The pollution exclusion and the courts today

Exceptions to the pollution exclusion

Other considerations

Conclusion

Introduction and History

 The first pollution exclusion appeared in standardized forms in 1970, but an historical review should begin in 1966. Before 1966, liability policies protected insureds against claims for bodily injury or property damage caused by accident. Due to, among other things, increasing demands for broadened coverage by insureds, as well as court decisions holding that gradual pollution losses were covered as accidents, the language of most liability policies was changed in 1966 from “caused by accident” to “caused by an occurrence.” Comments from members of the insurance industry at that time indicated that the occurrence language would exclude intentional or logically expected harmful results from pollution.

 In 1970, the Insurance Rating Board (a predecessor to Insurance Services Office) issued two mandatory endorsements meant to clarify the extent of non-coverage with regard to claims for pollution damage; one endorsement was for business risks of every sort (except professional) and the other was for oil risks. The general business risk exclusionary endorsement (which was later incorporated into the printed provisions of most commercial liability forms in 1973) read as follows: “This insurance does not apply. . .to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.”

 Most of the resultant litigation concerning the scope of the pollution exclusion centered on the meaning of “sudden and accidental” in the exception to the exclusion, and particularly on the meaning that should be accorded to “sudden.” Two major interpretations of the phrase emerged.

 One view is that sudden and accidental is a restatement within the pollution exclusion of the definition of occurrence, so that the only types of pollution losses that are excluded are those that are expected or intended by the insured; that is, both abrupt and gradual pollution damage is covered so long as the pollution was unintended and unexpected. Another view has given sudden a temporal meaning, so that coverage applies only if the polluting event is both accidental and abrupt, that is, happening quickly and not gradually. Despite the fact that this sudden and accidental language is over 25 years old and despite the fact that current CGL forms have dropped that phrase from the pollution exclusion, the issue of coverage (or non-coverage) under the sudden and accidental exception to the pollution exclusion is still at issue around the country.

 Some examples of cases where the sudden and accidental clause is given a temporal status are: Dimmit Chevrolet, Inc. v. Southeastern Fidelity Insurance Corp., 636 So. 2d 700 (Fla. 1994); Board of Regents of the University of Minnesota v. Royal Insurance Company, 517 N.W.2d 888 (Minn. 1994); and, Bedford Affiliates v. Harvey Manheimer, 205 F.3d 1321 (2nd Cir. 2000). The Dimmit case is interesting in that it represents a reversal of opinion from the sudden and accidental phrase causing the pollution exclusion to be ambiguous (thus rendering the pollution exclusion not applicable) to the opinion that the term has a temporal aspect with a sense of immediacy or abruptness (with the result that the pollution exclusion is applicable). The justice on the Florida supreme court who changed his mind about the meaning of sudden and accidental, thereby supplying the majority opinion that sudden has a temporal aspect, stated that “Try as I will, I can not wrench the words sudden and accidental to mean gradual and accidental.” This case represents a very solid discussion of the issue and lists case law on both sides of the question.

 Some examples of cases where the sudden and accidental clause is viewed as a restatement of the occurrence requirement, thus causing the pollution exclusion to fall victim to the ambiguity trap, are: Greenville County v. South Carolina Insurance Reserve Fund, 443 S.E.2d 552 (S.C. 1994); Pat v. St. Paul Fire & Marine Insurance Company, 15 F.3d 699 (7th Cir. 1994); and Textron Inc. v. Aetna Casualty & Surety Company, 754 A.2d 742 (R.I. 2000). The Greenville case is a decision by the South Carolina supreme court that deserves attention in that it takes note of the split of authority as to the proper definition of sudden and accidental that exists in this country and lays a solid foundation for interpreting the clause as an ambiguous term that is, according to the court, “susceptible of more than one reasonable interpretation.” The Rhode Island case echoes this finding.

 As mentioned before, the sudden and accidental phrase was dropped from the pollution exclusion, and, in 1986, the Insurance Services Office (ISO) issued commercial general liability (CGL) coverage forms with a nearly absolute pollution exclusion. The wording of this exclusion has remained mainly the same throughout the subsequent revisions of the CGL forms, although the current version of the CGL form does list several exceptions to the exclusion in an attempt to clarify under what particular circumstances the exclusion is applicable. For more information on the pollution exclusion as it exists today, see CGL Coverage Form—Coverage A.

