Decades after its inception, the liability insurance policy’s pollution exclusion remains a much-litigated area of insurance law. In the third-party liability context, the provision precludes coverage for injury or damage arising out of the discharge, release or escape of pollutants. Although the term “pollutants” is generally defined in the policy, litigants and judges grapple with the meaning of that and other terms in the exclusion.
A look at third-party pollution exclusion decisions issued over the past year reveals that by a strict measure of wins and losses insurers prevailed more often than policyholders. Chinese drywall and lead were among the products that were disputed in 2013 with mixed results for carriers and insureds. However, insurers dominated in decisions involving supposed “sudden and accidental” discharges, another provision that continues to spark litigation years after policies containing that exception were written. Another trending issue is whether the exclusion is limited in its application to traditional industrial environmental exposures.
The Pollution Exclusion in Products Cases
Several insurance disputes involving Chinese drywall — defective drywall that was imported to the United States from China over the last decade — were resolved in 2013. Three were in the Southeastern United States, where many drywall claims originated. The region’s humid climate allegedly caused the materials to release sulfur gases, causing bodily injury and property damage.
In American Home Assurance Co. v. Arrow Terminals Inc. (M.D.Fla. May 8, 2013), the issue was whether damage inside a residence from defective drywall fell within the term “atmosphere,” as used in the pollution exclusion. In concluding that the insurer had a duty to defend, the court found that the exclusionary language “into or upon land, the atmosphere, or any water course or body of water” limited application to outdoor environmental contamination as opposed to the release of noxious gases inside homes.
In the underlying facts of another Florida case, Granite State Ins Co. v. American Building Materials Inc. (11th Cir. [Fla.] Jan. 3, 2013), a builder and contractor were sued in class actions after the drywall began emitting large quantities of sulfide gas after installation. The gases caused eye irritation, nausea, shortness of breath, cough and neurological injury. The drywall also corroded the copper wiring in homes. The appeals court in the resulting declaratory judgment action held that the pollution exclusions were triggered because the gas was an irritant or contaminant that caused damage after its release.
Drywall used in repair work to damaged homes from Hurricane Katrina was at the core of the coverage dispute in Prestige Properties Inc. v. National Builders and Contractors Ins Co. (S.D.Miss. Oct. 10, 2013). Prestige was a defendant in a Katrina-related class action involving drywall installed in storm-damaged homes. The chemical components in the drywall allegedly broke down and, as in Granite State, produced sulfides that caused injury and damage. Citing Granite State, the Prestige court granted the insurer’s motion for summary judgment, holding that the essence of the underlying complaint’s allegations was that gases were released from the drywall and caused irritation to the homeowner. Therefore, the gases were encompassed by the policy’s definition of gaseous irritants.
In contrast, a Colorado court found that an absolute pollution exclusion was ambiguous as to whether Chinese drywall was a “pollutant.” In ProBuild Holdings Inc. v. Travelers Property Cas Co of America (Colo. 20th Dist. Ct. Oct. 4, 2013), the court noted that it was not clear whether the drywall itself or the gases it emitted were considered the pollutant. In determining whether the substance was a pollutant, the court also observed the context in which the substance causes damage and whether a reasonable insured would consider that substance as a pollutant in that context.
Lead was another product at issue in pollution exclusion cases in 2013.
In Doe Run Resources Corp. v. Lexington Ins. Co. (Doe Run I), 719 F.3d 868 (8th Cir. (Mo.) June 13, 2013), the Eighth Circuit rejected a policyholder’s argument that an absolute pollution exclusion did not cover neighboring property damage caused by lead processing. The insured asserted that the lead substances could not be considered a pollutant because it was used in its mining operations and lead concentrate was its primary product.
The court disagreed, finding that these substances qualified as pollutants under the policy when they escaped or reached a place where they were no longer a useful product. Furthermore, the court found that discarded lead concentrate, which migrated on the neighboring premises, was not a product that the insured intended to sell. In a companion case, Doe Run II, 719 F.3d 876 (8th Cir. (Mo. June 13, 2013), the panel issued a split decision on whether the mining waste affecting other properties was precluded from coverage.
