Growing Abuse Of The Absolute Pollution Exclusion

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1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: Growing Abuse Of The Absolute Pollution Exclusion Law360, New York (February 10, 2011) -- Courts have struggled with the scope of the so-called absolute pollution exclusion since its inception in Two schools of thought have developed: Some courts limit its application to traditional environmental pollution, while others apply it to a much broader array of substances that may be considered hazardous or toxic. In the latter group of states, the past year has seen a startling expansion of the application of the exclusion. These courts have held that the plain and broad language of the pollution exclusion covers releases not only of toxic waste materials into the environment but also of pollutants including herbicides, fertilizers, dirt and dust that are used in or released as a result of the insured s essential business activities. Many policyholders do not believe that they need to purchase pollution coverage because their business does not include hazardous waste. However, recent case law reveals that any company that uses a substance that may be considered toxic now need to consider whether they need to add pollution coverage to their insurance profile. Cases Finding the Pollution Exclusion Applies to Bar Coverage Mendoza The underlying plaintiff in Union Insurance Co. v. Mendoza, No , 2010 U.S. App. LEXIS (10th Cir. Dec. 13, 2010), Karla Mendoza, sued the insured, Irsik G&B Farms. She alleged that while she was working on a road construction project near Irsik s property, an Irsik employee checked the system used to apply anhydrous ammonia fertilizer spray with a tractor, releasing vapors that engulfed Mendoza. This resulted in difficulty in breathing and required medical attention.

2 Mendoza and Irsik entered a $1 million consent judgment, which Mendoza agreed not to execute against Irsik. The company that issued Irsik s farm owners/ranch owners insurance policy then sought a declaratory judgment that the policy s pollution exclusion barred coverage for the consent judgment. The federal district court, Kansas Supreme Court, and the U.S. Court of Appeals for the Tenth Circuit all agreed that the pollution exclusion applied. It found that anhydrous ammonia, while useful as a fertilizer in farming operations, was unambiguously a pollutant under the policy. New Salida The Tenth Circuit also applied the exclusion in a New Salida Ditch Co. v. United Fire & Casualty Insurance Co., No , 2010 U.S. App. LEXIS (10th Cir. Oct. 28, 2010). In New Salida the pollutants triggering the application of exclusion were soil, rock, dirt and fill materials. In 2005, the insured, New Salida Ditch Co., repaired an irrigation ditch in Salida, Colo., along the Arkansas River, causing dirt, rock, soil and fill material to enter the river and riverbank. Federal and state agencies ordered New Salida to undertake a corrective action and pay civil penalties, identifying the soil, fill and other materials as pollutants under the federal Clean Water Act and Colorado s equivalent. New Salida submitted a claim for defense and indemnity costs to its commercial general liability carrier, which denied coverage, and New Salida filed suit. The district court found the policy s definition of the term pollutant, for purposes of the total pollution exclusion clause, unambiguously included the soil and fill materials that entered the river, rejecting New Salida s assertion that fill material would have to be specifically listed in order to be a pollutant. Because the policy language was clear, the reasonable expectations of the policyholder were irrelevant. The Tenth Circuit affirmed, briefly stating that based on a review of the record and legal authority, the district court properly denied coverage. Devcon The underlying claim in Devcon International Corp. v. Reliance Insurance Co., Nos / , 2010 U.S. App. LEXIS (3d Cir. June 8, 2010), was a nuisance suit brought by residents of the neighborhood around an airport, alleging the insured construction contractor s work at the airport generated large quantities of dust that drifted over the plaintiffs property. This contaminated their drinking water and caused breathing problems, leading the U.S. Virgin Islands Department of Planning and Natural Resources to order the airport operator to undertake dust control measures and provide relocation assistance and drinking water to residents until the project was completed.

3 The Third Circuit found the plain language of the pollution exclusion was clear and meant that there was no insurance coverage for bodily injury or property damage resulting from releases of airborne solids or fumes such as the dust clouds at issue. Universal Crop Protection Alliance In the underlying suit in Scottsdale Insurance Co. v. Universal Crop Protection Alliance LLC, 620 F.3d 926 (8th Cir. 2010), 80 Arkansas cotton farmers alleged that an herbicide distributed by the insured, Universal Crop Protection Alliance (UCPA), damaged plaintiffs cotton fields when the herbicide was applied off-target or relofted after it was applied to nearby rice fields. UCPA s CGL insurer sought a declaration that it had no duty to defend or indemnify UCPA under the pollution exclusion in the policy, which barred coverage for property damage that would not have occurred but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants, including any solid, liquid, gaseous or thermal... contaminant, including... chemicals. The district court granted summary judgment for the insurer, and the Eighth Circuit affirmed. The court found simply that the pollution exclusion is broad and unambiguously relieves Scottsdale of any obligation to defend or indemnify UCPA from the cotton farmers claims under either the off-target drift or relofting theories of migration. Lang Nationwide Mutual Insurance Co. v. Lang Management Inc., Case No (S.D. Fla. Oct. 7, 2010), like UCPA, involved an herbicide. The underlying plaintiff owned the golf course and alleged that a subcontractor for the insured property maintenance company, Lang Management, contaminated the lakes on the golf course with an herbicide, Diuron, which is toxic to humans, animals and plants. When the lake water was used the irrigate the golf course, the herbicide was spread around the entire property. Lang s CGL and commercial umbrella carrier brought a declaratory judgment action asserting that the pollution exclusion in each policy barred coverage. The exclusion applied first, to bodily injury and property damage claims which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time and, second, to any loss, cost or expense arising out of any... request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize or in any way respond to, or assess the effects of pollutants. Pollutant was defined as any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fume, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

