THE ABSOLUTE POLLUTION EXCLUSION: NAVIGATING PATHWAYS AROUND TOTAL CONFUSION
“Rarely has any issue spawned as many, and as variant in rationales and results, court decisions as has the pollution-exclusion clause.” 1
While the pronouncement of the Supreme Court of Alabama may have been a little extreme, the fact remains that a decade later, courts are still citing it as accurate. The pollution exclusion remains in many jurisdictions as uncertain as ever, due to inconsistent, fragmented, factually-specific, and overly broad judicial precedent. As a result of this discord, parties lack certainty in determining when a pollution exclusion may be applicable to their case. This article addresses the history of the exclusion, problems and issues in interpretation, arguments for and against a narrow reading of the clause, and a recent case study from California’s evolving case law. Some take-home lessons are also provided for addressing this exclusion pre- and post-claim.
The Development And Evolution Of The Pollution Exclusion
The pollution exclusion is a standard form endorsement to the CGL policy. Its evolution is the product of decades of tension between, on one hand, judicial interpretation confirming defense and indemnity coverage for environmental pollution, and, on the other hand, attempts by the insurance industry to exclude such coverage for a broad array of pollution related injuries from their standard policies.
CGL policies are typically designed to provide coverage for “sums that the policyholder becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” Prior to 1966, the standard-form CGL policy provided coverage for bodily injury or property damage caused by an “accident,” but failed to provide a definition for the term “accident,” leading to many judicial decisions that extended CGL coverage to pollution-related injuries or damages.2
During the 1960s, however, the insurance industry’s concern regarding the costs of insuring such incidents was dramatically heightened by the birth of sweeping federal statutes such as the Clean Air Act that expanded the expenses and obligations associated with the cleanup of environmental hazards, as well as the notoriety of several large-scale and expensive environmental catastrophes.3
In 1966, the insurance industry responded to these developments with a revised standard CGL policy, changing the term “accident” to “occurrence,” and specifically defining the term “occurrence” to be “an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury and property damage that was neither expected nor intended from the standpoint of the insured.”4
Yet, despite the insurance industry’s efforts, the courts continued to apply revised CGL policies to cover accidents caused by environmental pollution, so insurers in 1970 modified the policy again to draft a “qualified pollution exclusion,” which was developed as a standard form exclusion (f).5 This exclusion provided, in relevant part:
This policy shall 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.6
But the industry’s revisions again led to diverging judicial viewpoints on coverage, this time centering around the meaning of the term “sudden and accidental.”7 Additionally, the 1980s ushered in the passage of even more statutes expanding liability for environmental remediation, such as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).8
Insurers again went back to the drawing board, and in 1985 began promulgating a new “absolute pollution exclusion,” eliminating the term “sudden and accidental” and the requirement that the pollutant be discharged “not or upon land, the atmosphere or any watercourse or body of water.”9 The absolute pollution exclusion is a standard exclusion (f) Insurance Services Office (“ISO”) Form CG 00 01.10 However, in practice, insurers often make variations to the language of this exclusion.
A “total pollution exclusion” has also been in widespread use since the mid-1980s. Generally, the total pollution exclusion is less qualified and more extensive, often containing no express exception to the exclusion for damage by “hostile fire.”11 However, the term has been applied to a number of variations on the “absolute pollution exclusion,” some of which are fairly identical.12
Ambiguity And Jurisdictional Splits In Interpretation
In the past three decades, the standard-form CGL pollution exclusion has not changed, but courts have continued to apply it unevenly across the nation, and inconsistently from case to case within a single jurisdiction.13 Given the scale of the expenses at issue in defending and indemnifying claims of “property damage” and “bodily injury,” it is no surprise that the scope of the pollution exclusion has emerged as “one of the most hotly litigated insurance coverage questions to arise over the past three decades.”14 Over 200 decisions from more than 36 states have analyzed the exclusion, on issues ranging from what substances qualify as a “irritant” or “contaminant,” to what constitutes a “discharge, dispersal, release or escape,” to what types of negligent acts can be categorized as pollution for purposes of the exclusion.15
Disputes over the application of the exclusion center around its meaning, often applying the insurance policy interpretation doctrines of plain meaning, ambiguity, and whether the exclusion is conspicuous, plain and clear.
