LMA5595 and LMA5596 PFAS Exclusions for Liability policies

Posted on by Stephen Tomlinson

 LMA PFAS Exclusions

Lloyd’s Market Association Bulletin LMA22-024-CM was issued in August 2022 and included two PFAS exclusions – LMA5595 and LMA5596 – for liability insurance and liability reinsurance policies. This article considers the background to these PFAS exclusions before analysing the exclusions themselves.

Background to PFAS Exclusions

PFASs Definition

According to the OECD, PFASs are fluorinated substances that contain at least one fully fluorinated methyl or methylene carbon atom (without any H/Cl/Br/I atom attached to it), i.e. with a few noted exceptions, any chemical with at least a perfluorinated methyl group (–CF3) or a perfluorinated methylene group (–CF2–) is a PFAS. PFASs include perfluorosulfonic acids, such as perfluorooctanesulfonic acid (PFOS), and perfluorocarboxylic acids like perfluorooctanoic acid (PFOA).

PFAS Use

PFASs are surfactants, i.e. reduce the surface tension between a liquid and another liquid or solid, making them effective in resisting fire and repelling water, oil, and grease. PFASs are found in materials such as firefighting foam, nonstick cooking pots and pans, paints, coatings for cables and wires, lubricants, food packaging, and textiles. Furthermore, PFASs are water soluble and appear to move through soil. PFASs are commonly described as persistent organic pollutants or “forever chemicals” because they remain in the environment for long periods of time.

PFAS Health Effects

Increasing PFAS litigation – see below – has been driven by growing evidence that PFASs are harmful to the environment and health. A 2022 National Academies of Sciences, Engineering, and Medicine report noted that:

  • PFAS exposure was linked to increased risk of dyslipidemia (abnormally high cholesterol), sub-optimal antibody response, reduced infant and foetal growth, and higher rates of kidney cancer; and
  • drinking water is contaminated with PFASs in thousands of communities across the United States.

Increasing PFAS Litigation

The LMA5595 and LMA5596 PFAS exclusions are a response to increasing private tort lawsuits and government enforcement of environmental laws and regulations. In the USA, for example, more than 6,400 PFAS-related lawsuits have been filed in its federal court since 2005; of these, more than 1,000 were filed in 2021 concerning firefighting foam. Initially, the defendants in such litigation tended to be primary producers of PFAS such as chemical companies and manufacturers of fire-suppressant foams. More recent litigation, however, recent litigation has targeted secondary manufacturers, textile manufacturers, cosmetics manufacturers, fashion and fast food companies.

There has been speculation that this increasing litigation could expose insurers to unanticipated claims, akin to asbestos claims (see, for example, ‘PFAS: The Next Asbestos‘?). Two examples of significant PFAS litigation are described below.

DuPont class action and settlement (West Virigina)

In February 2017, DuPont and its spin-off Chemours paid USD $671 million to settle lawsuits for 3,550 personal injury claims related to PFOA release from their Parkersburg plant into the drinking water. The settlement came after a court-created independent scientific panel, the C8 Science Panel, found a ‘probable link‘ between PFOA (also known as C-8) exposure and six illnesses: kidney and testicular cancer, ulcerative colitis, thyroid disease, pregnancy-induced hypertension and high cholesterol.

3M settlement with Minnesota

In February 2018, 3M settled a lawsuit brought by the state of Minnesota for USD $850 million; Minnesota had sought judgment for USD $5 billion. The lawsuit alleged that:

  • 3M dumped chemicals at sites near Minneapolis for more than 40 years, enabling them to get into wildlife and drinking water; and
  • 3M knew the chemicals were harmful but concealed the effects from regulators and distorted science on them.

Analysis of the LMA5595 and LMA5956 PFAS Exclusions

Are LMA5595 and LMA5596 necessary?

As noted above, LMA5595 and LMA5596 PFAS exclusions have been developed for liability insurance and liability reinsurance policies. Whether the LMA5595 or LMA5596 are necessary will depend upon the pollution exclusion in the policy. If applied in reinsurance contracts, however, then insurers may then apply them to policies they issue to avoid reinsurance gaps.

