the mold starts to multiply, and before you know it, mold spores are being transmitted throughout the building, leading to potentially devastating property damage as well as bodily injury claims.
 
“All mold needs to grow is warmth, moisture and a food source,” Pritchard says. “You could have mold growing inside your walls and have no idea.”
 
Indeed, the EPA estimates that one-third to one-half of all structures have damp conditions that may encourage development of indoor pollutants such as molds and bacteria. A building plagued by such issues is said to have ‘sick building syndrome,’ a serious problem with sometimes deadly consequences for its inhabitants, and serious financial impacts for building owners and contractors who have not sought out adequate environmental insurance to protect themselves from the exposure.
 
Growing threats
While mold spores, external pollutants and off-gassing building materials can all lead to serious health issues, it’s Legionnaires’ disease that the American Industrial Hygiene Association characterizes as “the most lethal building-related illness associated with waterborne bacteria.”
 
The disease is entirely environmental; it isn’t passed from person to person. Rather, people become infected with Legionella bacteria after inhaling the mist from water sources where the bacteria thrive – potable water systems, fountains, cooling towers and hot tubs – in homes, hospitals and hotels.
 
Legionnaires’ disease is on the rise across the nation. According to the Centers for Disease Control and Prevention, incidence of the disease in the general population increased 320% in the first decade of the new millennium. And it continues to escalate, as evidenced by last summer’s record-setting outbreak in New York City that claimed at least a dozen lives.
 
“The recent outbreak of Legionnaires’ disease in New York City in August 2015 is a good case in point on the wide-ranging effects of pollution exclusions,” Dybdahl says. “Losses associated with bacteria are specifically excluded by fungi and bacteria exclusions found in virtually all general liability and property insurance policies today.”
 
Category 3 water – a government term for water that is contaminated with bacteria – is another area of particular concern for exclusions pertaining to indoor air quality. All water in a drain or sewer pipe, water on carpeting for more than two days, floodwaters, tidal surges, wind-driven ocean water and any water that comes in contact with soil are all considered to be Category 3. By default, the fungi to bacteria exclusion in GL and sublimit property policies applies to Category 3 water losses.
 
“A sewer leak in a high-rise apartment building can easily be a $10 million problem,” Dybdahl says. “If the owner of the building has not done something about the fungi to bacteria sublimit that has likely been slipped into their property policy, they will have $10,000 to deal with a $10 million problem, and nobody told them about it. That’s quite a gap.”
 
The fact that there has been continuously affordable environmental insurance for the entire time exclusions have been in place “doesn’t help on the E&O side of things” for insurance agents, Dybdahl adds.
 
Despite the affordability and availability of the product, “there seems to be a historical aversion to buying this type of coverage,” he says. “There seems to be a stigma about it.”


(to be continued)

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