J. Kent Holland, J.D.
ConstructionRisk, LLC

Introduction

This newsletter reviews a number of court decisions from around the United States that applied the pollution exclusion in contractor’s commercial general liability (CGL) policies to deny coverage for damages that were deemed to arise from pollution – even though the contractors strenuously argued that pollution was not involved. Examples of matters the courts have found to be pollutants include naturally occurring materials such as dust, sand, dirt, gravel, silt, clay, and rocks that become “pollutants” when they end up in a place such as groundwater, a stream, or the air, where they would not naturally be located. Cases have also found sulfuric gasses released from Chinese drywall, asbestos from scraping ceiling tiles, diesel fumes from contractor equipment, carbon monoxide from a faulty heater, non-hazardous construction debris, epoxy fumes, and carbon monoxide released from a floor grinding machine all to be “pollutants” and therefore excluded from coverage under contractors CGL policies.

Pollution Exclusion

Many of the decisions discussed herein demonstrate that courts are recognizing the intent of the CGL pollution exclusion to exclude coverage for situations even though the “pollutant” is naturally occurring and is not a substance that was man-made, such as chemical or hazardous wastes. After all these years of pollution exclusions being enforced by courts, it is surprising that so many law suits are filed seeking pollution coverage under polices that contain pollution exclusions. Instead of spending money on attorneys fees and court cases trying to shoe-horn environmental pollution damages into standard policy coverage, a more prudent and cost- effective risk management approach would be for contractors and facility operators to purchase pollution insurance coverage such as an owner’s pollution legal liability (PLL) policy or a contractor’s pollution liability (CPL) policy that is specifically designed to provide pollution coverage.

Project owners that are hiring contractors can protect themselves from pollution liability arising out of the contractor’s work by requiring the contractor to maintain a CPL policy that names the owner as an additional insured. Indeed, this is a good way to prequalify firms before contracting with them.

Rather than taking a chance as a contractor of having no coverage for injuries and damages such as those described in these court cases, contractors performing services with a chance of creating a pollutant in the course of their operations should consider purchasing a contractor’s pollution liability (CPL) policy to cover that risk.

Example Cases

Cases have upheld applicability of the exclusion in a variety of settings involving CGL policies, including the following:

• The widespread dissemination of silica dust as a by-product of industrial sandblasting operation would commonly be thought of as environmental pollution and thus came within the exclusion, the court also noting that there need not be wholesale environmental degradation to constitute pollution. Garamendi v. Golden Eagle Ins. Co. (2005) 127 Cal.App.4th 480, 486, 25 Cal.Rptr.3d 642.
• The pollution exclusion precluded coverage for rock quarry operator’s activities of placing dirt and rocks in creek bed; dirt and rocks were pollutants subject to the exclusion Ortega Rock Quarry v. Golden Eagle Ins. Corp. (2006) 141 Cal.App.4th 969, 980–981,
  990, 46 Cal.Rptr.3d 517.
• A layperson reasonably would understand release of methylene chloride into public sewer is a form of environmental degradation; coverage precluded even if triggering event was a negligent one-time release. American Casualty Co. of Reading, PA. v. Miller (2008), 159 Cal.App.4th 501, 515, 71 Cal.Rptr.3d 571.
• The pollution exclusion barred coverage for offensive and injurious odors coming from a compost facility and spreading over a mile away. Cold Creek Compost, Inc. v. State Farm Fire & Casualty Co. (2007) 156 Cal.App.4th 1469, 1471, 68 Cal.Rptr.3d 216.
• Natural organic fertilizer has been held to be a pollutant within the meaning of CGL pollution exclusions when the fertilizer leached into groundwater or contaminated water sources. Space v. Farm Family Mutual Ins., 235 A.D.2d 797.
• Naturally occurring hazardous substances are deemed pollutants when an “unnatural process,” such as mining, causes them to be found in a location other than where they originally naturally occurred. Gold Fields Am. Corp. v. Aetna Casualty, 295 A.D.2d 289.
• Ingestion and absorption of lead in paint chips by an individual at a rental property was excluded from coverage Auto-Owners Insurance Co. v. Hanson, 588 N.W.2d 777 (Minn. App. 1999).
• Pollution exclusion barred coverage for lung injuries suffered by individuals inside an ice rink that resulted from nitrogen dioxide, a toxic by-product of a Zamboni ice-cleaning machine. The court held that “merely bringing a Zamboni machine on the premises merits exclusion under [the policy].” League of Minn. Cities Insurance v. City of Coon Rapids, 446 N.W.2d 419 (Minn. App. 1989).

