Spring, 1999
CLAIMS LAW UPDATE
THE ABSOLUTE
POLLUTION EXCLUSION -
OUT OF THE FRYING PAN?
[Ref: Environmental, Paras 1209 & 1211]
With environmental
claims providing probably the greatest ongoing exposure for any one type of claim in the
history of the industry, it’s clear why insureds and insurers have employed every
conceivable argument in their coverage interpretation battles. Billions (some say a
trillion) are at stake, with the coverage results sometimes turning on how many justices
prefer one dictionary definition over another. One of the major battle fronts has been
over the interpretation of the “sudden and accidental” exception to the
“qualified” pollution exclusion found in CGL policies since the early
`70’s. This exclusion states that claims due to pollution are not covered except
where the event causing the pollution was sudden and accidental (hence,
“qualified” because it does not apply to all pollution). This issue continues to
be of significant concern well into the `90’s, particularly with respect to what
might be termed the traditional pollution claim. That is, the large scale claim triggered
by long term dumping. To stave off future litigation, in the mid `80’s, insurers
removed the qualified pollution exclusion from CGL policies and crafted a new
“absolute pollution exclusion.” While the intended purpose of the new exclusion
was to minimize litigation of pollution related claims, the absolute pollution exclusion
is now the most litigated coverage issue.
What the insurance professional should know is that while the litigation over the older
exclusion continues with the “traditional” type pollution claim, the courts are
faced with some different issues under the new policy language. The concern over the newer
exclusion is so significant that at least one state has attempted to regulate the
interpretation of the absolute exclusion through special legislation, and a state
insurance commissioner has issued an advisory letter to insurers in another. After
updating the status of the sudden and accidental exception, this article will cover some
of the new issues raised by the absolute exclusion.
The change to the
absolute pollution exclusion has not altered the fact that, for many current environmental
claims, determining whether there is coverage is still governed by the sudden and
accidental issue. Due to the nature of environmental claims, where the damage can remain
undetected for decades, new claims continue to be brought which are governed by the old
policy language. Only about half of the state supreme courts have ruled on the sudden and
accidental language, leaving a significant number of states with the question unresolved
by the top court.
A key issue in the litigation over sudden and accidental is whether the phrase is
ambiguous. Once a court determines that policy language is ambiguous, the standard rule of
interpretation requires construing the ambiguous language in favor of the insured. A
slight majority of states have held that the language is clear and unambiguous and have
found for the insurers. According to these courts, the meaning of sudden and accidental is
clear — the polluting event must be one that occurs abruptly as well as accidentally.
In the minority of courts, where the clause is considered ambiguous, the only requirement
is that the pollution be unexpected. Since it need not be abrupt or even necessarily of a
short duration, coverage could be afforded for pollution which occurred over a period of
many years.
The state supreme courts of Delaware, Florida, Idaho, Iowa, Maryland, Massachusetts,
Michigan, Minnesota, New York, North Carolina, Ohio, Oklahoma, Utah, and Wyoming have held
that the sudden and accidental exception to the pollution exclusion is clear in requiring
that the event be both unexpected and abrupt. All eleven U.S. Circuit Courts of Appeal
have also ruled for the insurers. Alabama, Colorado, Georgia, Illinois, Indiana, New
Hampshire, New Jersey, Oregon, South Carolina, Washington, West Virginia, and Wisconsin
supreme courts have interpreted the same language in favor of the policyholders.
This exclusion has
generally been effective in barring coverage for the types of claims (insureds involved in
industries usually associated with chemical spills and dumping) which created so much
controversy under the older policy language. However, the new language has moved the
coverage disputes into a new arena involving different types of insureds with less typical
types of claims.
First, consider that the language of the older exclusion was contained in one sentence. In
an attempt to be all-encompassing, the absolute exclusion covers more than half a page.
Although the new exclusion has clarified some issues, policyholders contend that it has
been applied to situations for which it was never intended. For example, they argue that
the exclusion should apply only to insureds whose business involves the potential for the
traditional type of toxic spills and dumping (“active polluters”) and not to the
carpenter who has been sued because the fumes from his wood glue sickened someone. The
resolution of this issue centers on what qualifies as a contaminant or pollutant. Another
key issue is what is meant by a “discharge” of a pollutant.
There has always been
controversy over how pollutant should be defined. The earlier versions of the qualified
pollution exclusion did not specifically state “pollutants means ...” as the
absolute version does. The new expanded language is an attempt to more clearly define
pollutant in the policy rather than leaving the courts to define the term. Nevertheless,
courts have still been involved in deciding what qualifies as a pollutant. Policyholders
are litigating because so many different types of claims are coming within the
all-encompassing definition.
An example is Donaldson v. The Hanover Insurance Company, 560 NW2d 273 (1996),
where the Wisconsin Court of Appeals held that carbon dioxide exhaled by employees in a
poorly ventilated area was within the policy exclusion for pollution. When the employer
was sued by employees who were sickened by the carbon dioxide, the court found that the
claims were excluded because the stale breath qualified as a “gaseous irritant.”
