Ambiguous definition means insurer owes duty of defense
The justices of the Supreme Court of Rhode Island had to decide whether the policy definition of "pollutant" was ambiguous.
The Supreme Court of Rhode Island has vacated a lower court’s grant of summary judgment to a commercial insurer that the company does not have to defend a heating and air-conditioning company against a homeowner’s suit for property damage. The case is Regan Heating & Air Conditioning v. Arbella Prot. Ins. Co., 2023 R.I. LEXIS 6 (R.I. 2023).
Regan Heating & Air Conditioning (Regan) was sued by a homeowner who found 170 gallons of home heating oil in his basement the day after Regan began installing a new heating system. Regan sought coverage from Arbella, but the claim was denied for pollution, which the policy defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.” In the denial letter, Arbella stated that oil was a pollutant and therefore the loss was excluded by a total pollution exclusion endorsement that replaced the regular pollution exclusion in the policy. A limited exception endorsement for building heating equipment did not create ambiguity because the damaged property was not “owned, occupied by or rented or loaned to an insured”; Regan had merely worked at the property. Regan, on the other hand, asserted two points that allegedly showed otherwise: the endorsements were incompatible with one another, and the policy definition of “pollutant” was ambiguous.
Conflicting endorsements
First, Regan claimed the total pollution exclusion endorsement and the limited exception for heating equipment both purported to replace the pollution exclusion in the standard Arbella policy. The total pollution exclusion endorsement precluded coverage, but the limited exception endorsement gave it back. There was no indication of which endorsement held the ace.
When reading the endorsements independently and in sequence, the justices found that the total pollution exclusion replaced the standard policy language, and the limited exception only modified it. Where the total pollution endorsement precluded “liability coverage for claims which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time,” the limited exception only afforded coverage in cases of bodily injury sustained in a building due to “smoke, fumes, vapor or soot from equipment used to heat that building.” Therefore, there was no conflict between the endorsements to create ambiguity.
Ambiguous definitions
Regan also contended that the policy definition of “pollutant” was ambiguous. Arbella defended its denial with McGregor v. Allamerica Insurance Company, 868 N.E.2d 1225 (Mass. 2007), where the Supreme Judicial Court of Massachusetts held that “spilled oil is a classic example of pollution, and a reasonable insured would understand oil leaking into the ground to be a pollutant.” The Supreme Court of Rhode Island noted that the total pollution exclusion endorsement on Regan’s policy did not list “oil,” much less home heating oil, as a pollutant. If the exclusion did not list oil, the court reasoned, then could the offending home heating oil in O’Donnell’s house be considered a pollutant within the policy?
The court distinguished the holding in McGregor was specific to environmental pollution; the issue there was whether the location of an oil leak made a difference in determining whether oil could be a pollutant. As McGregor had involved clear, actual environmental damage, the location of the leak–a residence versus a commercial site–did not matter. The justices continued this vein of analysis and referenced multiple cases where courts had held oil was a pollutant in the specific context of environmental damage, such as oil leaking into a river, a harbor, or the ground. The oil in O’Donnell’s basement had caused property and home damage, but no environmental damage.
Regan also cited Nautilus Insurance Company v. Jabar, 188 F.3d 27 (1st Cir. 1999) for support. In Nautilus, the First Circuit Court of Appeals had found that the policy definition of “pollutant” was ambiguous because it could extend to any substance on the planet that irritated someone or contaminated property. The First Circuit had also found it was reasonable that “an ordinary intelligent insured could reasonably interpret the pollution exclusion clause as applying only to environmental pollution.” (quoting Nautilus). Both the total pollution exclusion and the definition of “pollutant” found in Nautilus were identical to those found in Regan’s policy. The Supreme Court of Rhode Island agreed with the First Circuit and held that the definition of “pollutant” in Regan’s policy was ambiguous. The justices vacated the summary judgment for Arbella and sent the case back to the lower court for consistent proceedings.
Editor’s note: It is worth noting that the justices of the Supreme Court of Rhode Island did not say the McGregor court or any other court was wrong in finding oil was a pollutant. The McGregor decision had placed heavy emphasis on how oil had leaked into and contaminated the ground. While an ordinary insured would easily understand that oil leaking into the ground was a pollutant, the line was murkier when considering home heating oil leaking into a home.