Manufacturers face numerous and potentially severe environmental risks, whether stemming from their facility operations, their products, their services, their waste disposal practices, or even their over-the-road exposures. Because they can be held liable for damages resulting from any of these sources, a thorough risk mitigation program cannot be considered complete without pollution coverage for these insureds in place as a key risk transfer mechanism.
But creating such a program is not always easy. Confronted with a sometimes bewildering array of customizable environmental products, an agent needs a firm grasp of the basics to speak to their clients with confidence. This guide is offered to help you understand both the exposures and the available tools to address them.
Understanding the Unique Risks of Common Manufacturing Classes
Furniture Manufacturers: On-site storage and usage of hazardous materials—including solvents, adhesives, stains, varnishes, and lacquers—can result in soil or groundwater contamination if these items are improperly stored or disposed of. Volatile organic compounds and other chemicals commonly used in the finishing process may also lead to air emissions subject to environmental regulation. Additionally, the finished furniture itself may contain formaldehyde or flame retardants that can off-gas for years, worsening indoor air quality for consumers.
Textile Manufacturers: Processes typical to this class include mercerizing, dyeing, sizing, cleaning and finishing. The compounds used to perform these steps include alkalis, bleaches, heavy metals, solvents and other volatile organic compounds such as flame retardants. These materials and processes pose a significant risk of water contamination, so it is important to carefully review the manufacturers’ chemical storage, wastewater treatment, and waste disposal practices. Chemical residues on fabrics may also cause allergic reactions in certain consumers.
Paper Manufacturers: Pulp and paper mills commonly use solvents to bleach and de-lignify pulp, as well as biocides to prevent bacterial growth in finished products. Because the pulping process requires enormous amounts of water, discharges back to surface waters may result in toxic impacts to fish, water fowl, and sediments. Paper production is also energy intensive, leading many mills to have their own onsite coal-fired power plants. These may produce air emissions causing acid rain, or greenhouse gases contributing to global climate change.
Insulation Manufacturers: Any hazard associated with the production and usage of insulation depends heavily on the product type: foam plastics might utilize chlorine-based chemicals that deplete atmospheric ozone; fiberglass may rely on chemical binders that off-gas, contributing to indoor air quality issues; fibrous materials may be treated with problematic fire retardants. Even products deemed environmentally-friendly may pose a risk if installed improperly. Worse, remodeling projects may release hazardous materials long since banned from use.
Chemical Manufacturers: This class of business includes not only the producing of commodity chemicals, but also the mixing, blending, diluting, or converting of basic chemicals to make a wide variety of other products. Such activities may cause air pollution from the release of chemical fumes, water pollution from accidental spills or contaminated effluent, or soil pollution from improper storage of hazardous materials. Production waste such as process residues, spent catalysts or solvents, or contaminated containers may cause loss if disposed of improperly.
Herbicide & Pesticide Manufacturers: Similar to other chemical manufacturers, this class is characterized by the bulk storage and transport of hazardous materials. What is unique about this class, however, is that its products are designed to kill certain targeted species. In the event of a fire, explosion, derailment, or other catastrophic release, non-target species (including humans) may be exposed to inordinately high doses of biocides, possibly resulting in claims for natural resource damages, property damage, or bodily injury including death.
Remediation Equipment Manufacturers: Firms that produce equipment (such as oil/water separators or vapor extraction systems) designed to prevent or remediate pollution conditions might seem to present a very low risk compared to other manufacturers. In fact, they are no less vulnerable to loss, particularly due to claims that their equipment failed to remediate contamination, or even worse, exacerbated a known pollution condition. If they also install or service their own equipment, they may be exposed to pollution liability as a contractor.
Storage Tank Manufacturers: Both above- and below-ground storage tanks are manufactured for a specific end use, whether for containment of dry bulk, liquid, or gaseous materials. Their construction features dictate the onsite operations. For example, a facility making steel tanks performs fabricated plate work, steel rolling, cutting and welding operations that may include the use of solvents. A fiberglass tank manufacturer, on the other hand, may use resins, solvents, coatings, adhesives, or foaming agents that known to be sources of toxic air emissions.
Common Exposures & Coverage Used to Address Them
Presence or generation of contaminants.
Unlike many types of pollution exposures, manufacturing risks have a high level of inherent exposure in their operations. Whether it is the raw material used in the manufactured product, chemicals, solvents, lacquers or paints used in the manufacturing process, or the substances used to run and service the machinery, facilities have a significant on and off site pollution exposure. The exposure extends not only to the actual materials handled, but to the waste stream generated by the facility, as well as long term incremental contamination of the property. Exceeding discharge permits or contaminating the local ground water are both significant environmental liabilities all manufacturing risks face.
