The Hawaii Department of Health issued a Notice and Finding of Violation and Order on January 7 against a contractor responsible for a sewage spill that sent 28,000 gallons of untreated domestic sewage into Reed’s Bay, just off the coast of the Big Island. The leak occurred on November 30, when workers for Maui-based Goodfellow Bros., LLC, a general contractor working for the Hawaii County Department of Environmental Management’s wastewater division, accidentally punctured a pipe while excavating to prepare the foundation for a sidewalk.
Bacterial monitoring was conducted around the spill site and warning signs were posted for seven days until water quality returned to normal levels, the health department reported. The violation requires the contractor to pay a $25,000 penalty and provide a report on ways to prevent such spills going forward.
“The fine is not nearly as high as it could have been,” said Karim Jaroudi, Product Specialist, Environmental, Burns & Wilcox, Toronto, Ontario. “Cases like this could involve a fine, a cleanup order, natural resource damage remediation and have other implications.”
Environmental incidents are often excluded on a contractor’s Commercial General Liability (CGL) policy. Some CGL policies might offer limited, and likely inadequate coverage. To help mitigate costs, contractors should consider a separate Contractor’s Pollution Liability (CPL) policy. This is a third-party liability policy that addresses the contractor’s activities when they are off premises and working on another party’s behalf.
“Many contractors carry only CGL Insurance coverage and pollution is often excluded from CGL Insurance policies,” said Linda Bobro, Vice President, Managing Director, Burns & Wilcox, Pittsburgh and Philadelphia, Pennsylvania. “If something like a sewage discharge occurs and the contractor does not have CPL Insurance coverage, they could be saddled with significant uninsured losses.”
All contractors have environmental exposure
Contractors often opt against CPL Insurance coverage because they equate pollution with hazardous materials and assume it will not be a factor if they are not using or handling so-called “hazardous materials,” said Gina Jones, Vice President, Director, Environmental Programs, Burns & Wilcox, Denver, Colorado.
“Every single business has an environmental exposure, and contractors—just regular, everyday general contractors—have some of the biggest exposures of all,” Jones said. “Too often contractors think that because they are not dealing with substances like methyl ethyl gas they do not need CPL Insurance. They do not realize that substances they use every day at work could cause severe pollution losses.”
While companies with risk managers have begun to invest in CPL Insurance, there is still a large contingent of construction professionals — general contractors, land developers, electricians and HVAC installers — who are unaware of the need for environmental coverage. “They think pollution is never going to be an issue for them,” Bobro said.
Unfortunately, Jaroudi noted, “it is situations like accidental sewage leaks that end up being the best teacher.”
“This sewage spill speaks very clearly to the misconception that a contractor who is not environmentally specialized has no serious exposure. This shows the liability potential when a contractor is working on third-party sites,” he said. “This contractor tapped a pipe while digging the foundation for a sidewalk and all of a sudden ended up suffering an environmental loss.”
In 2019, the Environmental Protection Agency (EPA) received $471.8 million in combined federal administrative and judicial civil penalties and criminal fines, the highest total of all but four of the past 10 years. The agency also announced commitments for $283 million in reimbursement of EPA costs and more than $108 million in oversight billed.1
Every single business has an environmental exposure, and contractors—just regular, everyday general contractors—have some of the biggest exposures of all.
In Canada, governmental water-related fines and penalties represented 49 percent of environmental fines and penalties over $75,000 in 2018. Of these, two of the largest penalties were issued for violations to the Fisheries Act: one company was fined $1 million for pollutants leaked into the Chaudière River and Lac Mégantic and another paid a $3.5 million fine for several incidents involving improperly-treated effluent discharged into the Saint John River.2 In 2019, the Ministry of the Environment, Conservation and Parks in Ontario alone assessed more than $362,000 in environmental penalties.3 These fines represent only one type of potential expense that can arise from a pollution incident.
Environmental incidents have always been a potential hazard for contractors; however, lawsuits have become more common in recent years, Bobro explained. “There has been an uptick in environmental incident-related claims,” she said.
Assistance for cleanup, injuries, damage to natural resources and more
Following an environmental incident, a CPL Insurance policy would generally help with costs related to site cleanup, property damage and bodily injuries that occur as a result of pollution. CPL policies typically address losses from both sudden and gradual pollution related to contracting operations performed at a job site by or on behalf of a contractor, Jones explained. Defense costs and regulatory fines and penalties are also commonly included in CPL Insurance policy coverages, though some states prohibit coverage for penalties.
“There are many jurisdictions and states where fines and penalties are not insurable by law,” Jones noted.
The $25,000 penalty assessed for the sewage spill in Hawaii is on the lower end of the cost spectrum for such incidents, Bobro said. In similar situations, she stressed, “penalties could be millions of dollars.” Lawsuits can also arise well past the time an incident occurs if other parties like homeowners or businesses are affected by the spill.
Even a relatively small incident could threaten a business. “If a small contractor does not have an environmental policy in place and something unexpected happens, the related costs could put that contractor out of business,” said Bobro. “It is not uncommon.”