 The Pollution Exclusion and the Courts Today

 This section of this article deals with the legal interpretations of the pollution exclusion as presented on the 1986 CGL forms. This is so, simply due to the fact that lawsuits can be long, drawn out affairs and the suits filed over the 1986 pollution exclusion are finally finishing their journey through the legal system. However, since the pollution exclusion on the current CGL forms is similar in wording and intent to the 1986 version, it is logical to assume that these court decisions are an accurate reflection of how the current pollution exclusion will be viewed in future cases.

 In general, the post-1973 pollution exclusionary language has been upheld by the courts. The following cases are examples of current judicial interpretations.

 The pollution exclusion in the general liability insurance policy barred coverage of clean up costs caused by the flow of fuel oil from ruptured storage tank pipes. This was the decision by the U.S. district court in Guilford Industries, Inc., v. Liberty Mutual Insurance Company, 688 F. Supp. 792 (D. Me. 1988). In that case, a flood ruptured the piping for oil tanks at the insured plaintiff's mill and oil flowed downstream causing property damage. The state of Maine told Guilford Industries that it would be held responsible for clean up of the oil as well as for any damage claims. When the insurer defendant denied coverage for the damage, Guilford sought a declaratory judgment that the property damage caused by the oil was covered under its insurance policies with Liberty Mutual. The district court said in its ruling that the pollution exclusion is “clear and unambiguous; an examination of the policy establishes lack of coverage”.

 In a New York case, the Suffolk County supreme court decided that the clear and unambiguous pollution exclusion from liability insurance coverage of property damage arising out of release or discharge of pollutants barred coverage of pollution damage. The court, in discussing the issues, stated that “any exclusions…must be couched in language that is clear, specific, and unmistakable” and that “if the insurer can establish, as a matter of law, that the damage or injury complained of is unambiguously excepted from coverage, summary judgment in favor of the insurer is proper”. And, that is exactly how the court viewed the pollution exclusion in Budofsky v. The Hartford Insurance Company, 556 N.Y.S.2d 438 (N.Y. Sup. Ct. 1990).

 A Minnesota court of appeals found that alleged injuries resulting from the build up and release of toxic gases were excluded from coverage under a general liability policy and that the pollution exclusion was not vague or ambiguous. The case is League of Minnesota Cities Insurance Trust v. City of Coon Rapids, 446 N.W.2d 419 (Minn. Ct. App. 1989). Here, some individuals suffered lung injuries from the release of nitrogen dioxide in a city ice arena; they promptly sued the city, which then sought coverage under its liability policy. The trial court granted the insurer's motion for summary judgment based on the pollution exclusion and the court of appeals upheld the reasoning and the decision of the trial court.

 Some other cases that have upheld the CGL forms' pollution exclusion (or an exclusion similar in language, put out by particular insurance companies) are: Western World Insurance Company v. Stack Oil, Inc., 922 F.2d 118 (2d Cir. 1990), interpreting Connecticut law; A.J. Gregory v. Tennessee Gas Company, 948 F.2d 203 (5th Cir. 1991); Hydro Systems, Inc. v. Continental Insurance Company, 929 F.2d 472 (9th Cir. 1991); Colonial Tanning Corp. v. Home Indemnity Company, 780 F. Supp. 906 (N.D. N.Y. 1991); Central Illinois Public Service Company v. Allianz Underwriters Insurance Company, 608 N.E.2d 155 (Ill. App. Ct. 1992); U.S. Bronze Powders, Inc. v. Commerce & Industry Company, 611 A.2d 667 (N.J. Super. Ct. 1992); Modell & Company v. General Insurance Company of Trieste, 597 N.Y.S.2d 75 (N.Y. App. Div. 1993); and, Casualty Indemnity Exchange v. City of Sparta, 997 S.W.2d 545 (Mo. Ct. App. 1999) in which a court of appeals declared that “this court must enforce the absolute pollution exclusion as written, not rewrite it.”

 Of course, even though the court cases cited above represent the majority opinion today, there are bound to be dissenting voices. Consider the case of Family Service of Rochester, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA., 562 N.Y.S.2d 358 (N.Y. Sup. Ct. 1990). In this case, the insured delivered fuel oil to a customer's home over a period of months and the oil leaked from the customer's fuel tank onto neighboring lands. The neighbors filed suit and claimed that Family Service knew or should have known that inordinate amounts of fuel oil were being delivered, indicating leakage, and so Family Service was negligent in its duties. Family Service sought coverage from National Union Fire which denied coverage and so, this action was brought to clarify the insurer's obligation to defend and indemnify Family Service. The New York supreme court of Monroe County decided that “the allegations of the…complaint do not fall within any of the enumerated paragraphs of the pollution exclusion and thus can not properly be excluded from coverage on these grounds”; therefore, the insurer's motion to dismiss the complaint was denied.

