Understand the Difference Between General Liability and Environmental Liability and Check Your Needs at Least Annually
LSL Partner Ron Stumpf Talks with Sandra Denisac, Vice President, CIC, at McGriff Insurance
General vs. environmental liability
Ron: What is the difference between general liability and environmental liability coverage?
Sandra: It sounds like a general liability policy would cover “everything”. But that’s not the case, and, it’s become a more critical distinction while catching companies unaware. The general liability responds to 3rd party claims of bodily injury, property damage and personal injury. But, an almost absolute exclusion will exist in the general liability policy for any claim involving a “pollutant”. This is where environmental liability policy moves to cover that gap.
What are toxic substances, and where are they found?
Sandra: A pollutant, in most insurance policies, is a substance defined as any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapors, soot, silt or sediment fumes, acids, alkalis, chemicals, hazardous substances, hydrocarbons and waste. It is often expanded to include viruses, bacteria and mold. These substances can be released into the soil, air, bodies of water and waste water streams, resulting in bodily injury or property damage.
Ron: Manufacturers using or producing heavy-duty chemicals would be logical places. Where else do you find these substances?
Sandra: That is a problem. It’s not always obvious and is really found on MOST premises of business. For instance, an automotive service business isn’t manufacturing chemicals, but, they will drain oil and coolant in the scope of their operations. They capture the “waste”, which is then removed and transported by another third-party, for further disposal. The property owner/business is responsible for any spill on the property and to where it is even further disposed. Less obvious may be manufacturing companies, apartment buildings, or office/retail properties. They may have some pollutants, such as adhesives, acids, or cleaning compounds solutions that maintenance crews keep on the premises or they are used in their manufacturing processes. Chlorine, for instance, is considered chemical pollutant. Additionally, if there’s a fire, the smoke contains emissions of these to seep into the atmosphere. Often, people are unaware or forget they’re there, or, do not think of the potential harm and damage they can do AND not being covered by the general liability. So, again, any of these substances going into soil, water and the air, on and off your premises, is your responsibility and liability.
When is the best time to review these policies?
Ron: Many of our clients come to us for help with buying a business or selling their current one. Reviewing their current insurance policies is one of the things we look at with them at that time.
Sandra: Yes, and particularly during transitions, mergers, and acquisitions, more eyes are on the business. We think it’s essential that companies remain alert to the nuances of their liability coverage. Here we have given the example of why they should possess both general liability AND an environmental liability policy. Surprising, but, every company has some level of environmental liability to the extent of what is on the premises. And, this will encompass not just what they’re producing now, but what was previously handled on that property.
Every property owner is at risk by virtue of what the past occupancy has been also. For instance, suppose one purchases a retail shopping center and there was a dry cleaning service on that site, in previous years, which performed older (currently prohibited) processes. They could be inheriting some site contamination that has nothing to do with their current or future operations. Even so, they may look to a separate environmental liability insurance policy. This, too, can be sought outside of indemnity agreements within a property transaction which may not be sufficient to financially ensure a future complete remediation, and, to satisfy the regulatory body. There are different ways to structure that coverage to transfer the risk along with addressing the length of historical exposures.
Whose responsibility is it?
Ron: It seems like everyone who owns a business should check to make sure whether they need both an environmental liability and a general liability insurance policy.
Sandra: Yes, property owners/manufacturers need to be particularly cognizant not only of their own site, but, the potential of contaminating neighboring properties, transportation beyond the boundary of their property (by their vehicles or others) and utilized disposal sites for their “pollutants”. These are all in their stream of liability. Even though they may utilize a third-party transporter who specializes in hazardous waste, or, disposal, they still have vicarious liability in a spill or release. Additionally, if their product itself is deemed as a pollutant ( a chlorine distributor), a product pollution coverage would need to be sought. Here’s something else to consider. That contamination could diminish a company’s property value or their neighbor’s property value in the course of that spill. So, in all these examples, environmental liability insurance would be advised.
Ron: We have clients that buy property for expansion or investments. Most properties are purchased with debt. What are the insurance considerations?
Sandra: You’ll have a seller, buyer, and, potentially a lender involved. And, for the interest of all parties, a phase 1 is usually sought. That report will confirm the condition of the property or could suggest that a phase 2 (digging deeper) be performed, to further verify the presence or lack of pollutants. If the Phase 1 is acceptable, with nothing greatly revealed, all parties could proceed to transaction. But contamination could still found in the future. The tort for environmental liability is farther reaching. Even with the best indemnities struck, is the financial wherewithal of the seller/buyer adequate in the future, to remediate a pollution condition successfully? An environmental liability policy can be utilized to establish confidences to all parties in the transaction, and, transfer the potential future risk. Often this can be negotiated favorably for an extended term of up to 10 years.
Ron: Speaking of buying and leasing property, let’s say that we have some investors that want to do a ground lease with someone like a “Starbucks”. Does “Starbucks” have an environmental policy, or do we need to put something in the lease regarding that?
Sandra: I would say that there definitely should be provisions within that lease that address environmental liability and indemnification from the tenant back to the property owner. But, even with that, your client investor/property owner is still going to be responsible by virtue of their property ownership, in addition the vicarious liability of other’s use of that property. Are those indemnities supported by adequate financial means (assets) or an insurance policy? Does it extend to name the client as additional insured? With that, the policies would need to be in effect at the time of a revealed contamination. Most policies are written on a claims-made basis, which simply means, when the policy expires so does the expected coverage.
Ron: How about leasing to medical offices?
Sandra: A medical office often has some medical waste handling. A property owner/business will want to see that the medical office is carrying environmental liability insurance, for any infectious waste, handled and disposed of in the course of their care. This is different but poses the same environmental liability exposure as chemicals and is often encompassed in what is defined as a pollutant. (viruses, bacteria, mold, infectious waste) So, the property owner/tenant are both in the environmental liability realm for what is being handled.
Sandra’s Recommendations: We think business owners should meet with their insurance broker to discuss any business changes and meet, AT LEAST, annually. Lots of things can happen during a year. It is also prudent to make sure all locations of a company are included in the update interview. We use expanded checklists with our clients, additionally, to best ensure we’re not missing anything.
We suggest that organizations utilize only those specialized independent contractors, and consultants, with the appropriate credentials. Regulatory Body requirements are an evolving environment. They might assistant in such things as a review of your chemical handling and general safety, while reviewing those best practices that should be in place. Those specialists will also suggested mechanisms and steps for soil, air, and water testing, when required, for pollutants.
LSL’s Recommendations: Companies should have routine insurance audits and be aware of the general and environmental liability policies applicable to their business.
For a list of agencies and hazardous substances in California, and to learn more about the topic, please visit some of these websites: https://calepa.ca.gov/, https://dtsc.ca.gov/, https://www.ca.gov/,
About Sandra Denisac, VP, CIC at McGriff Insurance
Sandra has 35+ years in the insurance industry with special expertise in Professional, Management, Cyber, and Environmental Liability placements. Her knowledge spans all business sectors with particular emphasis on the High Tech, Financial, Chemical and Recycling Industries.
About Ron Stumpf, CPA, Partner, LSL CPAs
With four decades in public accounting, Ron Stumpf’s area of expertise includes audits, reviews, compilations, and mergers and acquisitions. His savvy business sense partnered with his knowledge of government regulations and tax law make him the perfect match for entrepreneurs and business owners.