For simplicity, we roughly divide jurisdictions into two camps regarding the application of the “pollution exclusion” to acts of negligence: (1) One camp, conscious of the historical development of the exclusion, as well as the reasonable expectations of a policyholder, applies the exclusion narrowly only to what is viewed as “traditional environmental pollution”; (2) The other camp sees the exclusion as an unambiguous contract provision, reading it broadly to preclude coverage for all claims that involve toxic substances, regardless of whether they result from conventional types of pollution to the soil, land, air, or water, or from acts of negligence in the usual course of business that happen to involve harmful substances.16 The first favors policyholders and the second favors insurers, and their advocates generally divide along those lines.
But the fragmentation of authority does not end there. Still other courts have noted that “[a] term which is clear in one context may be ambiguous in another,” allowing arguments to begin anew with each new set of facts.17 Even the split of authority is itself viewed differently by different courts: some decisions have cited to the existence of conflicting judicial interpretations of policy terms as evidence of ambiguity, whereas other courts have found the conflict not to be determinative of ambiguity.18
Moreover, while many lawsuits have been filed involving some aspect of the absolute pollution exclusion, a number of jurisdictions still have a surprising dearth of authority regarding its application. For example, the California Supreme Court did not issue an opinion rejecting the insurance industry’s broad interpretation until 2003, when it held in MacKinnon v. Truck Insurance Exchange, 31 Cal. 4th 635 (2003) that it would apply the exclusion to exclude only “injuries arising from events commonly thought of as pollution, i.e., environmental pollution,” as opposed to mere “ordinary acts of negligence involving toxic chemicals” resulting in bodily injury. The New Jersey Supreme Court took up the issue two years later and came to a similar conclusion.19 The Supreme Courts of Alaska and Georgia did not analyze whether the absolute pollution exclusion was ambiguous until 2008; both found that it was not and applied the exclusion literally.20
Even more recently, federal courts in a handful of jurisdictions have been handed the job of determining whether the total pollution exclusion was ambiguous or limited to environmental pollution only, without any clear and controlling state precedent, and have certified the question to their state’s highest courts.21
Thus, decades after its most recent iteration has been released into the world, it would seem that whether the total pollution exclusion is plain or ambiguous, or is applied narrowly or broadly, is in many ways an unsettled issue.
Navigating A Path Between Extremes
Is the Exclusion: (1) Clear and Unambiguous Resulting in a Literal Interpretation or; (2) is the Exclusion Ambiguous or so Overbroad that it Violates the Insured’s Reasonable Expectations of Coverage?
Courts interpreting the exclusion narrowly in favor of finding coverage have relied on insurers’ motivation in drafting the exclusion, and have argued that to expansively apply the scope of the exclusion beyond the insurers’ stated objective of avoiding expense and exposure resulting from environmental litigation, to situations not remotely resembling traditional environmental pollution, would give the insurers a undeserved windfall.22
As a second rationale for narrow interpretation of the exclusion, some courts have argued that interpreting the term “pollutant” in the exclusion literally to mean any possible “contaminant or irritant” would have absurd or otherwise unacceptable results, overextending the reach of the “total pollution exclusion” to everyday events that simply happen to involve something that could be characterized as a substance that is an irritant – for example, a slip and fall on a puddle of spilled swimming pool chlorine, or application of iodine to someone who has an unexpected allergic reaction.23
Third, many courts have cited to the doctrine of interpreting the policy according to the reasonable expectations of the policyholder that the exclusion is a term of art limited to environmental pollution.24 These courts have refused to broadly apply the exclusion to factual scenarios that fall so far adrift of expectations of what is meant by a “total pollution exclusion” that a reasonable insured would not be plainly and clearly alerted that a claim would not be covered.25 These courts have noted that interpreting the exclusion broadly effectively eviscerates CGL coverage for “bodily injury” or “property damage” for policyholders in certain industries,26 As proffered by the Wisconsin Supreme Court, “[t]he reach of the pollution exclusion clause must be circumscribed by reasonableness, lest the contractual promise of coverage be reduced to a dead letter.”27