The insured argued that carbon dioxide should not be considered a pollutant because it is
a naturally occurring substance which is harmless unless present in concentrated levels.
Quoting its earlier decision in United States Fire Ins. Co. v. Ace Baking Co., 476
NW2d 280 (1991), the court said “it is a rare substance indeed that is always a
pollutant.” Therefore, while the by-product of human respiration might strike most as
harmless and certainly not a pollutant, the court held that just as the most toxic of
substances is not always a pollutant, generally harmless substances are not always benign.
Ace, then, stands for the proposition that a normally harmless substance can be a
pollutant when it ends up where it should not be (Ace involved a fragrance additive stored
in the same room as ice cream cones, causing the cones to become fragrant). The Donaldson
court found that the carbon dioxide in its case was not harmless and qualified as a
pollutant because it was present in sufficient levels to be an irritant.
The Wisconsin Supreme Court reversed the Donaldson decision (564 NW2d 728, June,
1997) because it found that the definition was not clear enough to alert an insured that
coverage would be denied for injury claims that “have their genesis in activities as
fundamental as human respiration.” While the appeals court decision in this case may
be an extreme example, it is this type of difference of opinion that causes much of the
litigation in this area. Insureds expect that the exclusion should apply only to active
industrial polluters who pose a risk to the environment, and insurers have argued that its
wording should allow the exclusion to include a broader range of activities.
Courts which have held the exclusion applicable to other than active polluters have done
so because they find that the language of the exclusion is clear and unambiguous. Courts
which have ruled for the insured have often looked to the “reasonable expectations of
the insured.” This is a policy interpretation rule which, according to most courts,
should only come into play when the policy language is ambiguous. However, while most
courts have first ruled that the definition of pollution is ambiguous and then applied the
rule of interpretation, some have gone straight to the rule without first holding that the
language is ambiguous. These courts apply the reasonable expectations rule in a greater
variety of situations, including where enforce- ment of the provision in question (even if
clear and unambiguous) would defeat the general purpose of the coverage.
In a Massachusetts Supreme Court decision, Western Alliance v. Gill, 426 Mass. 115
(1997), the court applied the reasonable expectations rule without first holding that the
absolute pollution exclusion is ambiguous. The court said: “... the exclusion has to
be applied in a common sense manner with due attention to the circumstances of the
accident giving rise to a coverage claim.” The insured in this case owned an Indian
restaurant which used tandoori ovens to prepare the cuisine. A combination of
circumstances caused carbon monoxide produced by the ovens to accumulate in the dining
area, resulting in permanent brain damage to the claimant. The court considered what the
“objectively reasonable insured,” having read the pertinent policy language,
would expect to be covered. It also considered that the reason for the exclusion’s
creation was to avoid the huge exposures presented by traditional pollution claims.
Finally, the court considered the terminology of the exclusion and observed that terms
like discharge, dispersal, and release are terms of art used in the realm of improper
disposal or containment of hazardous waste. Considering all of these factors the court
found that coverage should be afforded where the injury or damage arises out of
“ordinary activities gone slightly awry,” as opposed to a major escape of
pollutants from an industrial site which threatens the environment. The Illinois Supreme
Court reached a similar conclusion, holding that the exclusion applies only to
“injuries caused by traditional environmental pollution,” in American States
Insurance Co. v. Koloms, 687 NE2d 72 (1997). Koloms also involved a carbon
monoxide claim.
Courts which have found the definition of pollutant to be unambiguous have applied the
exclusion to a wide range of activities and substances. Some courts, for example, have
held that carbon monoxide is clearly within the definition of pollutant, as are: fumes
from cleaning products, sealants, glue, etc.
In a decision which it states is in keeping with the “substantial majority” and
the “national trend,” the Florida Supreme Court held that the exclusion is clear
and unambiguous, applying to preclude “all coverage of any liability arising out of
the release of pollutants.” In Deni Associates of Florida v. State Farm Fire &
Casualty Co., 711 So2d 1135 (1998), the court ruled on two certified questions from
appellate courts. The first case involved an ammonia spill from a blueprint machine. The
ammonia fumes sickened tenants in the building where the spill occurred. In the second
case, the claimants were splashed by insecticides from a crop-spraying helicopter.
The Deni court first rejected the argument that the reasonable expectations
doctrine should apply. In Florida, the court said there is no need for the rule because
where the policy is ambiguous, the language is construed in favor of the insured. The
court then explained that where there is no ambiguity, the reasonable expectations
doctrine is inapplicable because applying the rule would result in rewriting, rather than
interpreting, the policy. Since the court saw no ambiguity in the policy language, it
applied the exclusion to both cases and denied coverage.
Courts which have addressed this issue (state and federal) are split on whether a
pollutant must be something which is harmful to the environment and normally harmful to
people or whether it can be a common substance which does not normally harm the
environment or people, but because of particular circumstances, does cause injury.