Casenotes on Decisions Denying Pollution Coverage

Asbestos Damages Are Excluded under Condominium Association’s Property Insurance Policy

Where a property insurance policy for condominium association contained a pollution exclusion, there was no coverage afforded for damages arising out of a contractor’s work of an asbestos remediation contractor. The association hired the contractor to scrape acoustical ceilings and stairways that contained some asbestos.

In the process of performing the work, asbestos fibers were released into the air, the common area hallways, stairwells and some individual units – and even some areas outside of the building. A comprehensive abatement of the building to cleanup the mess was required.

No recovery could be obtained from the contractor since its general liability policy contained a specific asbestos exclusion, and the firm itself was insolvent. When the association’s property insurance carriers declined coverage, the association filed suit, alleging that because the policy did not specifically state that damage caused by asbestos was not covered; the policy was ambiguous despite a broad and clearly stated total pollution exclusion that would appear to exclude any and all pollution claims regardless of the type of pollution.

The association also argued that the release of asbestos was only a one time event caused by negligence of a contractor and was not the type of “release” that the pollution exclusion was intended to apply to. In Villa Los Alamos Homeowners Association v. State Farm Insurance Company, 198 Cal. App. 4th 522 (Cal. 2011), the court held that damages were excluded from coverage under the policy.

It did not matter to the court whether the dispersal of the asbestos was widespread or local, or whether it was recurring or just a “one-time” release. The court completely rejected the Association argument that the “[r]elease of asbestos in a single condominium building is not [a]
Dispersal ‟such that a reasonable layperson insured would understand it to be environmental pollution ‟subject to the exclusion.” One-time events, says the court, can create a “pollution event” that is subject to the pollution exclusion of the policy. Examples of such events, provided by the court, include a worker that sustains injury from contact with wastewaters containing chemicals, from repairing a sewer line. Even a one-time event that causes an “impurity, something objectionable and unwanted” can constitute an “environmental pollution” subject to the pollution exclusion of the policy, explains the court.

Damages Caused By Chinese Drywall are Excluded From Coverage Under Homeowner’s Insurance

Chinese Drywall caused damage that was not from coverage under a homeowner’s insurance policy because of several exclusions for (1) faulty, inadequate or defective materials, (2) latent defects, (3) rust or corrosion and (4) pollution. Two years after purchasing their home, the homeowners began having chronic malfunctions in the heating, ventilation and air conditioning (HVAC) system. It was determined that Chinese Drywall had been used in building the house and that it was releasing sulfuric gases causing corrosion of various metal components, including HVAC coils, refrigerator units, electrical wiring, plumbing, jewelry, appliances, electronics, and other household items.

The homeowners filed suit against the homebuilder, the builder’s CGL insurance carrier (State Farm Insurance) and its own homeowner’s insurer (Louisiana Citizens). On cross motions for summary judgment on the homeowner’s policy, Louisiana Citizens argued that each of the four exclusions reference above applied to bar coverage under the policy. The trial court granted summary judgment in favor of the insurance company. This was affirmed on appeal in Ross v. C. Adams Construction & Design, LLC, 70 So.3d 949 (La. 2011) for the reasons explained herein. No explanation is provided in this case as to what happened in the suit against the builder/contractor, but unless that company had a policy that expressly covered pollution, it would likely have suffered the same pollution exclusion fate as the homeowner. The need for contractor’s pollution liability (CPL) insurance is once again manifested by the problems associated with Chinese drywall.

No CGL Coverage for Chimney Repairs Necessitated by Carbon Monoxide Leakage

A court held that there was no “occurrence” as defined by the commercial general liability (CGL) policy when repairs had to be made to chimneys in new houses due to leaking flue gasses and carbon monoxide.

Soon after houses were completed and sold, the developer began receiving complaints from homeowners about the chimneys, and the homeowners filed suit. In response to the suit, the developer demanded that its CGL insurer provide it with defense and indemnification. The insurer agreed to provide a defense, but with a reservation of rights. The developer also demanded indemnity under the contractor’s CGL policy that had named the developer as an additional insured.

The developer paid to have the defective chimneys repaired. The homeowner suits were then settled or withdrawn. While this was taking place, the developer’s insurance company filed a declaratory judgment action against the developer and against the contractor’s insurer, asking the court to declare that coverage was not triggered under the policy for the allegations contained in the lawsuits. Both insurers filed motions for summary judgment. In opposing the insurers’ summary judgment motions, the developer argued that the leaking carbon monoxide that seeped into the homes as a result of the faulty chimneys resulted in property damage and constituted “occurrences” under the insurance policies.

The insurers argued that the carbon monoxide caused no physical damage, and that the claims were essentially for faulty workmanship, which they contend was not covered by the policies. The trial court granted the insurers motions for summary judgment. This was affirmed on appeal in the case of Concord Gen. Mutual Insurance v. Green & Co. Bldg. & Dev. Corp., 2010 WL 3618713 (N.H., 2010).