Additionally, some courts have mulled over the meaning of the terms “discharge, dispersal, release or escape” in the total pollution exclusion, maintaining that these terms signify some type of freedom from containment, over a substantial area. These courts have found the application of the total pollution exclusion to be inappropriate in factual scenarios where, for example, the claim resulted from the negligent handling of chemicals to be otherwise intentionally applied or directed locally in the course of business.28
In contrast, courts to apply the exclusion broadly have found, more simply, that the exclusion clearly and unambiguously excludes all “bodily injury” or “property damage” coverage, whenever a cause of injury can be characterized as a pollutant, broadly defined, notwithstanding the policyholder’s reasonable expectations of coverage.29
A Case Study From California
Particularly in jurisdictions taking a narrow reading of the exclusion, policyholders and insurers have continued to hotly dispute coverage in cases where a pollution exclusion is present, and especially so where the court has based its narrow reading on the holding that the exclusion was ambiguous when applied to the facts of the case.
For example, in California, the MacKinnon opinion sought to provide clarity to litigants. However, since virtually all claims over which the application of the total pollution exclusion is debated will involve some act of negligence (or typically be subject to other policy exclusions), parties have simply taken the language of MacKinnon and battled over the question of what constitutes a “traditional environmental pollution,” as opposed to an act of negligence that merely happens to involve toxic substances.30 Moreover, MacKinnon’s finding that the exclusion was ambiguous as applied to the facts therein, and thus the exclusion susceptible to the interpretations of both the policyholder and the carrier, may have caused carriers to reserve rights and litigate more frequently than in other jurisdictions where courts have stated on the record that the exclusion unambiguously does not apply in cases that do not involve traditional environmental pollution.31
As a result, in many cases, a judicial determination that is too specific or too vague means that the question is simply reopened for a renewed debate each time it is asserted. Ultimately, this uncertainty increases expenses for both carriers and policyholders, and can lead to unfair results.
In an attempt to provide more clarity to one jurisdiction’s narrow reading of the total pollution exclusion, a recent opinion from the Central District of California sets forth a more specific test in Great American Assurance Co. v. M.S. Industrial Sheet Metal, Inc., Case No. 8:11cv00754 (C.D.Cal.2012) (Docket No. 67). In that case, policyholder and contractor M.S. Industrial Sheet Metal tendered to its CGL carrier a personal injury/negligence claim in which two plaintiffs claimed that M.S. Industrial’s installation and/or recommendation of a workplace ventilation system for a commercial printer caused them to be exposed to harmful printer exhaust while working within a warehouse.
The carrier, Great American Assurance Company, filed a declaratory relief action regarding its duty to defend M.S. Industrial in light of a total pollution exclusion endorsement. Both parties filed cross-motions for summary judgment on the issue of whether a duty to defend was owed. The carrier argued for a literal “but-for” application of the exclusion since the personal injury plaintiffs alleged that they were harmed as a result of chemicals in the air, and further tried to compare the industrial setting of the claim to prior precedent to argue that the exclusion should apply. The court disagreed and held that the total pollution exclusion did not apply to preclude the duty to defend for the claim.
The court reasoned, pursuant to MacKinnon, that the claim clearly presented a case of ordinary negligence that happened to involve toxic substances, as opposed to traditional environmental pollution. The court set forth a new two-part test: the total pollution exclusion applies to preclude insurance coverage in California only if the exposure is (1) from a toxic environmental pollution or accident that is a persistent by-product of the insured’s business as opposed to a “localized toxic accident”; and (2) if the facts of the exposure fall within the insurance industry’s historical objective of avoiding liabilities for environmental catastrophes related to industrial pollution.