4 The court found that Diuron clearly was a pollutant and that the underlying claim arose from a request or demand that the insured, or others, monitor, respond to or assess the effects of the herbicide use on the golf course. The pollution exclusion therefore applied to bar coverage. Prime Tanning In Prime Tanning Co. Inc. v. Liberty Mutual Insurance Co., F. Supp. 2d (D. Me. 2010), the insured operated a leather tannery in St. Joseph, Mo. The tannery produced a sludge byproduct, which was spread on farms in Missouri as a fertilizer with the approval of environmental agencies, from 1983 until early Then, several farm owners sued Prime, asserting that the sludge contained hexavalent chromium and damaged their property. Prime s CGL insurer declined to defend or indemnify Prime, which filed a declaratory judgment action against the carrier. The CGL policies' pollution exclusions provided that they did not cover claims for 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 water course or body of water. The court found that under both Maine and Missouri law, the pollution exclusion barred coverage for the farmers suit. Clipper Mill Avalon Wellness LLC, the plaintiff in the underlying suit in Clipper Mill Federal LLC v. Cincinnati Insurance Co., Civ. No. JFM , 2010 U.S. Dist. LEXIS (D. Md. Oct. 20, 2010), was a former tenant of the insured, Clipper Mill. Avalon alleged it had to abandon the suite it had rented for its psychotherapy, counseling and massage business, because: 1) temperatures in the rooms were not effectively controlled by the HVAC system; 2) sound traveled between rooms in a way that threatened the confidentiality of therapy sessions; and 3) toxic airborne pollutants made one of Avalon s principals sick. Clipper Mill in turn sought a declaratory judgment that its CGL carrier had a duty to defend and indemnify Clipper Mill from the Avalon suit. Clipper Mill s CGL policy s pollution exclusion excluded from coverage claims arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release, escape or emission of pollutants... at or from any premises, site or location which is or as at any time owned or occupied by, or rented or leased to, any insured.

5 In Clendenin Bros Inc. v. United States Fire Insurance Co., 889 A.2d 387 (Md. 2006), a Maryland state court observed that historically, the insurance industry intended the pollution exclusion to apply only to environmental pollution and environmental exposures. Clipper Mill s policy, however, specified that *p+ollutants include but are not limited to substances which are generally recognized in industry or government to be harmful or toxic to persons, property or the environment. Thus, the exclusion extended the definition of pollutants to substances harmful to people as well as in the environment. Avalon s claims for personal injury and property damage caused by airborne toxins therefore were within the pollution exclusion. However, an exception for bodily injury claims caused by the inadequate ventilation of vapors potentially applied, so the court denied summary judgment. Cases Finding the Exclusion Inapplicable The insureds did manage to beat back their insurers in several cases. These cases are still of interest because they demonstrate that insurers are continuing to try to expand the boundaries of the exclusion. Half Court Press In Builders Mutual Insurance Co. v. Half Court Press LLC, Civ. A. No. 6:09-cv-00046, 2010 WL (W.D. Va. Aug. 3, 2010), in contrast to New Salida and Devcon, the court found that the pollution exclusion did not bar coverage for claims that water, soil and sediment escaping from the insured s property damaged adjacent property. The underlying plaintiff alleged the insured developer constructed homes on its property without taking appropriate erosion and sediment control measures, allowing soil, water, debris and sediment to flow onto the plaintiff s downgrade property, damaging a lake. The plaintiff sought damages and injunctive relief, and the defendant s CGL insurer sought a declaratory judgment on its duties to defend and indemnify the developer. The contractor s CGL policy contained a pollution exclusion barring coverage for claims which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, disposal, seepage, migration, release or escape of pollutants at any time. The court found that although under some circumstances, sediment could be a pollutant, the damage at issue was allegedly caused, in part, by water, which clearly was not a pollutant. Therefore, the duty to defend applied and the pollution exclusion did not. Hirschhorn In Hirschhorn v. Auto-Owners Insurance Co., No. 2009AP2768, 2010 Wisc. App. LEXIS 842 (Wis. Ct. App. Oct. 19, 2010), the Hirschhorns demolished their vacation home when they found it was contaminated with bat guano, and a contractor advised them that it might be impossible to eliminate the odors.