 And, in the case of North American Specialty Insurance Company v. Georgia Gulf Corporation, 99 F. Supp. 2d 726 (M.D. La. 2000) the U.S. district court said that the exclusion was ambiguous because “the exclusion failed to specify whether it applies only to discharges caused by the policyholder or also to discharges caused by third persons.” This ambiguity was construed in favor of coverage for the insured.

 The point to be emphasized by the cases cited above, is that courts today will look at the complaint and the facts of the case, measure them against every applicable sentence in the pollution exclusion, and judge accordingly. In the Family Service case, for example, the facts and the bases of liability were found not to match any sections of the pollution exclusion and that situation could certainly repeat itself in court decisions yet to be reported. However, as noted previously, most courts today are upholding the absolute pollution exclusion of the post-1973 general liability policies; the majority of courts that have reviewed the nearly identical language of the various absolute pollution exclusions have ruled them unambiguous and, thus, enforceable under the law of contracts.

 This being said, some courts today are also attempting to carve out exceptions wherein the pollution exclusion is not applicable. The main areas of focus for these courts are the meaning of “pollutant” and the environmental intent of the exclusion.

 Exceptions to the Pollution Exclusion

 The pollution exclusion does define the word “pollutant”. And, based on this definition, some courts are inquiring as to whether the substance in question fits the definition, whether the substance is in fact a pollutant and thus, is a proper subject for the exclusion. As the district court said in the Guilford case mentioned above, “almost any substance might fall within the exclusion, but it can only do so in certain very precisely drawn circumstances.”

 In Re Hub Recycling, Inc., 106 BR 372 (D. N.J. 1989) was a case where the insurer sought a summary judgment against Hub Recycling, contending that the insurance policy purchased by Hub precluded coverage for the costs of clean up of land used by Hub in its recycling business. The U.S. district court ( New Jersey ) said that “in the context of a pollution exclusion clause in liability insurance, the mere presence of recyclable materials could not preclude coverage of land clean up without further proof that the materials were also irritants or contaminants. Inasmuch as there is a genuine issue of material fact as to the nature of the recyclable materials, the insurer is not entitled to summary judgment”. The court rejected the insurer's contention that all recyclables are waste and are, therefore, part of the pollution exclusion clause; the court decided that the term “waste” raises ambiguities and, of course, ambiguities are resolved against the insurer. The insurer had to prove that the waste in question was either an irritant or contaminant in order for the exclusion to apply.

 On the other hand, an appeals court in Missouri had no trouble describing kitchen waste as a pollutant. The court said that the definition of pollutant on the liability policy specifically included waste and the dictionary defined waste as garbage, rubbish, excrement, or sewage. The substance from the kitchen in this case met that description and so, the pollution exclusion applied. The case is Boulevard Investment Company v. Capitol Indemnity Corporation, 27 S.W.3d 856 (Mo. App. Ct. 2000).

 Titan Holdings Syndicate, Inc. v. City of Keene, 898 F.2d 265 (1st Cir. 1990) is another case in which the meaning of pollutants is addressed by the court. In this case, the insured city brought an action for declaratory judgment, seeking coverage for claims for bodily injury and property damage based on, among other things, loud and disturbing noises and unduly bright night lighting emanating from the city's sewage treatment plant after the insurer had declined coverage, based on the pollution exclusion. The U.S. court of appeals for New Hampshire stated that “what is at issue is whether the excessive light and noise are pollutants within the meaning of the policy…. While we agree that excessive light and noise possibly could be considered pollutants…according to the policies, a pollutant is any solid, liquid, gaseous, or thermal irritant or contaminant…. Excessive noise and light may be irritants, but they are not solid, liquid, gaseous, or thermal irritants.” The court of appeals found that since the irritants did not fit the exact definition in the pollution exclusion, coverage was not excluded and the city of Keene was entitled to a defense from the insurer.