Thus, while maintaining MacKinnon’s narrow approach, the court also added clarity to the MacKinnon decision.
Conclusion and Take-Home Lessons
Uncertainty regarding the total pollution exclusion is likely to last for some time. How can you best protect your client from uncertainty and expense related to the total pollution exclusion?
Even before a claim is filed, when selecting or renewing CGL policies, companies should closely review any provisions regarding “pollution,” and evaluate their potential liability under a variety of factual scenarios. In jurisdictions broadly interpreting the scope of the total pollution exclusion, policyholders should purchase additional pollution coverage.
If a dispute regarding coverage arises, policyholder counsel can look to some of the above arguments, as most jurisdictions apply some variation of the rule that insurance policy provisions must be interpreted broadly and in favor of coverage. Contrary precedent may very well be distinguishable based upon the facts of the case and may even render the exclusion ambiguous. Prior decisions and rationales set forth by courts in the policyholder’s jurisdiction are likely to be inconsistent and often lead to conflicting results when applied to the facts of your client’s case. If so, resort to well established principles of policy interpretation to establish the insurer’s obligation to provide policy benefits. You may be able to properly frame the coverage determination in favor of finding coverage.
Don’t limit yourself. If your jurisdiction’s case law is not well-developed, it may be that that your best arguments come from other states, or that the issue needs to be reviewed by a higher court. Even if your jurisdiction has set forth a standard, your case may present a need to update that standard to make it more specific or general. Lastly, stay aware of how your arguments in the coverage case may impact your client in handling the underlying claim; in some jurisdictions, you may have grounds for a stay of the coverage dispute while the underlying action is pending.
* Eric Little is the managing partner of Little Reid & Karzai LLP in Irvine, California. And solely represents policyholders. Jacqueline Beaumont is an associate at Call & Jensen in Newport Beach, California, and was counsel for the policyholder in Great American v. M.S. Industrial, Inc.
1 Porterfield v. Audubon Indem. Co., 856 So. 2d 789, 800 (Ala. 2002).
2 The development of the pollution exclusion clause is relatively uncontroverted and has been extensively discussed by the courts; among the most comprehensive treatments are in Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 384-87 (N.Y. 2003); Am. States Ins. Co. v. Koloms, 177 Ill. 2d 473, 489-492 (Ill. 1997).
3 See id.
4 See id.
5 See id.
6 See id.
7 See id.
8 See id.
9 See id.; see also discussion in Porterfield, 856 So. 2d at 796 (Ala. 2002); MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 650 (Cal. 2003).
10 The absolute pollution exclusion in ISO Form CG 00 01 12 07 states in relevant part that the policy shall not apply to ““Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” ….” Pollutant is 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.”
11 This carve back to the pollution exclusion typically states that the pollution exclusion does not apply to personal injury and property damage “caused by heat, smoke or fumes from a hostile fire” ... which is defined as one that “is uncontrollable or breaks out from where it was intended to be.” Maffei v. Northern Ins. Co. of N.Y. 12 F3d 892, 895 (9th Cir. [Cal.] 1993).
12 Stempel on Insurance Contracts, 3d. Ed., 14-166 (14.11[C]) (2007).
13 See discussion in Porterfield, 856 So. 2d at 800-806 (Ala. 2002).
14 Apana v. TIG Ins. Co., 574 F.3d 679, 680 (9th Cir. [Haw.] 2009) (internal quotations omitted).
15 See Porterfield, 856 So. 2d at 801 (Ala. 2002) (discussing cases and history of exclusion).
16 Many cases and articles have extensively cited the two camps and representative decisions. See, e.g., Apana, 574 F.3d at 682-683 (9th Cir. [Haw.] 2009), MacKinnon, 31 Cal. 4th 635, 650 (Cal. 2003).
17 Sullins v. Allstate Ins. Co., 340 Md. 503, 508 (Md. 1995).
18 Id. at 517-518.
19 Nav-Its, Inc. v. Selective Ins. Co. of Am., 183 N.J. 110 (N. J. 2005).
20 Whittier Properties, Inc. v. Alaska Nat. Ins. Co., 185 P.3d 84, 90 (Alaska 2008); Reed v. Auto-Owners Ins. Co., 284 Ga. 286, 288 (2008).
