THE DANGER IN THE NEIGHBORHOOD

Delores Kaczor was enjoying her apartment while Pacific Restorations was working on the apartment building owned by Roy Street. What Delores didn’t know at the time was that fumes from a toxic ingredient in the deck-waterproofing treatment were wafting into her apartment and into her lungs. The fumes aggravated her pre-existing pulmonary disease. After she was hospitalized she sued both Pacific and the apartment owners, Roy Street Associates, for her injury.

The insurance companies for Pacific and Roy Street Associates refused to defend or indemnify because their policies contained pollution exclusions.

See how the courts ruled below.

There are no disputes regarding the facts of this case. Roy Street Associates owns an apartment building located at 200 Roy Street in Seattle, WA. Pacific Restoration (Pacific) was hired by the owners in 1996 to make repairs and improvements to the building. The parties agreed to use PC–220 and Polyglaze AL, manufactured by Polycoat Products as waterproofing for the surface of a deck. Both contain a toxic ingredient called toluene diisocyanate (TDI), whose fumes are known to irritate the respiratory tract and can cause central nervous system depression in high concentrations.

A tenant, Delores Kaczor, (Kaczor) lived in an adjoining apartment of the deck. Pacific failed to warn Kaczor that they were applying the sealant and fumes entered her apartment while the deck dried. The fumes aggravated her pre-existing chronic obstructive pulmonary disease and she required hospitalization as a result. She sued Pacific and the building owners for personal injury and property damage. Kaczor died in 1998 and the case was dismissed. Her estate filed a second lawsuit for her injuries and that was settled for $30,000.

At the time of the incident, Pacific was insured with a general liability policy from American States Insurance Company. Roy Street was named as additional insureds. Roy Street held their own coverage on a general liability policy with State Farm Fire and Casualty Company (State Farm). Both insurance companies denied the claim based on the pollution exclusion. The policyholders filed this action claiming that the insurance companies had failed to defend and seeking indemnification. Roy Street and Pacific contended that the pollution exclusion was meant for environmental harms, not for personal injuries arising from ordinary neglect.

The trial court granted a summary judgment in favor of the insurance companies and the policyholders filed for an appeal. The court of appeals affirmed and held that the exclusion was not ambiguous.

Quadrant Corp. v. American States Ins. Co., Supreme Court of Washington, En Banc. April 28, 2005, 154 Wash.2d 165 110 P.3d 733, No. 74663–0

What is the pollution exclusion?

INTRODUCTION

The language in the pollution exclusion in the Insurance Services Office (ISO) Commercial General Liability (CGL) Coverage Forms has been examined closely and has generated a great deal of controversy since it was first introduced in 1973. Court interpretations in various jurisdictions over time vary widely so its original intent has been eroded. Over the years the exclusion has been modified to clarify the intent to continue to exclude most types of pollution regardless of whether the pollution event is gradual, or sudden. Over the years a number of important and common sense exceptions have been added. In addition, there are several endorsements that provide coverage for exposures that the basic coverage form excludes and also some that eliminate the exceptions within the coverage form. The review of events that led to the major insurance changes included in the following analysis was initially prepared by Victor B. Levite, San Francisco attorney and resident partner in the California law firm of Barger & Wolen.

FEDERAL LEGISLATION

The sinking of the Torrey Canyon and the Santa Barbara oil spill brought environmental pollution to the forefront of national concern, even though pollution has existed for years as a by-product of industrialization and economic growth. Congress enacted the Resource Conservation and Recovery Act (RCRA) in 1976. It attempts to protect the environment by prohibiting open dumping and by regulating how hazardous solid waste is handled. Regulations under the Act apply to approximately 400 specifically named substances, to other substances that can be ignited, and to corrosive, reactive, explosive, or toxic substances.

Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, also known as Superfund) in 1980. It provides funds for emergency response and cleanup when hazardous substances are released into the environment. The Act provides for direct action by a claimant against an insurance company and imposes strict, retroactive, and joint and several liability.

The Superfund Amendments and Reauthorization Acts (SARA) amended CERCLA in 1986 in many ways, one of which increased the trust fund from $1.6 billion to $8.5 billion.

There are other pertinent federal laws and regulations in addition to the laws that address pollution liability that many states have passed.

ADVERSE COURT DECISIONS

There are many important court decisions that deal with the pollution exclusion and with pollution liability.

An example of a case that enforces the exclusion as intended (representing a distinct minority view) is American States Insurance Company vs. Maryland Casualty Company, 487 F. Supp. 1549, U.S.D.C., E.D. Michigan (1984). In this case, the United States District Court denied insurance coverage in four suits that arose out of dumping toxic waste materials. It was alleged that the toxic wastes were dumped continuously since 1966 and caused water contamination. The plaintiffs claimed harm to themselves and to the use of their property. The court held that the release of toxic materials was continuous and not sudden or accidental. As a result, the insurance company did not have to defend or indemnify the insured.

Unfortunately for the insurance industry, courts have reached different conclusions in most cases. For example, in the case of Waste Management of Carolinas, Inc. vs. Peerless Insurance Company, 323 S.E. 2d 726 (Court of Appeals of North Carolina, December 28, 1984), the court held that the words “sudden” and “accidental” were ambiguous. It decided that the damages that occurred were neither intended nor expected from the insured’s standpoint. The case involved a suit by the United States Government under RCRA that sought injunctive relief and reimbursement of costs from groundwater contamination. The landfill’s owners sought indemnity and contribution from the insured because of negligence in not preventing hazardous waste being deposited from 1973 to 1979.