 Some insureds' operations involve some aspect of controlled discharge or dispersal of toxic elements—paint contractors, exterminators, weed control contractors, etc. In a case dealing with this type of issue, a federal district court in Kansas held that a mixture of malathion and diesel fuel, used by a city to control mosquitoes, was not a pollutant. The court ruled that the term “pollutants” meant “a substance that is particularly harmful or toxic to persons or the environment generally, and not merely those substances harmful to particular persons or property due to special circumstances.” Since malathion was approved by the EPA for mosquito control and its mixture with diesel fuel was standard usage, this pesticide was not a pollutant because it did not normally harm humans. The case is Westchester Fire Insurance Co. v. City of Pittsburg, Kansas, 791 F. Supp. 836 (D. Kan. 1992).

 In a case involving the post-1986 pollution provision, Atlantic Mutual Insurance Co. v. McFadden, 595 N.E.2d 762 (Sup. Jud. Ct. Mass. 1992), the Massachusetts court held that lead in paint, putty, or plaster is not a pollutant for purposes of the exclusion. The insured, a landlord, had been sued for bodily injury due to lead poisoning of two children who lived with their mother on the rented premises.

In Regional Bank of Colorado v. St. Paul Fire & Marine, 35 F.3d 494 (10th Cir. 1994), a U.S. court of appeals stated that “an ordinary policyholder would not reasonably characterize carbon monoxide emitted from a residential heater as pollution”.

 In Incorporated Village of Cedarhurst v. Hanover Insurance Company, 636 N.Y.S.2d 390 (N.Y. App. Div. 1996), a New York appeals court held that sewage was not a pollutant.

 Other courts see other substances differently. In Texas, a Federal court held that cleaning solvent is a pollutant and so, the exclusion applied; the case is Amoco Production Company v. Hydroblast Corporation, 90 F. Supp. 2d 727 (N.D. Tex. 1999). Another Federal court said that paint fumes are a pollutant; see Nationwide Mutual Insurance Company v. DNS Automotive, Inc., 270 F.3d 948 (D. Md. 2001). And see, Kim v. State Farm Fire & Casualty Company, 728 N.E.2d 530 (Ill. App. 2000) wherein an appeals court declared that the pollution exclusion applied because perchlorethane was a contaminant that had been released.

 These cases indicate that, while the current pollution exclusion may generally be upheld, courts are looking into the definition of pollutants and applying their own distinctive interpretations on a case by case basis. This means that just because the facts of a claim may fit within the terms of, and thus, make the claim subject to, the pollution exclusion, the exclusion may still be avoided if the substance that was spilled or released does not match the individual court's definition of a pollutant.

 Similarly, some courts seek to limit the scope of the pollution exclusion to environmental claims only.

In Gamble Farm Inn v. Selective Insurance Company, 656 A.2d 142 (Pa. Super. 1995), an appeals court in Pennsylvania, in granting coverage despite the insurer's denial based on the pollution exclusion, stated that the pollution exclusion is directed at claims involving pollution of the natural environment. This case offers a good discussion of the pollution exclusion as an anti-environmental contamination exclusion only.

 Another case of interest is Meridian Mutual Insurance Company v. Kellman, 197 F.3d 1178 (6th Cir. 1999). Here, a Federal appeals court interpreting Michigan law, declared that the pollution exclusion does not shield an insurer from liability for injuries caused by toxic substances that are still confined within the area of the intended use. This court listed many cases on both sides of the question as to whether a total pollution exclusion barred coverage for all injuries caused by contaminants, or applied only to injuries caused by traditional environmental pollution. This battery of conflicting judicial opinions helped the appeals court find coverage in the dispute.

 Essex Insurance Company v. Avondale Mills, Inc., 639 So. 2d 1339 (Ala. 1994), Continental Casualty Company v. Rapid-American Corp., 609 N.E.2d 506 (Ct. App. N.Y. 1993), the McFadden and the Westchester decisions mentioned above, all make the case that the pollution exclusion was created to exclude only environmental pollution damage. So, unless the claim deals with environmental damage, the particular courts that decided these cases (and those that would follow their lead) would not apply the pollution exclusion.

 On the other hand, there is American States Insurance Company v. Technical Surfacing, Inc., 50 F. Supp. 2d 888 (D. Minn. 1999). In this case, the Federal court rejected an insured's contention that the pollution exclusion did not apply to pollution inside a building. The court said that “no geographical limits on the location of the pollution” were in the exclusion's language, and so, the exclusion applied. Echoing this sentiment, the Pennsylvania Supreme Court in Madison Construction Company v. Harleysville Mutual Insurance Company, 735 A.2d 100 (Pa. 1999), said that no language in the pollution exclusion limits its application—implicitly or explicitly—to instances in which the pollutant has escaped into the environment. This was a situation where a worker was injured due to fumes emanating from a compound used by the insured. The trial court had decided that any discharge or release or escape of pollutants must be into the environment in order to trigger the exclusion, but the state supreme court disagreed and reversed the lower court's decision.