The coverage designed to address this exposure is:
Premises Pollution Liability (also called Site Specific Pollution Liability, EIL or PLL): coverage designed to address onsite cleanup of new or unknown preexisting contamination, as well as third party BI & PD. They can also cover off site BI, PD and Cleanup costs.
Manufactured product causes a pollution event.
A significant exposure for manufacturers remains the liability associated with their product. While most CGL programs provide coverage for the failure of the product, many exclude any pollution resulting from that failure. In the case of a manufactured vessel failing and releasing the fuel it held, this would lead to a significant pollution event that would be uncovered. If a product is a blended chemical and it interacts with the environment improperly through miss blending, it could cause a significant pollution problem. A product off gassing a toxic substance could be construed as a product failure and the resulting pollution event declined. It is important to recognize that the CGL carrier may be able to take any resulting pollution event and use it as grounds for declination of coverage.
The coverage designed to address this exposure is:
Products Pollution Liability: Coverage designed to respond specifically to the pollution element of a product failure.*
Contracting Operations performed away from the site.
Some manufacturers may be involved in the installation of their product or in service after the sale. These job site operations can lead to potential environmental issues. Exposure can come from materials brought to the site by the service team (fuels, lubricants, solvents, cleaning agents, etc.) or from an actual accident caused by the service people directly, such as a cut fuel pipe, breached tank wall, etc.
Coverage for the liability associated with these operations is:
Contractors Pollution Liability (CPL): coverage used to address the insureds’ liability for pollution conditions they cause at a job site.*
Disposal of Waste – Non-Owned Disposal Site coverage.
Every manufacturing process generates a waste stream of some sort. This may be discharged under permit into the sewer system or a stream, or it may be collected in drums for disposal. Waste retention lagoons are regularly pumped and cleaned, with the resulting byproduct disposed of. As the generator of the waste, the manufacturer retains a degree of liability for the waste, even when it’s been properly disposed of. This can lead to claims at locations completely removed from the Insured’s site.
Coverage for the liability associated with that disposal is called:
Non-Owned Disposal Site coverage (NODS): coverage that deals with the insured’s liability for pollution conditions at a non-owned disposal site. Some carriers provide for scheduled or blanket coverage for this endorsement.*
Over the road transportation of products, contaminants, or waste.
Transportation creates a wide range of exposures for all insureds. Whether it is the insured bringing in raw materials or delivering their product, or a third party hired by the insured disposing of waste, a spill on the highway presents an environmental exposure for the Insured. This over the road exposure can come from the Insured operating their own vehicles, or through their contingent liability for those they hire.
Coverage for the liability associated with that transportation is called:
Transportation Pollution Liability (TPL): This form is for the insureds’ liability for pollution conditions arising from transportation of their products or waste generated by their processes.*
* Each of these coverage lines can be endorsed on to the Premises Pollution policy. Coverage provided can still vary by carrier. It’s important to understand what the individual carrier’s endorsement states.
As illustrated in the following examples, environmental liability can arise from many sources:
- In an effort to diversify its income stream, a paper mill decides to use part of its manufactured pulp to produce butanol as a renewable fuel source. Despite a grant from the Department of Energy, it does not have sufficient funds to upgrade its outdated machinery, resulting in chronic violations of the state’s air quality standards. The Department of Environmental Protection imposes a $57,000 punitive fine on the mill.
- A furniture manufacturer has located the perfect site for a new production facility. Despite their exercise of due diligence, a long-abandoned underground heating oil tank was not discovered until after the property purchase was complete. Installed decades before, the tank has leaked for years and contaminated the subsurface soils. The new owner spends $33,000 to excavate and dispose of the tank and polluted soils.
- As part of an effort to provide a broader range of services to its customers, an insulation manufacturer starts a contracting division to install its “green” insulation products in commercial buildings. During a remodeling project, the manufacturer’s employee tears out large amounts of the original insulation, releasing asbestos throughout the structure. The property owner sues the manufacturer for $275,000 in damages.
- A chemical manufacturer moved several drums of spent solvent waste to a loading dock for pick up and disposal by a third party carrier. During loading, one of the drums was accidentally punctured, causing the waste to leak from the truck continuously throughout transit. Multiple drivers filed claims for property damages to their vehicles which were splattered by the leaking hazardous materials, a loss totaling $42,000.