An insurer also prevailed in a Delaware court on its argument that the exclusion precluded coverage for an infant’s lead poisoning resulting from an abatement company’s negligent paint removal. Farm Family Cas Co. v. Cumberland Ins Co (Del. Super. Oct. 2, 2013). Acknowledging that lead paint qualified as a contaminant, the court determined that the contractor’s abatement responsibilities were all highly suggestive of conduct that would cause discharge, dispersal, migration, release or escape of the hazardous lead.
Other courts dealt with products that could be harmless in some situations, but harmful in others. For example, the Colorado Supreme Court held that an insurer need not cover a restaurant sued by two workers who inhaled hydrogen sulfide gas while attempting to clear a grease clog from a manhole near the restaurant. Mountain States Mutual Cas. Co. v. Roinestad, 296 P.3d 1020 (Colo. Feb. 25, 2013). Subsequent investigation revealed that the clog resulted from the restaurant regularly dumping cooking grease down a cleanout.
The court held that the grease became a contaminant when large quantities were discharged into the sewer and caused the clog. In Country Mutual Ins Co. v. Hilltop View LLC (Ill. App. Ct. Nov. 13, 2013), an insurer argued it was not responsible for defending its insured against neighbors’ claims based on odors from the operation of a confinement hog farm and the application of manure from the hog farm on the property.
The appellate court disagreed, holding that the pollution exclusion did not apply because the odor was not “traditional environmental contamination.” Although manure is hazardous in certain situations, the court concluded that this fact did not justify the broad conclusion that it was always “hazardous material” for purposes of the exclusion. The panel also observed that because the neighbors claimed that the insured caused interference with the enjoyment of property, there was no claim of environmental pollution in the traditional sense.
In its ruling, the Hilltop court distinguished the underlying claim from another Illinois case decided in 2013, Village of Crestwood v. Ironshore Specialty Ins Co. (Ill. App. Ct. Feb. 22, 2013), which involved the non-naturally occurring chemical perchloroethylene ("PCE"). In Crestwood, the insured was sued for knowingly and routinely mixing well water polluted with PCE with clean municipal tap water to cut municipal expenses. The policyholder alleged that because it was not an active polluter, the pollution was not considered “traditional environmental pollution” and the exclusion did not apply. The court determined that the policyholder’s deliberate contamination of the fresh municipal water supply by mixing it with chemical-laden groundwater and then distributing that contaminated combination into the community qualified as “traditional environmental pollution.”
A Missouri appeals court ruled for the policyholder in a case where a grandmother brought her granddaughter and a friend over to her apartment to stay the night and left the car running in the garage. Consequently, the granddaughter died of carbon monoxide poisoning and the friend suffered injuries. American National Property & Cas Co. v. Wyatt (Mo. Ct. App. 2013). The court reasoned that while carbon monoxide is a pollutant when released in an industrial or environmental setting, an ordinary policyholder would not characterize carbon monoxide as a pollutant if released in a residence.
In a Minnesota case involving carbon monoxide poisoning, Midwest Family Mutual Ins Co. v. Wolters (Minn. May 31, 2013), an insurer’s reliance on an absolute pollution exclusion was upheld where a general contractor was sued for injuries resulting from an improperly installed in-floor radiant heating system. The court applied the exclusion beyond traditional industrial environmental pollution. Because the policy did not only use language restrictive to a natural environment such as “atmosphere” or ‘watercourse,” the court concluded that the exclusion applied to indoor carbon monoxide pollution.
Bacteria associated with Legionnaires’ Disease was the subject of an Eleventh Circuit decision. Westport Ins Corp. v. VN Hotel Group LLC (11th Cir. (Fla.) March 22, 2013). The plaintiffs in the underlying claim alleged that the deceased had contracted the disease while a guest at one of the insured’s hotels, either through the water in the shower or the outdoor spa. The court found that the bacteria associated with the disease was not considered a pollutant because if it was, the separate exclusion for bacteria or fungi would be rendered meaningless. However, the bacteria exclusion did not apply because the bacteria occurred at an outdoor spa, not within a building as the exclusion trigger required.