Although the Insured argued that the entry of carbon monoxide into the homes was itself physical injury to tangible property, the court concluded otherwise, finding that the carbon monoxide caused no physical, tangible alteration to any property. The main argument for coverage by the developer was that bodily injury could occur to homeowners if the chimneys were not repaired. Such bodily injury would have been caused by the carbon monoxide. But carbon monoxide can be considered a “pollutant” and, therefore, bodily injury resulting from the carbon monoxide could be excluded from coverage pursuant to the pollution exclusion.

CGL Pollution Exclusion Applies to Dust and Diesel Fumes

Dust and exhaust fumes emanating from a cement company’s construction operations at a nearby airport caused harm to a group of nearby homeowners. The injuries complained of included contaminated drinking water, breathing disorders, and psychological damage. The cement company tendered the claim to its commercial general liability (CGL) insurer to defend and indemnify it against the pending lawsuit. A provision in the policy, however, excluded coverage caused by pollution. The trial and the appeals court in Devcon Int’l Corp. v. Reliance Ins. Co., 609 F.3d 214 (3d Cir. 2010), concluded the exclusion was clear and unambiguous in its application to the injuries in this case.

In this case, a cement company was sued by a group of homeowners alleging that, during construction of a nearby airport, the company generated large quantities of dust and exhaust fumes. The plaintiffs in the personal injury case claimed that the dust contaminated the homeowners’ drinking water and cisterns and caused breathing disorders, which led to other “unspecified physical, emotional, and psychological damage.” They also alleged that emissions from construction vehicles were causing similar problems.

The trial court found that the pollution exclusion removed coverage for the plaintiffs’ injuries and that the insured had no reasonable expectation of coverage for such harms because they were beyond the scope of coverage. Summary judgment for the insurer was entered by the trial court. In affirming the trial court decision, the appellate court determined that the harms alleged by the homeowners were outside the policy because “the policy provides no insurance coverage when bodily injury or property damage results from airborne solids and fumes such as the dust clouds and engine exhaust.

The court acknowledged the result of its decision might seem harsh but that it is not the court’s responsibility to provide a result different from that for which the parties bargained for in their policy. As explained by the court:

If it seems harsh to leave [insured] without coverage, we reiterate that both [insured] and [insurer] are sophisticated businesses capable of bargaining to protect their interests. Indeed, it is no stretch to consider that injuries caused by clouds of dust and diesel fumes generated constantly over a period of several months represent the type of harm from which [insurer] sought to shield itself when drafting the pollution exclusion. [Insured] accepted the insurance policy with full knowledge of the exclusion’s broad language. It is not inequitable to hold [insured] to the terms of its bargain, even if, in retrospect, it wishes that it had negotiated for greater insurance coverage.
For these reasons, the court concluded that the pollution exclusion applied to the injuries described in the underlying complaint and that the policy provided no coverage for the alleged harms.

CGL Pollution Exclusion Bars Coverage for Injury from Carbon Monoxide Released from a Heater

The pollution exclusion of a CGL policy was held to unambiguously apply to exclude liability coverage for injuries caused by carbon monoxide “seeping, discharging, releasing, and dispersing” into an apartment.

The coverage question arose when a tenant of the apartment filed suit against the landlord, alleging that as a result of carbon monoxide accumulating in her apartment from a stopped-up heater vent, she gave birth to child with a number of problems, including seizures. The CGL insurer declined to defend the property owner in the suit by the tenant, contending that it owed no duty to defend or indemnify due to its policy’s absolute pollution exclusion.

The insurer filed a declaratory judgment action to determine its duties to the property owner. The trial court granted summary judgment to the insurer, finding there was no duty to either defend or indemnify. This was affirmed on appeal in Nautilus Ins. Co. v. Country Oaks Apartments, 566 F.3d 452 (5th Cir. 2009), which held the emission of carbon monoxide from a furnace into an apartment unambiguously satisfies the pollution exclusion’s requirement of the “discharge, dispersal, seepage, migration, release, or escape” of a pollutant.

Although the property owner admitted that carbon monoxide is a gas, it argued that it is not an “irritant or contaminant” because it does not generally irritate or contaminate but is instead a naturally occurring substance in the environment encountered by individuals at various concentrations on a daily basis. In rejecting the owner’s argument, the court cited previous case law in which it had explicitly rejected the argument that a substance must generally or usually act as an irritant or contaminant before it can be considered to constitute a “pollutant” under the pollution exclusion. Even a normally occurring substance such as saltwater can be a “contaminant,” explained the court, “when it is introduced, accidentally, onto property that is not meant to receive it.”