For Liability policies written on an occurrence basis, the LMA5595 and LMA5596 PFAS exclusions would only serve to exclude liability in future policies. For past occurrences, the Liability policies in force at that time will have to respond to the claim, subject to the pollution exclusions.

In the USA, it is understood that most insurers inserted ‘absolute’ or ‘total’ pollution exclusions after 1985. According to Pillsbury, however, ‘[i]n nearly half the states, policies containing this form of pollution exclusion have been held to be ambiguous and to provide coverage for pollution that was not expected or intended.’

LMA5595 and LMA5596: broad exclusions on PFAS liability

Broadly, paragraph 1 of the LMA5595 and LMA5596 endorsements exclude claims in connection with any PFAS – please refer to the endorsements for the exact wording. The LMA5595 and LMA5596 also contain anti-concurrent terms (see ‘regardless of any other cause contributing concurrently or in any sequence’). Paragraph 2 then acts as a clarification that the exclusion applies to costs to clean-up, monitor or assess the effect of any PFAS.

Difference: LMA5596 reverses the burden of proof

The difference between LMA5595 and LMA5596 is that LMA5596 has an additional paragraph which reverses the onus of proof (‘If UNDERWRITERS allege that this Exclusion applies to any claim under this POLICY the burden of proving the contrary shall be upon the INSURED’). Here, it may be appropriate to consider:

  1. what would be required for the ‘underwriters’ to allege that the exclusion applies?
  2. if there is more than one insurer for the policy, how would this clause operate?
  3. what justifies reversing the onus of proof? Parties to an insurance contract may specify who bears the onus of proving a particular fact, even if this involves reversing the onus of proof: see Levy v Assicurazione Generali [1940] AC 791. However, reversing the onus of proof is contrary to the interests of insureds and conflicts with the traditional position whereby the insurer must prove that an exclusion applies. Given the resources and expertise of insurance companies, it is difficult to see how reversing the burden of proof could lead to more equitable outcomes.

LMA5595 and LMA5596 definition of ‘PFAS’

In their final paragraphs, LMA5595 and LMA5596 define ‘PFAS’ as ‘any organic molecule, salt, free radical or ion, the composition of which includes at least one:

a. perfluorinated methyl group (-CF3); or

b. perfluorinated methylene group (-CF2-).’

This definition differs from that use by the OECD (see ‘PFASs Definition‘, above) due to its use of ‘organic molecule, salt, free radical or ion’. While the difference may not be material, the source of the LMA definition is not known (to this author) and it is unclear why the LMA would not use the more common OECD definition.

LMA5394: Communicable Disease Exclusion for property treaty reinsurance

Posted on by Stephen Tomlinson

Analysis of LMA5394

About LMA5394

Drafted by the Lloyd’s Market Association (LMA) and released in March 2020, LMA5394 is a Communicable Disease Exclusion for property treaty reinsurance.

Clause 1: the Communicable Disease Exclusion

At its broadest, LMA5394 excludes damage or loss ‘in connection with’:

  1. a Communicable Disease; or
  2. the fear or threat of a Communicable Disease.

Furthermore, LMA5394 is explicit that this exclusion will apply regardless of any other cause or event which may have contributed to the damage or loss.

Clause 2: definition of ‘Communicable Disease’

In clause 2 of LMA5394, ‘Communicable Disease’ is defined as ‘any disease which can be transmitted… from any organism to another organism’.  Requiring the disease to be transmissible between organisms does qualify the scope of the definition; food poisoning, for example, would not be excluded as a ‘Communicable Disease’ because it is transmitted by the ingestion of contaminated food or water, not by a pathogen that is transmitted between organisms.

Beyond this,

  • sub-clause 2.1 inclusively identifies types of pathogens;
  • sub-clause 2.2 inclusively identifies means of transmission; and,
  • sub-clause 2.3 identifies possible effects of the disease or pathogen.

None of these sub-clauses, however, are essential to the operation of the endorsement.

LMA5502 and LMA5503: Communicable Disease (Property Treaty Reinsurance)

Posted on by Stephen Tomlinson

LMA5502 and LMA5503 Analysis

About LMA5502 and LMA5503

Drafted by the Lloyd’s Market Association (LMA) and released in May 2020, LMA5502 and LMA5503 are limited communicable disease exclusions for Property Treaty Reinsurance.