In yet another Eleventh Circuit case, the insurer prevailed in a case where hazardous dust blew onto neighboring properties from construction activities at the insured’s premises. The neighboring property owners sued, claiming property damage and injury. Mt. Hawley Ins Co. v. Dania Distribution Centre Ltd. (11th Cir. (Fla.) March 20, 2013). While the complaint described sewage odors, excessive noise and dust that came from the property, the underlying plaintiffs also alleged that the neighboring landowners developed health problems as a result of their contact with “the pollutants and poisons in the dust” discharged from the property. Because the claimed bodily injuries stemmed from pollutants in the dust, coverage for those injuries was excluded.
A total pollution exclusion precluded coverage under Texas law for third-party claims related to the “off-gasing” of spray polyurethane foam insulation, which was deemed a toxic irritant. Lapolla Indus Inc. v. Aspen Specialty Ins Co. (E.D.N.Y. Aug. 19, 2013).
Although claims against an oil and gas producer included trespass and breach of contract, a Louisiana appeals court determined that the various liability theories asserted all stemmed from the company’s alleged contamination of adjacent property by the migration of waste by-products. Lodwick LLC v. Chevron USA Inc.(La. Ct. App. Oct. 2, 2013). As a result, the court held that the company’s insurers properly relied on their respective policies’ pollution exclusions.
Sudden and Accidental Exception to the Pollution Exclusion
An exception to the earliest versions of the pollution exclusion allowed coverage for sudden and accidental discharges. Since the phrase “sudden and accidental” is not defined in the policy, it has been the subject of hundreds of environmental coverage decisions over the years. Modern cases addressing the exception often involve claims for pollution that occurred decades earlier.
Most recently, a New York federal district court, applying Massachusetts law, allowed an insurer to deny coverage to a utility company sued over the release of hazardous chemicals after an excavation exposed byproduct waste that the insured’s predecessor dumped decades ago. Narrangansett Electric Co. v. American Home Assur Co. (S.D.N.Y. Feb. 1, 2013). The court determined that the allegations suggested the release was “sudden and accidental” since the contractors did not expect the chemicals to be released during excavation. When one of the waste products at the site came into contact with air, sunlight or an acidic environment, toxic gases were instantly formed.
Under the facts in Interstate Packaging Company v. Century Indem Co. 2013 (M.D.Tenn. March 29, 2013), a food packaging manufacturer was sued for disposing chemical waste in a city-owned landfill, contaminating the property and drinking water. Interstate alleged the occurrence was “sudden and accidental” because the allegations in the complaint asserting liability were based on two discrete events: (1) the disposal of a 55-gallon drum that contained PCE and (2) the disposal of a paper towel dipped in PCE.
Ruling in favor of the insurer, the court found that Interstate did not demonstrate a connection between these two events and the settlement reached in the underlying suit. The court considered the depositions of several Interstate employees who testified that the polluting activities occurred as part of Interstate’s normal business activities.
Insurers also secured an appellate win in Ross Development Corp. v. PCS Nitrogen Inc. (4th Cir. (S.C.) June 6, 2013). There, the insured sought a defense and indemnity for environmental litigation arising from the cleanup of a contaminated site it formerly owned. For several decades, Ross’s phosphate fertilizer manufacturing plant in South Carolina produced waste byproducts containing high concentrations of arsenic and lead. Ross closed the plant after a fire destroyed it. Years after selling the site, Ross purchased insurance policies to provide basic coverage for damages arising from previously owned properties. The first group contained a qualified pollution exclusion barring coverage for the discharge of pollutants onto land unless sudden and accidental. The second batch contained an absolute pollution exclusion, which did have the exception, but would allow coverage if the discharge was “caused by heat, smoke, or fumes from a hostile fire.”
The court opined that because there was no dispute Ross intentionally used materials that created the harmful byproducts, the “sudden and accidental” exception did not apply. The insured failed to offer any evidence that the fire actually caused any third-party property damage.
Despite years of litigation over its meaning, the pollution exclusion continues to generate debate. Decisions issued in 2013 demonstrate that there will be ongoing disputes on issues such as whether a particular product is a pollutant, whether a pollutant has been discharged and whether the exclusion’s application is applied beyond traditional contamination.
**Note: this article is presented as it originally appears in Law360