The court quoted Webster’s Dictionary for the ordinary meaning of the word “irritant,” which is defined as “an agent by which irritation is produced (a chemical).” In this case, the plaintiff’s complaint in the underlying litigation alleged that she encountered a strong enough concentration of carbon monoxide to cause severe and permanent injuries to her baby in utero. The court concluded that “[t]hese allegations clearly involve a ‘pollutant’ as defined by the policy.” This is particularly true, said the court, in view of the substitution of the absolute pollution exclusion in place of the original policy exclusion that allowed coverage for injuries sustained from fumes from heating systems.

The court also rejected the plaintiff’s argument that the injuries were caused by something other than the “discharge, dispersal, seepage, migration, release, or escape” of carbon monoxide.

Citing previous precedent, the court said, “To ‘discharge’ a pollutant means to emit it.” (Citation omitted). “To ‘release’ a pollutant means to set it free from confinement.” And that is what happened here said the court.

The only way carbon monoxide could have accumulated in the apartment was for it to be “emitted” from the furnace, said the court, and “[t]he normal emission of carbon monoxide from an apartment furnace falls within the plain meaning of the terms ‘discharge,’ disperse,’ ‘seep,’ and ‘release.'” A gradual release is deemed sufficient by the court to meet these requirements. The court rejected the property owner’s argument that a “more robust event” than the normal emission of carbon monoxide from a home appliance is required to trigger the pollution exclusion.

Construction Debris Is Excluded Pollutant under Professional Liability Policy

Where an engineering company was sued by its client (a real estate developer) for allegedly negligently performing a Phase I Environmental Site Assessment (ESA) by failing to discover and report that construction debris and underground storage tanks were buried on the site, the engineer’s professional liability carrier denied coverage due to the pollution exclusion in the policy.

The court in James River Ins. Co. v. Ground Down Engineering, 540 F.3d 1270 (11th Cir. 2008), concluded that the construction debris described in the complaint “would be

considered an environmental impairment,” and coverage would, therefore, be denied by the first sentence of the exclusion that states “Pollution/environmental impairment/contamination is not covered under this policy.”

The developer in this matter purchased the affected property after the engineer reported there were no recognized environmental conditions. Subsequently, the developer found a significant amount of buried construction debris, as well as several 55 gallon drums and “half an underground storage tank.” The developer alleged that the construction debris caused elevated levels of methane gas that required environmental remediation.

The engineer’s professional liability insurance policy contained a pollution exclusion, and the carrier denied coverage in reliance upon that exclusion. In agreeing with the carrier that the damages were excluded from coverage, the court made several significant points. The court rejected the argument that in order for pollution to be subject to the exclusion, it must have been “caused by” the insured.

According to the court, because the exclusion applies to pollution claims “arising out of” the insured’s performance of services, it does not matter whether or not the insured “caused” the condition. With regard to the claims for damages based on the construction debris, the court found that they are explicitly within the exclusion and barred from coverage. As stated by the court, “Although the alleged conduct was negligence in performing the site assessment, Priority’s claim depends upon the existence of environmental contamination.”

The argument that construction debris is not a pollutant within the meaning of the exclusion fails for two reasons, explained the court. First, the complaint plainly alleged that the damages associated with the construction debris “come from elevated levels of methane gas caused by the debris.” The complaint even listed the debris under the heading “environmental contamination.”

Second, the pollution exclusion is not limited just to matters normally considered as “irritants” and “contaminants.” The definition of “irritants or contaminants” includes “waste.” The definition of “waste,” in turn, includes “all … materials to be disposed of, recycled, stored, reconditioned, or reclaimed.” The court concluded, “Only a strained reading of this language would exclude construction debris causing elevated levels of methane gas from this definition.”

Epoxy Fumes Are “Pollutants” and Excluded from Coverage Under CGL Policy

The pollution exclusion in a commercial general liability (CGL) insurance policy issued by Firemen’s Fund Insurance excluded coverage for damages arising out of a claim asserted by a warehouse employee alleging she developed respiratory problems as a result of inhaling fumes from epoxy sealant. Firemen’s Fund insured the subcontractor that installed concrete flooring (with an epoxy and urethane protective sealant) at a warehouse. In a declaratory judgment action against the insurance company, the subcontractor and additional insured prime contractor asked the court to rule that the pollution exclusion was ambiguous and could not be enforced to exclude coverage for the injuries in this case. The appellate court in Firemen’s Ins. Co. of Washington, D.C. v. Kline & Son Cement Repair, Inc., 474 F. Supp. 779, reached two significant determinations in holding that the exclusion barred coverage. First, the court found that epoxy/urethane fumes are pollutants as defined by the CGL policy. Second, the terms “discharge,” “dispersal,” “seepage,” “migration,” “release,” and “escape” are not ambiguous in the context of this case.