Clause 1: the exclusion

At its broadest, Clause 1 of LMA5502 and LMA5503 exclude damage and loss ‘in connection with’:

  • a Communicable Disease; or
  • the fear or threat (whether actual or perceived) of a Communicable Disease.

Because all that is required between the damage/loss and Communicable Disease is a ‘connection’, the Communicable Disease may not have to be a cause of the damage/loss for the exclusion to apply. This intended breadth of the exclusion is further demonstrated by the words ‘regardless of any other cause contributing concurrently or in any sequence thereto’ in clause 1.

Clause 2: exception to the exclusion

Clause 2 of LMA5502 provides an exception to the exclusion of clause 1 such that the reinsurance agreement will cover:

  • physical damage to property insured; and,
  • business interruption (‘Time Element Loss’)

that arise from the listed perils, i.e. fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, rainstorm, hail, tornado, cyclone, typhoon, hurricane, earthquake, seaquake, seismic and/or volcanic disturbance/eruption, tsunami, flood, freeze, ice storm, weight of snow or ice, avalanche, meteor/asteroid impact, landslip, landslide, mudslide, bush fire and forest fire.

LMA5503 preferable to LMA5502 for insureds

The exception for LMA5503, however, extends to the following additional perils: riot, riot attending a strike, civil commotion, vandalism and malicious mischief. As such, LMA5503 is preferred to LMA5502 from an insured’s perspective.

Clause 3: definition of ‘Communicable Disease’

In clause 3 of LMA5502 and LMA5503, ‘Communicable Disease’ is defined as ‘any disease which can be transmitted… from any organism to another organism’.  Requiring the disease to be transmissible between organisms does qualify the scope of the definition; food poisoning, for example, would not be excluded as a ‘Communicable Disease’ because it is transmitted by the ingestion of contaminated food or water, not by a pathogen that is transmitted between organisms.

Beyond this,

  • sub-clause 3.1 inclusively identifies types of pathogens;
  • sub-clause 3.2 inclusively identifies means of transmission; and,
  • sub-clause 3.3 identifies possible effects of the disease or pathogen.

None of these sub-clauses, however, are essential to the operation of the endorsement.

Clause 4: definition of ‘Time Element Loss’

Finally, clause 4 of LMA5502 and LMA5503 define ‘Time Element Loss’ as business interruption, contingent business interruption or any other consequential losses.

LMA5399: Communicable Disease Exclusion (Casualty Treaty Reinsurance)

Posted on by Stephen Tomlinson

Analysis of LMA5399

About LMA5399

Drafted by the Lloyd’s Market Association (LMA) and released in May 2020, LMA5399 is a communicable disease exclusion for Casualty (Liability) Treaty Reinsurance.

Clause 1: LMA5399 exclusion

At its broadest, Clause 1 of LMA5399 excludes loss and liability ‘in connection with’:

  • a Communicable Disease; or
  • the fear or threat, whether actual or perceived, of a Communicable Disease.

Because all that is required between the loss/liability and Communicable Disease is a ‘connection’, the Communicable Disease may not have to be a cause of loss for the exclusion to apply. This intended effect of the exclusion is demonstrated by the words ‘regardless of any other cause contributing concurrently or in any sequence’ in clause 1.

Clause 2: definition of ‘Communicable Disease’

In clause 2 of LMA5399, ‘Communicable Disease’ is defined as ‘any disease which can be transmitted… from any organism to another organism’.  Requiring the disease to be transmissible between organisms does qualify the scope of the definition; food poisoning, for example, would not be excluded as a ‘Communicable Disease’ because it is transmitted by the ingestion of contaminated food or water, not by a pathogen that is transmitted between organisms.

Beyond this,

  • sub-clause 2.1 inclusively identifies types of pathogens;
  • sub-clause 2.2 inclusively identifies means of transmission; and,
  • sub-clause 2.3 identifies possible effects of the disease or pathogen.

None of these sub-clauses, however, are essential to the operation of the endorsement.