21 See Century Sur. Co. v. Casino W., Inc., 677 F.3d 903 (9th Cir. 2012)(certifying question to Nevada Supreme Court); Nationwide Mut. Ins. Co. v. Overlook, LLC, 785 F. Supp. 2d 502, 511 (E.D. Va. 2011)(discussing prior certification of question of law, which Supreme Court of Virginia “declined to accept,” and resolving issue); Apana v. TIG Ins. Co., 574 F.3d 679, 684 (9th Cir. 2009)(certifying question to Hawai’i Supreme Court); City of Chesapeake v. States Self-Insurers Risk Retention Group, Inc., 271 Va. 574 (2006)(answering prior certified question regarding application of exclusion in Virginia); see also Eott Energy Pipeline Ltd. P'ship v. Hattiesburg Speedway, Inc., 303 F. Supp. 2d 819, 821, 824 (S.D. Miss. 2004) (noting in diversity case that “the Mississippi Supreme Court has yet to decide a case involving a pollution exclusion of any kind in an insurance policy” and that “if this Court had the power to do so, it would certify this issue to the Mississippi Supreme Court.”); Bituminous Cas. Corp. v. Cowen Const., Inc., 55 P.3d 1030 (Okla. 2002)(answering certified question regarding scope of pollution exclusion).
22 See, e.g., Am. States Ins. Co. v. Koloms, 177 Ill. 2d at 493-493 (Ill. 1997); Doerr v. Mobil Oil Corp., 774 So. 2d 119, 126 (La. 2000) opinion corrected on reh'g, 782 So. 2d 573 (La. 2001); Andersen v. Highland House Co., 93 Ohio St. 3d 547, 551 (Ohio 2001); Gainsco Ins. Co. v. Amoco Prod. Co., 53 P.3d 1051, 1066 (Wyo. 2002).
23 See MacKinnon, 31 Cal. 4th at 650 (Cal. 2003) and cases cited therein.
24 See, e.g., Sullins, 340 Md. At 515-516 (Md. 1995); Andersen, 93 Ohio St. 3d 547 (Ohio 2001).
25 See Regional Bank of Colorado v. St. Paul Fire and Marine Ins. Co. 35 F.3d 494, 498 (10th Cir. [Colo.] 1994).
26 See discussion in Am. States Ins. Co. v. Kiger, 662 N.E.2d 945, 948-49 (Ind. 1996) (exclusion was in garage policy issued to gas station); Ayersman v. W. Virginia Div. of Enviromental Protection, 208 W. Va. 544, 546 (W. Va. 2000) (skeptical of applying exclusion to “p[rimary function” of insured state department of environmental cleanup and protection.”
27 Donaldson v. Urban Land Interests, Inc., 211 Wis. 2d 224, 233 (Wis. 1997).
28 See MacKinnon, 31 Cal. 4th at 650 (Cal. 2003) and cases cited therein.
29 See, e.g., Nautilus Ins. Co. v. Country Oaks Apartments Ltd., 566 F.3d 452, 458 (5th Cir. [Tex.] 2009); see also Heyman Associates No. 1 v. Ins. Co. of State of Pa., 231 Conn. 756, 776 (1995).
30 See Cold Creek Compost, Inc. v. State Farm Fire & Cas. Co., 156 Cal. App. 4th 1469, 1480-1486 (Cal. App. 2007); Cas. Co. of Reading, PA v. Miller, 159 Cal. App. 4th 501, 514-516 (Cal. App. 2008); and cases discussed therein.
31 Compare the decision of the Illinois Supreme Court in American States Insurance Company v. Koloms, 177 Ill. 2d 473 (1997); MacKinnon has been cited in approximately three times more pollution exclusion cases in its own federal and state jurisdictions for the number of years the decision has been on the books. For more info contact Jacqueline Beaumont