The insureds argued that the definition of “pollutant” in the policy was ambiguous and therefore unenforceable as applied to the personal injury allegations.

In holding that epoxy fumes fall within the definition of “pollutant‟ and are therefore excluded from coverage, the court cited a Virginia decision that confronted the issue of whether heating oil is a “pollutant.” The court ultimately concluded that the ordinary meaning of the word “contaminant” encompassed fuel oil leaking out of fuel lines into the soil and that a plain reading of the entire pollution exclusion clause supported the court’s conclusion that heating oil was to be considered a pollutant pursuant to relevant policy language. In the current case, the court cited a scientific report, and stated that the harmful effects of epoxy fumes are well known, and in particular may cause moderate irritation to the respiratory system, its vapor may irritate the nose and throat, and persons using the product should guard against inhaling its harmful fumes and vapors.

“In addition,” said the court, “when canisters of a liquid or other compound are brought onto premises, opened, and the material, upon exposure to the air or after application to the surface, causes noxious fumes to emanate and make a person nauseous, dizzy, or otherwise feel ill, the fumes are clearly pollutants.” The court found the term “pollutant” unambiguously includes the fumes released from the epoxy/urethane sealant applied to the warehouse floor.

In this case, the insureds argued that the words “discharge, dispersal, seepage, migration, release or escape” are environmental terms of art that should apply only to discharges of pollutants into the environment. In rejecting this argument, the court stated that the policy nowhere references the words “environment,” “environmental,” “industrial,” or any other limiting language that would suggest the pollution exclusion is not equally applicable to both “traditional” and indoor pollution scenarios. The court concluded that the pollution exclusion clause applied to the situation in the instant case where a pollutant, epoxy floor sealant, was applied to the surface of the warehouse floor, and it dispersed into the air above and around the warehouse floor, eventually reaching a worker’s office where she later inhaled the toxic fumes.

Pollution Exclusion Bars Coverage for Damage Caused by Dirt and Rocks

The case of Ortega Rock Quarry v. Golden Eagle Insurance Corp., 141 Cal. App. 4th 969, is another example of courts recognizing the intent of the pollution exclusion to exclude coverage for situations even when the “pollutant” is naturally occurring. The U.S. Environmental Protection Agency (EPA) issued an administrative order to the operator of a rock quarry, and subsequently filed a lawsuit, alleging that the operator had, without a permit, discharged fill material consisting of dirt and rocks into a creek. The quarry operator tendered defense to its commercial general liability (CGL) insurers who denied coverage based on pollution exclusions in their policies.

The rocks and dirt in question were placed by the operator along a stream bed to fill in the main access road to the quarry which had been washed out by the overflowing creek during severe storms. Some of these fill materials then apparently eroded into the creek. The EPA order directed the quarry operator to cease the discharge of fill material and submit an erosion control plan and site restoration plan for both the site and for the creek.

The insurers asserted that dirt and rocks were pollutants within the policy definitions and thus subject to the pollution exclusion. It did not matter that dirt and rocks are naturally occurring in nature. The fact that they were dumped by the operator into the waterway made them pollutants.

The quarry operator argued that because the rocks and dirt were naturally occurring, they could not be considered pollutants. The appellate court rejected each of Ortega’s arguments and held that natural dirt and rocks are pollutants within the meaning of the Clean Water Act when placed in waters of the United States. A creek such as that involved here is considered “waters of the United States” within the meaning of the Act. Because the rocks and dirt had been moved from their natural location into the streambed, they became pollutants within the meaning of the pollution exclusion of the policies.

Carbon Monoxide is a Pollutant and Excluded from CGL Coverage

The pollution exclusion of a commercial general liability (CGL) policy was enforced to exclude coverage for injuries allegedly caused from carbon monoxide that was emitted from a propane- powered grinder that was being used to grind terrazzo floors while another contractor’s worker was working in the same area installing drywall.

The worker filed suit in state court against the owner of the grinder, alleging the company was negligent in failing to provide proper ventilation when operating its grinders and that it failed in its duty to properly monitor the work environment for carbon monoxide gas.

The insurance companies filed a separate declaratory judgment action in federal court, contending that the absolute pollution exclusion bars coverage. The court granted summary judgment in favor of the insurance companies, and this was affirmed in Continental Casualty Co.
v. Advance Terrazzo, 462 F.3d 1002 (8th Cir. 2006), with the court holding carbon monoxide is an “irritant” that was “dispersed” throughout the work site by the insured contractor. Moreover, the court held that this was a pollutant “brought on” to the premises by the contractor and therefore excluded from coverage.

