The Business Insurance Pollution Exclusion

A long time ago on a Boy Scout camp-out, I had a meal prepared for the younger scouts by the older kids. Everything was fine until they told us about the worms they had added to the stew. Your insurance can be like that — it may seem fine, until you learn what’s in there.

Let’s talk about one of the surprises: the pollution exclusion that exists in most commercial insurance policies. Your company probably has a general liability policy that’s designed to protect you from paying for injuries or property damage your business causes. However, almost all liability policies contain a broad exclusion for claims involving pollution.

What if an oil storage tank on your property leaks and contaminates a neighbor’s well? No coverage. The same problem arises if a product you sold leaks from a customer’s storage tank, polluting a nearby stream. Absent a special policy or amendment to your standard policy, there is typically no coverage in standard commercial insurance for this event.

Recall that we’re not just talking about cleanup expenses — there are fines and penalties assessed by federal and state regulators. Don’t look to insurance to pay these expenses either.

And it’s not just your general liability insurance to think about. Imagine your company’s truck overturns while making a delivery, spilling paint that runs into a storm drain. There is usually no coverage under your auto policy for this event. In fact, most automobile policies will only cover pollution from the gas tank, crankcase, or engine of your vehicle.

Your property insurance policy probably also provides limited pollution coverage, depending on the circumstances of the event. Several years ago, a client in Rockland, Maine had an oil storage tank outside his building. Ice slid off the roof and severed the feed-line that ran from the tank to the furnace, spilling two hundred gallons of heating oil. His property insurance policy included $15,000 of coverage for the cleanup of oil on his property, because the damage was caused by an insured peril — falling ice. The policy also paid to repair the severed fuel line and remove the contaminated soil, along with the testing required by the Department of Environmental Protection.

In that case, the company was in good shape. However, if the above spill had been caused by a corroded tank or leaky valve, there would have been no coverage. Your property insurance also won’t pay for damages to your building, a well, or a stream on your property that has been contaminated by a neighbor.

Reducing exposure

So here’s the situation: You’re faced with uninsured exposures if you’re accused of polluting someone’s property, or are the victim of pollution-related damages from another source. But your company doesn’t need to be left exposed. First, take a complete inventory of your pollution risks. Do you store paint, cleaning chemicals or scrap materials? Do you have a fuel storage tank for your heating oil? Do you transport pollutants? Did previous property owners store or process hazardous materials on your site?

With this information, you can speak with your insurance adviser about risk management and coverage options. Perhaps you can change the way you store material to limit your risk. Perhaps you can limit the volume of hazardous material you store on site. Maybe a shipping company can transport the chemicals for you.

Your adviser also can help adjust your current insurance policies. Some insurers will add endorsements to your current policies that remove some or all of the pollution limitations. Costs vary depending on your exposures and the appetite of your insurers, but additional premiums could be as low as $500 and as high as $50,000.

What’s more, several specialty insurers provide broad protection that will pay for cleanup and remediation after a pollution event. Industry-specific insurance programs have been designed for fuel companies, delivery services, gas stations, and dry cleaners. Again, your insurance adviser can help assess what’s on the market, but be cautious: There are no standard pollution policies. Each must be carefully reviewed for coverage and exclusions. The cost of special policies can range from $2,000 to hundreds of thousands of dollars.

Although pollution-related damages are excluded from most commercial insurance policies, you don’t have to be without protection. Review your options with your insurance adviser and find out where you are vulnerable. Armed with that information, you can act to limit your risks. After all, isn’t that what insurance is all about?