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Pollution Exclusions, Revisited and Refined

At one time, most substances we now regard as “pollutants” were useful, either as products in themselves, or as integral parts of industrial or commercial operations.

At some point, however, those substances can clearly become something we recognize as “pollution,” the toxic contamination of air, water, or soil separated in place and time from any useful function those substances may have performed.

Insurers have spent the better part of five decades seeking to prevent liability for pollution, an open-ended exposure that could lead to countless claims for costly environmental cleanup, from creeping into general liability coverage for premises operations.

It’s been a back and forth battle in the courts, with liability carriers arguing that the strict wording of “absolute” pollution exclusions excludes coverage for “any solid, liquid, gaseous or thermal irritant.”

Claimants counter that the application of pollution exclusions should be limited by a policyholder’s “reasonable expectations” of what should be considered a pollutant.

Under such expectations, “pollutants” would generally refer to toxic substances contaminating part of the natural environment, not common household or commercial products that may cause some irritation when used as intended.

Successes

With some notable exceptions, insurers have had considerable success in persuading state and federal courts to accept the plain reading of absolute pollution exclusions. (Go to www.aaisonline.com and see “What is pollution?” in the Spring 2009 edition of Viewpoint.)

In a recent example, in February 2013, the Colorado Supreme Court upheld an insurer’s pollution exclusion in a case where a sewer line was stopped by a 5-8 foot clog of cooking grease from a restaurant. The clog contributed to a buildup of hydrogen sulfide gas that overcame two workers trying to clear the clog, causing them to fall into a manhole and suffer injuries.

In its ruling, the Colorado Supreme Court agreed with the insurer’s argument that the cooking grease was a pollutant under the terms of the policy. In doing so, the court overturned an appellate court ruling that a policyholder would not reasonably expect common cooking grease to be classified as a pollutant.

Substances

Claimants have had some successes of their own, however, and AAIS recently acted to respond to two rulings that could create unwanted and unintended exposure for pollution under general liability policies.

In 2012, the Indiana Supreme Court ruled that a standard pollution exclusion was ambiguous and unenforceable because it did not specify, by name, what substances were to be considered “pollutants” under the policy.

In the Indiana case, the insured, a manufacturer, experienced a leak of a chemical solvent regularly utilized in its factory. This leak caused contamination in the subsoil and groundwater of adjacent properties.

The insured argued, in effect, that the accidental discharge of a substance used in its operations was a premises exposure insured under its general liability policy.

The court agreed, even though, in addition to an absolute pollution exclusion, the policy included an endorsement stating that the pollution exclusion applied “whether or not such irritant or contaminant has any function in your business, operations, premises, site or location.”

Product

The Indiana case was similar to an older one in Missouri, where an appeals court ruled in favor of the owner of a gas station sued over the spill of approximately 2,000 gallons of gasoline that migrated to adjacent property.

In that case, the owner of the gas station argued that “gasoline is a product, not a pollutant.”

The trial court agreed, in part, making the insurer liable for damages arising from claims for property damage, but upholding the policy’s exclusions for costs of environmental cleanup.

Significantly, in both the Indiana and Missouri cases, the alleged property damage did not arise from the use of substances as products or aspects of an industrial operation.

Instead, the damage resulted from pollution as traditionally understood: toxic substances released from where they were contained and contaminating adjacent air, land, or water.

AAIS Response

In response to the Indiana and Missouri cases, AAIS has filed new mandatory pollution amendment endorsements under agricultural and commercial liability lines in those states.

Among other things, the new amendatory endorsements include a specific list of hazardous substances or materials in the definition of “pollutant.”

The list of substances includes gasoline and other petroleum-derived products, and it incorporates by reference any substance or material identified in one of several hazardous material registers produced by the federal government.

In addition, the endorsements include a schedule to allow insurers to list additional substances or materials not listed or referenced in the endorsements.

Lastly, the new endorsements specify that the definition of pollutants applies whether or not such pollutants serve any purpose with respect to the named insured’s business, operations, premises, site or location.

AAIS is monitoring legal and regulatory activity in other states, and may choose to file the Indiana and Missouri endorsements elsewhere if there are adverse decisions for insurers regarding the application of pollution exclusions.

AAIS cannot control what some courts consider to be the “reasonable expectation” of insureds regarding pollution coverage, but it will continue to work to provide policy language that protects insurers from unintended exposure to environmental contamination by pollution.