The court rejected Advance Terrazzo’s argument that it did not bring the pollutant (carbon monoxide) onto the premises but instead merely brought on the machine which contained LP gas which is not a pollutant. The court declined to make a distinction between bringing on the machine with LP gas and the carbon monoxide that was directly emitted by using the machine.
As explained by the court, because the contractor brought on to the premises the machine that produced the carbon monoxide, “it falls squarely into the policy language triggering the absolute pollution exclusion.”

Silica Claim Barred by Total Pollution Exclusion in CGL Policy

Silica dust from sand-blasting operations was deemed to be a “pollutant” and therefore subject to the pollution exclusion of the CGL policy. Plaintiffs alleged they were exposed for many years to silica and silica dust at their employment, as a result of actions by 49 defendants. Among the defendants was Pauli Systems, Inc., who was alleged to have designed, tested, evaluated, manufactured, mined, packaged, furnished, supplied and/or sold abrasive blasting products, protective gear and equipment, safety equipment and/or sandblasting-related materials, equipment, products, etc.

In response to plaintiffs’ suit against it, Pauli Systems tendered the defense to Golden Eagle which denied coverage based on the pollution exclusion endorsement. Pauli Systems (hereinafter the “Claimant”) then sued Golden Eagle, seeking a court order for coverage. Claimant argued that silica is not a pollutant because it is not smoke, vapor, soot, fumes, acid, alkalis, chemicals, or waste, and is found in commonplace materials such as sand, glass, and concrete.

In rejecting that argument, the court in John Garamendi v. Golden Eagle Ins. Co., 127 Cal. App. 4th 480 (2005) stated that even if silica is not one of the enumerated items of pollution in the policy, the listing is not exclusive. In addition, the court found that silica dust comes within the broad definition of “any solid, liquid, gaseous, or thermal irritant or contaminant.” Moreover, pointed out the court, silica dust is identified by federal regulations to be an air contaminant.
Thus, the court explained that:

“The widespread dissemination of silica dust as an incidental byproduct of industrial sandblasting operations most assuredly is what is “commonly thought of as pollution” and “environmental pollution.”

The court held that:

“Even on the assumption that claimant’s alleged liability is based on the sale of defective products that contributed to personal injuries caused by silica dust, the injuries would not have occurred but for the discharge of the pollutant. Absent some other provision in the policy excepting product liability claims from the exclusion, the exclusion applies.”

CGL Pollution Exclusion Bars Coverage for Insulation Injuries

A total pollution exclusion endorsement on a surplus lines commercial general liability (CGL) insurance policy was enforced in Vermont to bar coverage for injuries claimed to arise out of insulation installed in a building. The Vermont Supreme Court held that bodily injury from claims arising out of toxic chemicals that allegedly became airborne as a result of the application of spray-foam insulation in a school building were excluded from coverage under the installer’s CGL policy.

The court in In Cincinnati Specialty Underwriters Insurance Company v. Energy Wise Homes, Inc., 2015 VT 52, WL 1524206, 2015 Vt. LEXIS 33 (2015), therefore reversed a trial court decision that granted summary judgment to the installer on the question of whether there was coverage under the policy.

The policy contained a “Total Pollution Exclusion Endorsement” that excluded coverage for “bodily injury … [that] would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The term “pollutants” was defined with the standard definition for that term found in CGL policies.

In addition, the policy specifically excluded coverage for “bodily injury” arising out of “the installation or application of any exterior insulation finishing system or any substantially similar system, including application or use of conditioners, primers, accessories, flashings, coatings, caulking, or sealants in connection with such system.”

The insurer argued that, given the fact that the broad language used in the exclusion, and the fact that the policy included additional exclusions for actual or alleged bodily injury arising out of, or caused by, other potential toxins, the policy did not provide any coverage for bodily injuries related to “toxins, chemicals, or pollutants.” In opposition to this argument, the plaintiff argued that the pollution exclusion was intended only to protect against liability for “traditional environmental hazards” and that the insurer’s interpretation was so overbroad as to make the policy meaningless.

Finding the policy language ambiguous, the trial judge concluded that the purpose of the pollution exclusion was to protect insurers against traditional environmental liabilities, and that here the term “pollutants” was ambiguous because it was capable of such broad interpretation as to frustrate any reasonable purpose of the policy.

On appeal, the Vermont Supreme Court stated that it recognized that courts are split on the question of whether the absolute pollution exclusion bars coverage for all injuries caused by pollutants, or whether the exclusion applies only to injuries caused by traditional environmental pollution. The court stated, “We recognize that the ‘broad nature of the pollution exclusion may cause the commercial client to question the value of portions of its commercial general liability policy.’ Our role on review, however, is not to rewrite the policy.”