Natural resource damage is another potential pollution hazard. If an environmental spill damages aquatic life, vegetation or animal populations, it can lead to a significant level of liability. If large numbers of salmon died due to a sewage spill in a river, for example, the contractor deemed to be at fault might need to pay to repopulate the river with fish.
“Remediation tends to be one of the pricier elements of a pollution incident,” Jaroudi explained. “These are often costs that were not budgeted for in a business plan. CPL Insurance coverage can help protect a company’s balance sheet against these unexpected expenses.”
Even seemingly harmless substances can be pollutants
While raw sewage typically contains viruses, bacteria and other components that can cause harm to ecosystems, wildlife and human beings,5 even seemingly inert substances can be the source of costly environmental incidents. When an overturned dairy truck spilled milk into a local stream, Jones recalled, the milk damaged an entire ecosystem.
“In the area where the milk was very concentrated, it killed all of the fish,” she said. The stream had to be restocked with fish. “That illustrates perfectly how something we drink every day can be deemed a pollutant in the wrong situation.”
In January last year, 97,000 gallons of cabernet sauvignon spilled from a tank at Rodney Strong Vineyards in California and eventually flowed into a river. Authorities said high water levels due to recent rainfall helped dilute the wine and may have prevented fish deaths.4
Bobro recalled another notable incident involving a produce truck that spilled a box of tomatoes onto a car. “The acid in the tomatoes ate through the paint,” she said. “A pollutant can be any substance in a location in which it is not typically found. These incidents can run into millions in damages.”
Anything out of its natural environment or in excess quantities is a pollutant. “A pollutant can be absolutely anything that we would normally consider innocuous,” Jones said. “Sunny Delight—the drink marketed for children—was a pollutant when it was released into a waterway. It is not just oil and gas that are pollutants: anything in excess is a pollutant.”
If a contractor has been lucky enough to not suffer a loss during 10 years in business, that is not evidence that the contractor does not have an exposure. That just means that contractor has been fortunate.
Because it can cause mold, which is considered a significant health hazard in the U.S.6 and Canada,7 even water can present an environmental liability. “Mold is a significant risk,” Bobro explained. “A contractor could hit a water pipe and not notice it is leaking. The leak could cause mold down the road. CPL Insurance can help cover costs to remediate mold damage.”
Given the recent uptick in environmental lawsuits and the potential costs involved, contractors may also want to consider Excess Liability Insurance. Excess Liability Insurance could provide coverage limits above and beyond existing policies and is usually available through the same carrier providing CPL Insurance, said Bobro.
Mitigating exposures is essential in uncertain times
By last August, infrastructure projects totaling more than $9.6 billion had been delayed or canceled due to COVID-19 — one of several ways in which contractors have been impacted by the ongoing pandemic.8 “The pandemic has been brutal for many contractors,” Bobro said.
Nevertheless, minimum premiums for Environmental Insurance have dropped significantly over the last decade, Jaroudi said, making CPL Insurance policies more affordable. “Whether or not to invest in CPL Insurance coverage should not be a price consideration; it should be a liability consideration,” he said. “It is accessible coverage for a contractor of any size.”
Bobro agreed, adding that “a CPL Insurance policy can be secured for as little as $2,500. It is not cost-prohibitive and is a wise investment, especially if you are not a traditional environmental contractor.”
Contractors can help protect themselves by staying in touch with their insurance brokers or agents about their business operations and coverage needs. “It is essential for contractors to make sure they work with experts who understand the risks they face and the best coverages for mitigating those risks,” Jones said.
This includes reviewing potential add-ons for CPL Insurance policies, such as pollution coverage for transported cargo, non-owned disposal sites, and emergency response. “These policies can also be tailored for a specific project,” Jaroudi said.
He stressed the importance of remembering that “absence of loss does not mean absence of risk.”
“If a contractor has been lucky enough to not suffer a loss during 10 years in business, that is not evidence that the contractor does not have an exposure. That just means that contractor has been fortunate,” Jaroudi said. “With the appropriate insurance coverage, good fortune turns into good risk management strategy and balance sheet protection.”
Sources 1 U.S. Environmental Protection Agency Enforcement and Compliance Assurance (OECA). “EPA Announces 2019 Annual Environmental Enforcement Results.” February 13, 2020. 2 “Environmental Fines and Penalties 2018 Update Report.” Berkeley Canada, March 2019. 3 Ontario Environment, Conservation and Parks. “Environmental penalty annual report: 2019.” February 2020. 4 “What Happens When Raw Sewage Is Dumped Into Water.” North Carolina Science Now. UNC-TV/PBS North Carolina, March 15, 2018. 5 Gilmour, Jared. “100,000-gallon red wine spill stains California creek bank. But what about the fish?” Sacramento Bee, January 24, 2020. 6 Centers for Disease Control and Prevention. “Basic Facts About Mold and Dampness.” August 11, 2020. 7 Health Canada. “Addressing moisture and mould in your home.” April 9, 2020. 8 Bousquin, Joe. “$9.6B worth of infrastructure projects delayed or canceled during COVID-19.” Construction Dive, August 4, 2020.