(This is the seventhof a ten-part series highlighting significant coverage issues in agents’ E&O policies. Take a look at your E&O policy. If it includes the wording described below or something similar, you may need an E&O makeover. Contact Gunnar Kephart at IIAT Advantage E&O at 800.880.7428)
Absolute Pollution and Mold Exclusions
Look for this language:
“The coverage under this policy does not apply to any claim based upon, or arising out of, or related to, directly or indirectly the actual, alleged or threatened discharge, dispersal, release or escape of pollutants (including mold).”
Some agent E&O policies contain exclusions that may look relatively harmless – until you read them carefully and understand exactly what is being excluded. Take mold and pollution exclusions for example. If you have a pollution or mold exclusion on your E&O policy, you might think the insurer wants only to exclude pollution or mold claims directly attributable to your agency premises or operations. Think again.
If one of your customers experiences an uncovered claim of this type and sues your agency, alleging that you failed to procure adequate insurance to cover the claim, your E&O policy may not step in to defend you. This is obviously not a good thing.
At least one court upheld an absolute pollution exclusion to the detriment of a liability policyholder. In National Union Fire Ins. Co. vs. U.S. Liquids, Inc., et al, the federal Fifth Circuit Court of Appeals considered a Texas case involving the pollution exclusion in a D&O policy that contained the same broad lead-in language displayed above. USL directors were sued by shareholders, who accused them of intentional and negligent breach of their fiduciary duties in causing USL to violate federal environmental and securities laws, and to inflate earnings by knowingly engaging in illegal toxic waste disposal.
National Union declined to defend the claims and the directors sued the company. The directors argued that the explicit grant of coverage in the D&O policy for securities claims would be rendered meaningless by reading the pollution exclusion to apply. (This would be equivalent to coverage provided in an E&O policy for an insurance agent’s failure to offer coverage, but such coverage being denied because of a pollution exclusion.) The insurance company answered that all of the claims made against the directors had one genesis – pollution – and therefore fell squarely within the scope of the pollution exclusion. The court agreed.
If your E&O policy contains a pollution exclusion and is written through a surplus lines company because you were unable to obtain coverage through a “standard” E&O carrier, there may be nothing you can do about this. But if you purchased the policy because the price was cheap, you should take a closer look at one of the standard carriers on your next renewal.