No CGL Coverage for Fly Ash Release

Pollution exclusions in a contractor’s commercial general liability (CGL) policies precluded a contractor from receiving reimbursement for its defense cost when it was sued for alleged property damage and bodily injuries resulting from its use of fly ash in a construction project. The Tenth Circuit Court of Appeals, applying Utah law, held that the pollution exclusions in the policy were clear and not ambiguous and that the allegations in the underlying complaints fell within the exclusions.

In the litigation that subsequently gave rise to Headwaters Res., Inc. v. Illinois Union Ins. Co., 770 F.3 885 (10th Cir. 2014), residents of Chesapeake, Virginia, sued Headwaters Resources, Inc., and VFL Technology Corp. (“Headwaters”) in Virginia state court, claiming that pollution generated by the defendants had caused them property damage and bodily injury. Specifically, the plaintiffs alleged that the defendants used toxic fly ash during construction of a golf course and that dispersal of the fly ash contaminated the air as well as ground and surface water.

During the years that the alleged property damage and personal injury occurred, Headwaters was insured under annual CGL insurance policies issued by Illinois Union Insurance Company and ACE American Insurance Company (“ACE”). These policies required ACE to reimburse Headwaters for expenses incurred in defending a suit when damages due to “bodily injury” or “property damage” within the scope of coverage were alleged. However, all of the policies had exclusions for injuries caused by pollution. Although the exclusions in the various policies were not identical, they were similar, and all were forms of the “total pollution exclusion.”

ACE denied Headwaters’ claim for reimbursement of the cost of defending the Virginia lawsuits, stating that the events giving rise to the claims fell within the pollution exclusions. Headwaters then filed a complaint against ACE in federal court in Utah, Headwaters’ principal place of business, alleging breach of the insurance contracts and bad faith in denying coverage. ACE moved for summary judgment on the complaint, arguing that the pollution exclusions expressly precluded coverage. The district court found that, because the sole cause of the plaintiffs’ claimed injuries was alleged pollution of the type that fell within the pollution exclusions in all of the policies, there was no coverage. The court granted summary judgment in favor of ACE. Headwaters appealed.

Headwaters’ primary contention on the appeal was that the district court recognized, but failed to appreciate, the effect of ambiguities in each policy’s pollution exclusion. According to Headwaters, those ambiguities precluded granting summary judgment in favor of ACE. The appeals court disagreed and affirmed the district court’s ruling, finding that the pollution exclusions were not ambiguous, and the allegations in the underlying complaints fell within the pollution exclusions of the policies.

In discussing the case, the appeals court noted:
Since the 1970s, the extent to which pollution exclusions apply to preclude coverage in commercial general liability (CGL) policies has been a ubiquitous feature of insurance litigation. Generally speaking, jurisdictions that have addressed the scope of the “total pollution exclusion” fall into one of two camps: (1) courts that apply the pollution exclusions as written because they find them clear and unmistakable; and (2) courts that narrow the exclusions to “traditional environmental pollution,” often because they find the terms of the exclusion to be ambiguous due to their broad applicability.

The Utah Supreme Court has not yet weighed in on this debate, and the district court did not pick a side on its behalf. Instead, the district court found that certain of the at-issue pollution exclusions unambiguously applied to bar coverage and that the remaining pollution exclusions, although possibly ambiguous, still applied because the complaints unquestionably alleged traditional environmental pollution.

Applying the Eight-Corners Rule

In duty-to-defend cases, Utah applies the so-called eight-corners rule—an insurer’s coverage liability is determined by comparing the allegations within the four corners of the complaint to the language contained in the four corners of the insurance policy. To avoid a duty to defend, the insurance company must demonstrate that none of the allegations in the underlying claim are potentially covered. However, before applying the eight corners rule in this case, the court had to address Headwaters’ claim that the pollution exceptions were ambiguous.
Headwaters argued that the pollution exclusions were so broad that they barred coverage for events arising from Headwaters’ regular business activities and that such a broad exclusion on normal business practices results in ambiguity. The appeals court disagreed, stating that the fact that policy provisions may apply broadly to bar coverage does not make them ambiguous. The court also noted that they were unaware of a categorical rule that prohibits a normal business activity from also producing pollution, stating “we have frequently concluded that the routine commercial activities of the insured can occasion application of a CGL policy’s pollution exclusion to bar coverage under Utah law.”

The court cited to a Utah Supreme Court decision, Sharon Steel Corp. v. Aetna Cas. & Sur. Co.,931 P.2d 127 (Utah 1997), which stated that when incidents of pollution appear to be more like normal business activities, the costs of cleanup should be included in the normal cost of business.

