Cleaning Up Debris and Pollution After a Loss
When property owned by your business is damaged or destroyed by a fire or other peril, the debris must be removed before the property can be repaired, replaced, or reconstructed. Debris removal costs can be substantial. This is especially true if the debris has been contaminated by a hazardous substance. Most commercial property policies cover these costs within the limit that applies to the damaged property. Thus, it is important to consider debris removal expenses when choosing limits of insurance.
Debris Removal Coverage
A majority of commercial property policies cover debris removal costs in the same manner as the standard ISO form. The ISO policy addresses these costs in a section entitled Additional Coverages. It covers expenses your incur to remove debris of damaged property if the damage results from a covered cause of loss. The expenses must result from a loss that occurs during the policy period and must be reported to your insurer within 180 days of the date of loss.
While virtually all property policies pay for debris removal, they may not cover the same types of debris. Some policies limit coverage to debris of Covered Property. They do not cover the cost of removing debris of property that isn't covered.
For example, imagine that a windstorm blows through your town, damaging your warehouse. The storm also damages a building adjacent to yours. After the storm has ended, piles of debris from the building next door litter your premises. Will your policy cover the cost of removing it? The answer depends on the wording in your policy. The debris originated from your neighbor's building, which is not Covered Property under your policy. If your debris removal coverage applies only to debris of covered property, it will not cover the cost of removing the remains of your neighbor's building.
ISO broadened debris removal coverage in the standard property form in 2012. The current form covers your expense to remove debris of covered property and other debris on the described premises when the debris results from a covered cause of loss. Other debris means debris of property that isn't specifically excluded under debris removal coverage.
Debris removal coverage does not apply to the cost to remove debris of property that belongs to you but isn't insured under the policy. An example is a storage shed located on your premises that you have elected to leave uninsured. Also excluded is the cost to remove debris of any property that belongs to someone else and is not of a type that would be covered property under your policy. For example, your policy won't cover the cost to remove debris of a small plane that belongs to a neighboring business that was blown onto your property by a tornado. Aircraft don't qualify as covered property.
Also excluded under debris removal coverage is the cost to remove debris of property designated as Not Covered. This includes the cost of removing debris of outdoor property like fences and trees.
Basic Debris Removal Limit
Under the ISO form, the limit provided for debris removal is 25 percent of the cost to repair or replace damaged property plus the deductible. For example, suppose that your company owns a warehouse that is insured under a commercial property policy. Your policy includes a $1 million blanket limit that applies to the building and its contents. Your policy includes a $1,000 deductible. A huge fire breaks out in the building, causing $500,000 in damage. Your debris removal limit is 25 percent of ($500,000 plus $1,000) or $125,250.
The amount you spend to remove debris is included in the limit that applies to the damaged property. In the previous example, suppose you spend 100,000 to remove debris of the damaged warehouse and personal property. The cost to repair or replace your property is $500,000. Your total loss is $600,000. Your loss should be covered in full (minus your deductible) since your total loss does not exceed your $1 million limit.
In the warehouse example described above, suppose that the windstorm damages your neighbor's building and the debris blows onto your premises. Your warehouse escapes damage. Since no Covered Property has been damaged, your policy may provide only a $5,000 limit for debris removal.
Extra $25,000 Limit
Many policies provide an additional $25,000 if either or both of the following occur:
- Your debris removal expenses exceed the amount of coverage provided. That is, your expenses exceed 25 percent of the sum of your loss plus your deductible.
- The sum of your debris removal costs and your property loss exceed your limit of insurance.
For example, suppose that your warehouse has sustained $300,000 in fire damage. Your cleanup costs are high ($100,000) because the damaged property was contaminated by hazardous chemicals stored in your warehouse. Your debris removal limit is $75,250 (.25 X $301,000) but your costs are $100,000. Your costs exceed your limit by $24,750. Fortunately, the extra $25,000 afforded by your policy will cover the shortfall.
Now suppose that the cost to repair your damaged property is $825,000. You spend $200,000 to remove debris from your damaged warehouse. Your debris removal costs don't exceed your debris removal limit, which is 25 percent of ($825,000 plus $1,000) or $206,500. Nevertheless, the amount of your loss plus your debris removal costs exceed your $1 million limit ($825,000 plus $200,000 = 1,025,000). The remaining $25,000 in combined costs should be covered by the $25,000 extra limit.
Cleanup of Pollution and Polluted Debris
Fires, windstorms and other perils can damage property that contains hazardous substances. If their container is damaged, these substances may contaminate the debris left behind or seep into the land or water. Examples of hazardous substances are bulk chemicals, paints, pesticides, fertilizers, lead batteries, gasoline, and asbestos siding or insulation.
Many states have laws that regulate the cleanup and disposal of hazardous substances, including those that exist in debris or are released during a fire or other disaster. Certain substances may require special handling, which can drive up debris removal costs.
Most property policies contain a pollution exclusion, which eliminates coverage for any damage caused by the discharge or release of pollutants. The exclusion does not apply if the discharge is caused by a specified cause of loss, a defined term that includes fire, windstorm, vandalism, and many other perils. In the scenarios cited above, your warehouse was damaged by a windstorm or a fire. If pollutants were released due to either peril, the cost of cleaning them up and disposing of them should be included in your debris removal coverage.
Cleanup of Pollutants From Land or Water
Note that debris removal coverage specifically excludes the cost of extracting pollutants from land or water. For example, suppose that your warehouse is damaged by a fire. The fire melts a metal drum containing liquid fertilizer. The fertilizer contaminates building debris. It also seeps into the soil and pollutes a stream near your property. Your debris removal coverage should apply to the cost of cleaning up the contaminated debris. It will not cover the cost of removing the fertilizer from the ground or the stream.
While water and land cleanup costs aren't included under debris removal coverage, they are covered by a separate coverage called Pollutant Clean-up and Removal. For the cleanup costs to be covered, the pollutants must have been discharged due to a covered cause of loss. The limit provided is usually low, such as $10,000. The limit is the most the insurer will pay to clean up pollutants during the entire policy period.