- A remediation equipment firm advertises a new state-of-the-art oil/water separator for enhancing the speed at which wastewater streams can be rendered safe for release to a municipal sewer system. When an installed machine fails to perform as promised, the firm’s client sues the manufacturer for reimbursement of the penalties assessed for discharging untreated water to the public sewers, as well as for property damages.
Finding Solutions for Your Client
A traditional approach for addressing many of these exposures is with a Site Specific Pollution (SSP) insurance policy. This type of coverage protects against liability for pollution conditions—new or pre-existing—that are at, under, or emanating from the insured’s covered location, regardless of whether the claim is first party or third party. Coverage is often enhanced by the inclusion of transportation pollution liability and non-owned disposal site liability, with defense costs and emergency response costs also standard. Punitive damages are covered where allowable by law, and terrorism coverage may be offered for additional premium.
Increasingly, however, many manufacturers are seeking package policies that provide an even more seamless approach, incorporating multiple other lines within the same insurance product. Such a package policy may combine general liability with broad site specific pollution coverage, as well as Contractors Pollution and Products Pollution liability. This type of approach can give both manufacturers and their investors’ confidence in their abilities to protect the many varied interests of their companies.
Overcoming Hurdles When Discussing Pollution Coverage with Your Client
Most producers can identify with the frustration felt when a client is staunchly resisting all their best attempts to properly address the very real sources of environmental liability they face. Following are some of the most common challenges you may hear, as well as our suggestions for how to handle them.
None of my manufacturing processes or products are hazardous.
One of the most common misperceptions is that pollution events can only be caused by materials known to be hazardous. This is a mistake that can be very costly in the event of a release. Even products such as milk, beer, syrup, produce or other consumables have been associated with hefty liability claims when their uncontrolled release into the environment has resulted in fish kills, wetland destruction, or other natural resource damages. Pollution insurance policies typically have an extremely broad definition of “pollutant,” providing a breadth of coverage far beyond those generally perceived as known and regulated threats to the environment.
We have a very good Spill Prevention, Control and Countermeasure (SPCC) plan in place.
When your client responds in this way, what you should hear is: “We choose to self-insure our pollution events.” Certainly many manufacturers have chosen to self-insure such exposures, but as their risk management advisor, you should emphasize the particularly costly nature of these exposures. Pollution events, unlike a standard property damage claim can continue to grow in cost. See the above claims scenarios for examples when addressing this issue with your insureds.
The Phase I Environmental Site Assessment indicated no problems with this property.
The chief disadvantage of a Phase I environmental report is that it includes no subsurface investigations. Because their methods are non-invasive, their conclusions cannot guarantee the absence of pollutants in the soil, surface waters, groundwater, or on-site structures. That’s why disclaimers to this effect are standard in such reports. Premises Pollution Liability may address potential unknown conditions that a Phase I report may have failed to discover. It’s also why a Site Pollution policy provides not only an ideal backstop for unknown legacy issues, but also a vital mechanism to protect the insured against future environmental losses or claims.
My standard property insurance policy already includes coverage for pollution.
Be sure to read the fine print. Most standard markets have broad pollution exclusions on their property policies. Those that don’t will typically provide only a very low sublimit to address a pollution-related loss, or their coverage terms are so narrowly defined that they will not respond to the vast majority of common loss scenarios. It is for these reasons that specialized pollution policies were developed in the first place, tailored to meet your clients’ unique manufacturing exposures.
My landlord is requiring me to buy this coverage, so I just want the cheapest cost possible.
Price consciousness is at the forefront of most decisions, but as we all know, cost and value are not synonymous. To sell a client an inferior product that leaves them bare in situations they thought had been addressed, may not only leave them vulnerable to environmental liability, but may also lead to errors and omissions claims against you.
The required application and underwriting information will vary on the insured and coverage being requested. Please contact us to discuss any opportunities. Combined General Liability/Products Pollution policies start as low as $10,000 plus taxes and fees depending upon the revenues, type of product manufactured, and limits requested.
Items to be submitted along with a products supplemental application:
- All sections of specialty application completed, and the application signed.
- ACORD 125 and 126 forms, fully completed, dated and signed.
- Resumes or statement of qualifications for key personnel.
- Financial statements for the most recent two years, including balance sheet and income statement.
- Three years currently valued GL and property loss runs.
- Complete copies of environmental site assessments performed on the subject property.
- Spill Prevention, Control, and Countermeasure (SPCC) Plan for the subject property.
- Product information, including material data safety sheets (MSDS) where applicable.