In rejecting Headwaters’ argument that the comprehensiveness of the pollution exclusions revealed ambiguity within the policies because literal application of the exclusions abolished all coverage, the court noted that the pollution exclusions, while far-reaching, did not abolish all coverage. Specifically, the court noted that, while Headwaters’ business might generate more pollution than the average CGL policyholder, it did not agree that Headwaters had no coverage under ACE’s CGL policy because pollution from its normal business activities was not covered. The court pointed out that Headwaters had coverage for foreseeable claims in many instances, such as a pedestrian injured in a slip-and-fall on company property. The court also pointed out that Headwaters could purchase additional special-purpose coverage that provided more comprehensive coverage for the environmental pollution risks associated with its business.

Pollution Exclusion Bars Recovery for Injuries from Concrete Sealant

A federal appeals court vacated a district court ruling and found that the pollutant exclusion in a commercial general liability (CGL) policy precluded a contractor from seeking defense and indemnification from its insurer for bodily injuries resulting from its use of a type of concrete sealant. The appeals court—applying Missouri law—ruled that TIAH, an acrylic concrete sealant used by the contractor, unambiguously met the policy’s definition of “pollutant” under the pollutant exclusion.

The court rejected the contractor’s argument that TIAH was not a “pollutant” in this context because it was a product it regularly used in its services. United Fire & Cas. Co. v. Titan Contractors Serv., Inc., 751 F.3d 880 (8th Cir. 2014).

Titan Contractors Services, Inc., is a provider of construction cleanup services, which include cleaning and sealing concrete floors. Three women filed suit, based on allegations of negligence, against the contractor in 2009 in Illinois state court. They alleged significant physical injuries stemming from the contractor’s use of TIAH at an improperly ventilated work site. The contractor sought defense and indemnification from United Fire and Casualty Company, an insurer that had provided the contractor with a CGL policy.

The insurer filed an action in federal district court in Missouri seeking a declaration that it did not owe the contractor a duty to defend or indemnify because TIAH was a pollutant under the policy’s exclusion. The trial court sided with the contractor and determined that this exclusion was not applicable.

The insurer successfully appealed to the Eighth Circuit Court of Appeals, which vacated the lower court’s holding in a divided decision. The appeals court looked to the language of the CGL’s pollutant exclusion, where “pollutant” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The court also considered basic descriptions on the properties of TIAH—including the manufacturer’s safety manual and federal environmental laws—and found that it unambiguously fell within the definition of pollutant.

The court then addressed the contractor’s argument that, even if TIAH appeared to fall within the exclusion’s definition of pollutant, coverage was nonetheless required under relevant Missouri legal precedent. Specifically, the contractor cited to a Missouri appeals case, Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., 997 S.W.2d 510 (Mo. App. Ct. 1999), where a pollution exclusion in a CGL insurance policy did not apply to the insured gas station because, in that context, gasoline was a “product it sells” rather than a pollutant. The appellate court found that the cited case had little support in Missouri or elsewhere because it conflicts with the “deeply entrenched rule” of insurance contract interpretation that a court may not “create an ambiguity in order to distort the language of an unambiguous policy.”

Moreover, the appellate court distinguished the current situation from that in Hocker Oil, where, if gasoline had been found to be a “pollutant,” that would have effectively eliminated coverage for the primary risks associated with operating a gas station. A reasonable insurance purchaser in the unique context of a gasoline station owner, said the court, may not believe that gas was an excluded pollutant, especially since the CGL policy in that case was purchased through the insurer’s “Gasoline Department.”

In contrast, the contractor’s concrete sealing operations amounted to only about a quarter of its business, and TIAH was only one of several methods that the contractor used.

Conclusion

The reported decisions highlight the importance of understanding how the scope of a CGL pollution exclusion may be interpreted under a particular state’s law. The courts have acknowledged concern that the scope of the pollution exclusion can be quite broad when the text is strictly applied. Yet the pollution exclusion has been found effective in barring coverage for numerous claims in many different states. Companies that routinely handle substances that could fit the expansive definition of “pollutant” must be especially mindful of the extent to which the pollution exclusion in a CGL policy could eliminate coverage for its ordinary risks.

Over the past several years, there have been numerous court decisions holding that the pollution exclusion of the CGL policy can be applied by the CGL insurance carriers to deny coverage for a wide variety of items that have been deemed to be “pollutants” despite creative arguments to the contrary. Rather than asking courts to grant pollution coverage that carriers say was never intended, or paid for, in a CGL policy, a more prudent insurance solution for a company with a known environmental risk would be to maintain a separate policy specifically designed to cover its potential pollution liability.