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The Pollution Exclusion and Misapplied Chemicals

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An interesting claim case occurred at a day care center. An employee misapplied ammonia when cleaning a toilet seat causing rashes on several children.

The company reserved their rights on the claim based on the environmental exclusion in the general liability policy.

A reservation of rights essentially lets the insured know that the company will investigate the claim, but feels the company may not be responsible for payments due to an exclusion or coverage issue.

Although the reservation of rights is a stretch in this case, the action indicates the insurance industry desire to limit environmental coverage by exclusion and activism.

The ammonia was not released by accident, it was simply misapplied to the surface being cleaned. Other chemicals would have been a much better choice.

Suppose the ammonia application was followed by a second employee applying bleach to the same area. The chemical reaction can be very toxic. Would this action create an excluded event? 

Under the coverage, the exclusion defines an event as sudden and accidental. The combination of the chemicals certainly is sudden and accidental even when both people purposely applied the chemical. The insurance carrier might apply the exclusion to this event successfully.

Certainly if both bottles spilled in a store room, the exclusion would apply.

The important consideration for business owners is that the insurance industry is frightened of environmental claims and is doing what it can to exclude them from liability policies. As astute risk managers, business managers must rethink strategies to eliminate environmental risk and transfer what's left.

Train employees on chemical and cleaning supply usage. Restrict usage to knowledgeable employees. Store chemicals appropriately to avoid leaks and spills. Do not store incompatible chemicals in the same area. Check the MSDS for pertinent information.

Look into environmental liability coverage as a separate line of coverage. Even the most benign chemicals can become problematic in the long-run. Why is the insurance industry afraid of environmental claims? Think asbestos. Think about underground storage tanks. 


Additional Insured Endorsement: read carefully

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Additional Insured (AI) endorsements either grant liability coverage to a contract partner for a specific project or they cover vicarious liability claims arising out of the AI's workmanship or products. Neither. Or both, depends how it's written.

AI might be the most widely misunderstood endorsement in general liability. First, the court interpretations are recent by insurance standards. Second, the courts in different states interpret the wording differently. Third, since the comprehensive policy changed into the commercial policy form, the change in wording is being interpreted as meaningful. Fourth, by the time a liability claim gets to court, the policy wording may have been interpreted several times.

ISO current wording:

Who Is an Insured (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured.

Some of the controversy comes from word choice in the endorsement:

1. Arising out of operations for that insured (holder of the AI)
2. Ongoing operations' yours on behalf of the AI
3. work yours on behalf of the AI (old form)
4. Various manuscript endorsements

Liability arising out of does not limit claims to negligence based acts or omissions. A very broad interpretation by the courts implies any connection between your operations and a loss gains coverage for the AI.

Work implies completed operations coverage while ongoing operations imply process only. The courts no longer make this distinction and interpret work as working, not completed work. The terms are synonymous on ISO forms, manuscript forms may be different.

The ISO form is being interpreted broadly as any process connection between your operations and damages may allow coverage under the AI.

Since the process usually involves your expertise combined with the general contractor, both parties may be held liable for the same act, even though clear negligence is only attached to one party.

Keep this broad interpretation in mind when considering AI status. Read your endorsement carefully, you may be accepting more risk than intended. 


Fine Arts: protect everything from prototypes to Picassos

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Sandy brought destruction to the northeast in uncountable and, before the storm, unimaginable ways.

Especially hard hit in value were collectors of fine arts and antiques. Even businesses lost precious antiquities and paintings. Many of these businesses thought fine art floaters were for attaching to homeowners only. Not so. The estimate of uncovered loss in Sandy equaled the covered losses, about half of a billion dollars.

Whether you display Civil War memorabilia, Louis XIII chairs or a stamp collection as points of interest and conversation starters, these dear assets need special consideration for their greater than intrinsic value.

Honus Wagner's hat is not just a baseball cap. Straight property policies view it that way. The fine arts form is required.

Inventory your fine arts: paintings, collections, memorabilia, statues, silver, gold, crystal, sculpture, anything with an art value. Either find receipts for purchase or obtain current appraisals.

Even the historical pieces or company museum should be valued. Do you have an original prototype of a famous invention? How about the original of your companies first stock certificate? Any well known awards or trophies?

Think one-of-a kind, think unique value, think collectible. Now think how you replace this value.

Fine arts coverage is about uniqueness. Some policies agree to an amount of loss up front. Although you will never find that second Mona Lisa, the value can be estimated and paid to you on loss.

If you use the lobby as a museum, certainly you will want to purchase substitute pieces in the event of a loss. Main Street property policies view intrinsic value in either replacement or actual cash value. 

That Louis XIII chair is fully depreciated under actual cash value and its replacement cost might be a few hundred dollars.

Other property categories limit loss to a few hundred or thousand dollars.

Learn from the crowd in New York City who never believed that loss could occur. Take time to inventory and value your treasures. 


Three Basic Steps in Disaster Planning

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Think about disaster planning as a nomadic tribe might. How do you pack only the essentials and relocate with little or no notice? How do you reestablish your business with next day efficiency?

The modern business world consists of three essential elements: virtual assets, current hard assets, and supply chain/delivery assets.

The virtual world of documents, financial accounts, and data drive the profit and loss, the income statement.

Everyone has been told to back up these data and keep a copy off premises. Try this approach:

1. Decide which data are truly mission critical: supply chain status, current orders, financial statements, bank accounts, payables, receivables, employee data, and customer data.

2. Copy these data updated monthly. One copy goes into the safety deposit box at the bank. One to a trusted officer.

3. Copy daily transactions for the month to the officer's memory stick. Update two sets at month's end.

These data will allow you to reroute supplies to temporary quarters, warn expected deliveries of delays, and keep up with daily transactions.

Assess current hard assets. Do you need brick and mortar location(s)? Keep a list of alternative available locations in that bank box. 

Do you need large machinery difficult or expensive to move and set up? If so, temporary changes in locations may be out of the question. But, an agreement to share capacity with a friendly competitor might solve the problem either one of you might face. 

Perhaps you're in a position that replacing hard assets would not be prudent. Re-engineering your process and modernizing makes sense. In this case, insure accordingly for business interruption; but be prepared to fund some of the downtime through corporate savings.

Hard asset loss needs to be prevented, contingency planned, or insured to protect company assets and reputation. Look at your key production assets and have a game plan in place.

Supply chain and deliveries data is critical in disaster planning to keep the process moving. You do not want your customers moving on to their plan B while you're recovering.

Can you store inventory in a second location? Perhaps you have customers in other states. Is permanent storage available to make a remote supply economical?

Delay supply acceptance if needed, but try not to miss deliveries. That disaster agreement with the friendly competitor might come in handy here.

Consider the mission critical aspects of your business. Think of the financial data, the hard assets, and the flow of goods when contingency planning.