Indoor Air Concerns for Reopening Businesses

Tom Williams


November 16, 2020

Environmental pollution incidents can have damaging consequences for a business, but companies do not fully consider all aspects when they assess whether it is adequately covered. In the midst of an ongoing pandemic, most people are focusing on different ways to stay healthy. At the same time, corporations are determining when to bring employees back to the office and what protocols to put in place when the office does reopen.

Although everyone is eager to return to a sense of work normalcy, many experts have speculated that a host of indoor air-related issues may be waiting in neglected office spaces and other work settings that were not properly maintained with appropriate air conditioning or operating water systems. Poorly maintained buildings and water systems create a perfect environment for legionella and mold, two of the environmental insurance industry’s loss leaders.

In addition to indoor air quality concerns, another environmental risk is the increasing use of enforcement undertakings to encourage companies to participate in the clean-up and prevention of environmental accidents that they caused. Businesses must also take these challenges into account to minimize further disruption and mitigate liability losses.

Mold and Legionella Concerns

Indoor air quality is a continuing environmental issue, driven by increased mold and legionella claims. This is especially exacerbated by the coronavirus pandemic, which has caused an unprecedented shutdown of commercial office buildings and delayed any planned maintenance or renovation activities. When certain water and air quality systems are dormant for long periods of time, they are susceptible to contamination by bacteria that thrive in humid, water-rich environments.

Mold and legionella can affect commercial real estate, hospitals, fitness clubs and other large buildings with complex plumbing and heating, ventilation and air conditioning (HVAC) systems that allow bacteria to grow and aerosolize into small droplets that are aspirated by facility occupants. Hotels, in particular, provide several potential exposure pathways for outbreaks linked to cooling towers, air conditioners, recreational water facilities, drinking water and fountains.

Legionella bacteria can cause a type of serious lung infection known as Legionnaires’ disease or legionellosis. According to the U.S. Centers for Disease Control and Prevention (CDC), Legionnaires’ disease has a death rate of almost 10%. In 2018, there were approximately 10,000 reported cases in the United States, although as many as 70,000 people or more may suffer in any given year. It is thought to be the cause of 2% to 15% of all community-acquired pneumonia cases that require hospitalization in the United States and Europe, and outbreaks have been recognized throughout North America, Africa, Australia, Europe and South America. CDC investigations show, however, that 90% of outbreaks would have been preventable with more efficient water management.

From an insurance standpoint, a legionellosis outbreak creates significant risks of third-party bodily injury and property damage, with can involve public and products liability (PPL) and environmental impairment liability (EIL) insurance. There are also a number of third-party claims scenarios in which claimants could assert that the policyholder is legally responsible for the loss the third party has suffered.

Environmental Prosecutions on the Rise

Globally, environmental prosecutions are increasing as public awareness of environmental matters grows and the standard by which businesses are judged changes. Fines and remediation standards are on the rise, and therefore environmental management should be a boardroom priority.

In the United Kingdom, regulators—usually the Environmental Agency—have increasingly used enforcement undertakings, a civil sanction that is an alternative to prosecution following the occurrence of an environmental offense. Enforcement undertakings, which form part of the original Regulatory Enforcement and Sanctions Act of 2008, are entered into voluntarily by the offender with the aim of remedying damages, reducing impacts on third parties and ensuring no new offenses. The number of agreed enforcement undertakings has outnumbered regulatory prosecutions in the past 12 months and this pattern will likely continue.

From October 2018 through May 2019, UK water companies paid £3.52 million ($4.38 million) in enforcement undertakings as an alternative to prosecution. Violations, ranging from operating without permits to abstracting for water without a license, mean offenders were forced to repair sites, restore or improve infrastructure, implement improved monitoring and response programs, inspect and sample new works and provide similar remedies to absolve any penalties.

The benefits of an enforcement undertaking to the offender include exoneration of a criminal record, no admission of guilt, no legal defense costs, avoidance of significant fines, control of the process and reduction of reputational risk. Benefits of accepting an enforcement undertaking to the regulator include the cost-savings of pursuing one, generating more environmental benefits, reducing the risk of losing in court, and a guarantee that damages are rectified.

Enforcement undertakings include costs for clean-up, biodiversity damages, regulatory expenses, future environmental management and improvement costs and compensation for damages to the natural capital, which could include financial contributions to an environmental improvement charity.

Certain elements of enforcement undertakings are covered by environmental impairment liability (EIL) insurance policies, such as clean-up costs, natural resources damage and biodiversity coverage, but financial contributions to charities and environmental management improvements to prevent future incidents are a definite gray area.

What is clear is that insurers, brokers and policyholders will need clarity. How companies deal with an enforcement undertaking will be a precedent-setting moment, and a complex one, given the uneasy interplay between criminality, voluntary payment and an offender’s duty to mitigate—not to mention the policy wording and conduct of the company.

Tom Williams is environmental insurance practice group leader for North America at Allianz Global Corporate & Specialty.