 Other Considerations

 There are other items in the current pollution exclusion area that should be mentioned here.

 An area of pollution liability exposure that is not absolutely excluded is bodily injury or property damage arising out of the insured's products and completed operations. Future judicial questions most certainly will arise as to whether certain claims fall within the products-completed operations hazard and thus, fall outside the reach of the pollution exclusion. These questions will be handled on a case by case basis.

 The pollution exclusion on the 1986 CGL forms denies coverage for bodily injury or property damage arising out of the dispersal or escape of pollutants at or from premises that the named insured owns, rents, or occupies. The current CGL forms have changed the wording of the exclusion. That particular part of the pollution exclusion now reads: bodily injury or property damage arising out of the…escape of pollutants at or from any premises…which is or was at any time owned or occupied by…any insured. This is a notable change.

 The wording on the 1986 CGL forms could lead to at least two avenues of attack upon the pollution exclusion. First, consider the “owns, rents, or occupies” phrase. If company A sells its premises to company B and then pollution from the premises (pollution that was put on the premises by company A prior to the sale and that has seeped continuously onto a third party's property) causes damage, B will no doubt seek compensation from A after B is sued by and has to pay for the damages done to the third party. Will the pollution exclusion from A's CGL form apply? A does not own, rent, or occupy the premises from which the pollution escaped, and yet, A will most certainly be held legally liable for at least some of the damage to the third party. No insurer should base its denial of coverage solely on (the 1986 version of) the pollution exclusion in this instance and reasonably expect to prevail.

 Consider, then, the second avenue, the limitation in this part of the exclusion to premises owned or occupied by “you”—the named insured. The separation of insureds clause on the CGL forms states that the insurance applies separately to each insured against whom a claim is made. If that part of the 1986 exclusion discussed here applies only to “you”—the named insured—it does not then apply to other insureds that are not named insureds. Therefore, if company A is an insured (but not a named insured) on company B's CGL form and owns premises from which pollution escapes and damages another party's property, the 1986 pollution exclusion will not apply.

 The wording on the current pollution exclusion should close down these two possible avenues of attack on the applicability of the exclusion.

 The current pollution exclusion also has some exceptions worth noting. Bodily injury if sustained within a building and caused by smoke, fumes, vapor, or soot from equipment used to heat, cool, or dehumidify that building is not excluded. This means that if, for example, carbon monoxide fumes seep from a furnace and injure customers or visitors in the insured's building, and the injured parties file lawsuits against the insured, the pollution exclusion will not prevent coverage for the insured. Another exception is for BI or PD arising out of heat, fumes, or smoke from a hostile fire. As an example, if the insured's building caught on fire and smoke billowing from the building caused damage to a neighbor's building or injury to someone working in that other building, the insured's CGL form would apply to a subsequent PD or BI claim.

 Another item of interest is that the current CGL forms include a pollution exclusion under the personal and advertising injury liability part (coverage B) of the forms. This was in response to some courts deciding that a claim for personal injury (as defined on the CGL forms) based on the release or dispersal of pollution was covered by the CGL form since there was no pollution exclusion applying to coverage B.

 The current pollution exclusion also has an express exception in it for bodily injury or property damage arising out of the escape of fuels or lubricants needed for the normal mechanical functions of mobile equipment. This exception is limited to certain circumstances such as not applying if the fuels or lubricants are intentionally released or discharged and not applying to a clean up order from the Federal, state, or local government.

 For more information on the pollution exclusion and its exceptions, see CGL Coverage Form—Coverage A and see CGL Coverage Form—Coverage B.

 Conclusion

 In summary, it can be said that the nearly absolute pollution exclusion found on the post-1973 CGL forms is holding up at this time in the face of judicial scrutiny. It can also be said, and indeed, needs to be said, that legal assaults on the exclusion will continue, with every part of the exclusion and every part of the insurance contract subject to debates over the meaning of words and phrases and their applicability to a claim of injury or damage. The wording of the current pollution exclusion may be intended to clarify that injury or damage resulting from pollution is, for the most part, not covered by the general liability policy; whatever the intent, however, the pollution exclusion remains only as absolute as the courts interpret it to be.