Beware of this water-related risk excluded by CGL

If water damage is top of mind for property insurers, does this mean mold is covered by a commercial general liability policy?

Not necessarily.

Commercial brokers should make sure they aware of exclusions in CGL policies that would prevent their clients from being covered if they are sued in connection with an incident involving asbestos or mold, Irin Bakhtiar, an environmental specialist with Zurich Canada, said last week in an interview.

This is because CGL policies tend to exclude losses arising from mold and asbestos.

Say for example your client is a construction contractor and builds or renovates a building. Suppose six months after a construction job is complete, a water leak results in mold and the contractor is found to be ultimately responsible.

The contractor could “be paying out of pocket for some very high severity losses,” Bakhtiar suggested in an interview with Canadian Underwriter.

For coverage to apply, she said, “you would have to have a pollution policy that would be able to cover mold.” On top of that, the broker would have to offer a ‘completed operations period’ long enough to cover an event that happens well after the contractor left the construction site. “The CGL usually wouldn’t cover it,” Bakhtiar said

For property owners “mold is a huge issue,” Bakhtiar warned. “Let’s say you are a real estate company, you own an apartment building and your tenants are getting sick,” she said. In that case, the company could be sued for bodily injury. “You would not have that coverage typically under a CGL policy.”

Many commercial insurance clients “don’t yet realize that they have exposures there, or they underestimate the exposures that they have,” Bakhtiar added.

Pollution can also be an issue for directors and officers in Ontario.

Thirteen former directors of Northstar Aerospace Canada were ordered to pay from their own pockets the cost of cleaning up pollution in Ontario. Northstar made parts for military helicopters including the Chinook, Apache and Blackhawk. Its Canadian operation was granted creditor protection by a court.

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Northstar’s Cambridge, Ont. site was contaminated by trichloroethylene and also by contaminants from a different property in the same area. The Northstar directors could have asked for judicial review of the clean-up order, issued in 2013.  But instead they reached an $8-million settlement with Ontario’s Environmental Review Tribunal, cited as Baker v. Director, Ministry of the Environment.

“In some cases,” those Northstar Canada directors “were persons who had absolutely nothing to do with the contamination, Harry Dahme, an environmental lawyer with Gowling Lafleur Henderson LLP, told Canadian Underwriter earlier.

However, those Northstar directors and officers did not have insurance coverage because they did not have an environmental impairment liability policy, and their D&O liability policy had an exclusion for environmental remediation, Brian Rosenbaum, director of Aon Canada’s legal and research practice, said at the RIMS Canada Conference in Winnipeg in 2014.

Canadian environmental protection laws hold directors and officers “jointly, severally and strictly liable for hazardous pollution,” Bakhtiar said July 3, 2018 in an interview, commenting in general and not on Baker.

This means a director or officer could be found personally liable if they were found to have failed to exercise “due diligence in upholding a certain maintenance and safety regime at the company,” Bakhtiar noted.