“Discharge”
is a term which has been central to environmental litigation for decades. As a result,
according to some courts, it has acquired a specific definition as a term of art. To these
courts, the term requires a release of pollutants which harms the environment. In some
decisions under the older policy language, the pollution exclusion was held not to be
applicable to claims where a pollutant escaped its intended confines, but did not escape
from the building in which it was housed. Courts reasoned that there was no discharge into
the atmosphere or environment if the substance remained within the building. The same
logic has been applied to claims under the absolute exclusion. As a result, courts have
held that carpet adhesive fumes, lead paint, photographic chemical fumes, pesticide,
carbon monoxide, asbestos, and liquid sulfuric acid which caused injury, but which
remained within a building, were not discharged. Without a discharge of a pollutant, the
absolute exclusion was found to be inapplicable.
Other courts have held that a discharge can occur as long as a substance escapes from its
original container. Consequently, carbon monoxide, fumes from waterproofing sealant,
ammonia gas, pesticide, insecticide, ammonia fumes from a blueprint machine, fumes from a
concrete curing agent, methane gas, nitrogen dioxide, and lead paint have been held to
have been discharged even without escaping into the outside environment or atmosphere.
Some courts do not even require a spill or unintentional event. Many of the examples given
above involved a product, such as an adhesive, being put to its intended use.
The Florida Supreme Court’s decision in Deni, for example, involved both types of
“discharges.” The insecticides sprayed from the crop duster were discharged into
the environment and were therefore held to be excluded pollutants. The ammonia fumes from
the blueprint machines remained in the building, but were still found to be pollutants
according to the policy definition. While courts in other jurisdictions have required a
discharge into the environment (“onto land, into the atmosphere, or into water”)
the Florida court rejected such a requirement because of the clear language of the
exclusion. These other courts imposed the discharge requirement because such language was
found in older policies and the courts felt that since the absolute exclusion is
ambiguous, policy interpretation based on a historical perspective is permissible.
Lead paint issues, in particular, have generated litigation of the discharge issue.
Because these types of claims often involve paint which had been applied in older
structures and then caused injury when it began to peel or flake, the courts have had to
determine whether the paint had been discharged. In a recent New Jersey decision, the
appellate court addressed such a claim as one of first impression in the jurisdiction. As
such, in Byrd v. Blumenreich, 722 A2d 598 (1999), the New Jersey court looked to
other jurisdictions for guidance. The court first noted that the absolute pollution
exclusion has been found to be clear in barring coverage for “toxic pollutants
released into the outdoor environment” in New Jersey cases. However, in Byrd,
the injured plaintiff was an infant who had lived in an apartment where lead paint was in
the process of flaking and peeling. The complaint alleged that the infant ingested the
particles and suffered lead poisoning of the nervous system as a result.
The court was concerned that the policy language was not specific enough to apply to
indoor pollution of this type. In reviewing the decisions from other states, the court
found similar concerns. According to the New Jersey court, the majority of courts which
have considered the issue have held that the exclusionary language is either ambiguous or
should be limited to environmental damage caused by improper disposal or containment of
hazardous waste. The Byrd court chose to side with the states which have held the
exclusion to be ambiguous in the absence of specific language relating to indoor
residential exposure to lead paint. The court said:
According to the court, Connecticut, Maryland, Massachusetts, New Hampshire, and New York have all ruled that the exclusion is inapplicable to such claims.
For claims governed
by the qualified pollution exclusion, the results should be predictable in those
jurisdictions where the highest court has ruled on the meaning of sudden and accidental.
In other jurisdictions, the meaning of “sudden” is less clear. In these states,
the outcome will ultimately be determined by whether the top court can be convinced that
the language is ambiguous or whether “sudden” will be given a temporal meaning.
Claims brought under a policy with the absolute exclusion can be confidently denied if
they are a result of pollution of the environment by active polluters. Where the insured
is not an active polluter, the results are mixed, although a majority of courts have found
the exclusion to be clear and unambiguous. The judicial interpretation of
“pollutant” and “discharge” will determine the outcome. The court must
determine if the definition of pollutant has been met and, in some states, the analysis
will also include a determination of whether the substance was discharged into the
atmosphere, land, or water.
Due to the controversy created by the absolute exclusion, some steps have been taken which
will simplify the claim professional’s approach. The Insurance Services Office, Inc.
(ISO) has issued two endorsements. The first, Limited Exception for Designated Pollutants
(Form CG 04 30), eliminates the effect of certain parts of the absolute exclusion for
substances regularly used in the insured’s business, but only if the substance is
specifically listed on the endorsement. The second is a mandatory endorsement which became
effective April 1, 1997 and is called the Amendment of Pollution Exclusion-Exception for
Building Heating Equipment (CG 00 54 03 97). The intent of this endorsement is to make it
clear that there is coverage for bodily injury if it was the result of exposure, within a
building, “to smoke, fumes, vapor, or soot from equipment used to heat that
building.”
FOR FURTHER INFORMATION OR COMMENTS:
mail to:
aei@aeiclaimslaw.com