6 The Hirschhorns homeowners insurer denied coverage, asserting that the accumulation was not sudden and accidental for purposes of the policy s pollution exclusion, and resulted from poor maintenance of the home. The Hirschhorns sued to resolve the coverage issues. The appeals court reversed the trial court and found that bat guano was not, clearly and unambiguously, a pollutant in the meaning of the pollution exclusion in the policy. Barrett The insured in Barrett v. National Union Fire Insurance Co. of Pittsburgh, 696 S.E.2d (Ga. Ct. App. 2010), was Atlanta Gas Light Company (AGL). AGL retained Coosa Valley Contractors (CVC) to assist in installing natural gas pipelines. The underlying plaintiff, Brey Barrett, a CVC employee, suffered permanent and disabling brain damage when natural gas accumulated under his rain poncho over a period of several hours while he was working to retrieve a lost part. Barrett and his wife sued AGL, asserting that the negligent and reckless conduct of AGL s employees caused his injuries. AGL and the Barretts entered a $2 million settlement. AGL s primary CGL insurer paid $1 million of the settlement, but AGL s excess carrier, National Union, denied coverage, and AGL assigned its rights under the policy to the Barretts, who sued National Union. National Union asserted that the pollution exclusion in its policy barred coverage because Barrett s injury arose from his exposure to natural gas, a pollutant. Moreover, according to National Union, the Georgia Supreme Court s decision in Reed v. Auto Owners Insurance Co., 667 S.E.2d 90 (Ga. 2008), mandated a finding that natural gas was a pollutant in the meaning of the exclusion. The Reed court found that a suit brought by a tenant who was exposed to carbon monoxide against her landlord was not covered by the landlord s insurance policy because the gas was a fume, irritant or contaminant, so that the policy s pollution exclusion applied. The Barrett appeals court nonetheless found the pollution exclusion in the National Union policy did not apply to bar coverage for Barrett s injuries. Barrett was not alleged to have been poisoned by the natural gas, nor was he harmed by the mere release of gas from the tap. Rather, the complaint alleged that because of the negligence of AGL employees, who supervised the worksite, the natural gas was released and allowed to accumulate, creating an oxygen deprived atmosphere. The resulting lack of oxygen harmed Barrett. Minkoff The underlying plaintiffs in Minkoff v. Action Remediation, Index No. 559/06 (N.Y. Sup. Ct. July 1, 2010), the Minkoffs, sued the insured mold remediation contractor, alleging that its negligent mixing of a disinfecting and sterilizing product, Sporicidin, and bleach, caused harmful chemicals and odors to infiltrate the Minkoffs home and harm their health.

7 The defendant contractor, in the same case, sought a declaratory judgment that its CGL insurer was required to defend and indemnify it for the Minkoffs claims. The court found that although the policy s pollution exclusion by its terms barred coverage, the contractor s pollution liability coverage endorsement reinstated coverage and saved the policy from being void for public policy reasons. The policy s pollution exclusion barred coverage for damages arising from pollution, the dispersal, migration, release or escape of hazardous substances, defined as any solid, liquid, gaseous, or thermal irritant or contaminant, including but not limited to acids, alkalis,... chemicals, fumes... mold/mildew/fungus... smoke, soot, vapor... and the byproduct of any chemical, mechanical or thermal process or reaction. The court found that the exclusion clearly applied to the mold and chemical fumes at issue, and several endorsements to the policy did not apply to allow coverage. The policy also included, however, a special contractor s pollution liability coverage endorsement covering pollution incidents caused by the performance of covered contracting operations. The insured s primary business was mold remediation, and a reasonable insured would expect that the chemical releases and toxic odors created by the mixing of Spoicidin and bleach, in the course of the contractor s business, to be a pollution incident covered by the endorsement. Conclusion These cases demonstrate that insurers are steadily expanding the reach of the absolute pollution exclusion clause from hazardous waste into the normal, day-to-day operation of the insureds' businesses. Few businesses do not use in their normal business substances that may, under some circumstances, be considered toxic or hazardous. These businesses are now at risk that they will not have coverage for spills and releases of products in the ordinary course of doing business. Companies must negotiate in their general liability policies for clear language that excepts business operations from the scope of the absolute pollution exclusion clause, or else purchase pollution liability insurance. --By Robert D. Chesler and Priya Masilamani, Lowenstein Sandler PC Robert Chesler ([email protected]) is chairman of of Lowenstein Sandler's insurance practice group in the firm's Roseland, N.J., office. Priya Masilamani ([email protected]) is counsel in the firm's environmental department in Roseland. The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients or Portfolio Media, publisher of Law360. All Content , Portfolio Media, Inc.