REVISED POLLUTION EXCLUSIONS

As a result of the court decisions, ISO revised the pollution exclusion in the 1986 edition. All pollution was excluded, without distinguishing whether it was gradual, sudden, or accidental.

There have been several subsequent revisions. While the most current edition of the CGL Coverage Form does not have an absolute pollution exclusion, ISO defines it broadly to make it as comprehensive as possible and to exclude as many types of potential occurrences as possible. The exclusion does not state that the pollution event must be accidental or gradual. All pollution incidents are excluded, other than the exceptions reviewed and addressed below.

POLLUTANTS DEFINED

The first step is to define pollutants. The definition ISO uses in all its coverage forms and policies attempts to name as many potential pollutants as possible without being unreasonable. Pollutants are any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. However, these are not the only pollutants because ISO uses the word “including” in the definition. Waste includes materials to be recycled, reconditioned, or reclaimed.

WHAT IS EXCLUDED AND WHERE

Insurance does not apply to pollution at or from any premises, site, or location now or ever owned, occupied by, or rented or loaned to any insured.

Coverage does not apply at or from any location or site used to handle, store, dispose of, process, or treat waste. This applies regardless of who was involved with the waste-related activity.

There is no coverage for pollutants that were transported, handled, stored, treated, disposed of, or processed as waste. This applies only if the insured or someone the named insured is legally responsible for was involved with the waste-related activity.

There is no coverage at or from any location or site where any insured is performing operations if it brings the pollutants to the location or site as a part of those operations. This also applies to contractors and subcontractors working for any insured and bringing pollutants to the site.

There is also no coverage at or from any location or site where any insured performs operations that involve pollutant testing, monitoring, cleaning up, removing, containing, treating, detoxification, neutralization, response, or assessment in any way. This exclusion also applies if contractors or subcontractors that work on an insured’s behalf perform these operations. Coverage does not apply to any loss, cost, or expense that arises out of any request, demand, order, or statutory or regulatory requirements the insured must comply with regarding the effects of pollutants. These may involve the insured or others testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, responding to, or assessing those effects.

Coverage does not apply to any loss, cost, or expense that arises out of any claim or suit by or on behalf of a governmental authority for damages due to testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, responding to, or assessing the effects of pollutants in any way. This does not apply to any liability for property damage the insured would have even if any of the above hadn’t been required or subject to a government authority.

SUDDEN OR ACCIDENTAL

All pollution events are excluded, except those covered because of one of the exclusion’s exceptions. This means events that occur suddenly or accidentally in addition to events that occur gradually and over time are not covered.

EXCEPTIONS TO THE POLLUTION EXCLUSION

Pollution from building heating, cooling, dehumidifying equipment or equipment used to heat water

This exception covers bodily injury sustained inside a building and caused by smoke, fumes, vapor, or soot from equipment used to heat, cool, or dehumidify the building or equipment used to heat water that the building’s occupants and their guests use.

Coverage applies only to injuries sustained inside the building. It does not apply if the same events release smoke, fumes, vapor, or soot outside the building that injures a person passing by.

Note: This exception has grown over the years. It was first added to except only heating equipment such as furnaces. It was then broadened to except cooling equipment and then dehumidifying equipment. The most recent addition is equipment that heats water. However, this is a limited exception because the only heating equipment that is excepted is that used to provide hot water for building occupants and guests. This would mean that heating equipment used to provide heat or used in manufacturing process would not be excepted.

Hostile fire

This exception covers bodily injury or property damage caused by or that arises out of heat, smoke, or fumes from a hostile fire.

Note: Black’s Law Dictionary defines a hostile fire as one that becomes uncontrollable or breaks out from where it was intended to be and becomes a hostile element.

Specific operating fluids released by contractors at job sites

This exception covers bodily injury or property damage that arises out of fuels, lubricants, and other operating fluids used in mobile equipment in their normal operations on the job site escaping. However, this is limited to operating fluids that escape from the vehicle part or receptacle designed to hold them. This exception does not apply to intentional release of operating fluids or such fluids brought to the job site to intentionally release them.

Note: Older editions of the CGL Coverage Form did not have this exception. It applies to only fluids needed to properly operate mobile equipment and not to any other liquid pollutants.

Pollution from materials required to be brought into a building

This is a difficult exception and must actually be provided in two different parts of the exclusion.

This actual exception (d) (ii) covers bodily injury or property damage sustained inside a building caused by gases, fumes, or vapors released from materials brought into the building. The materials must be used in conjunction with operations performed by the named insured or contractors or subcontractors that work on its behalf.

Examples of these materials are paint, cleaning solvents, chemical treatments, carpet glue, or tile glue that the insured, a contractor, or a subcontractor brings in to repair or service the building.

There is a problem with this exception. If the owner of the premises is an additional insured, this exception would not apply because under (1) (a) pollution losses from a premises that is owned, rented etc. to an insured are not covered. This means that as soon as the owner is added, the contractor loses this exception. This was clearly not what was intended so an exception (1) (a) (ii) was added so that when the owner, renter, occupier etc. of the location is an insured only because it is an additional insured of the contractor that is working at that location, that location is excepted.

EXCLUSION ENDORSEMENTS

There are three Commercial General Liability (CGL) endorsements that make the pollution exclusion more absolute.

• CG 21 49–Total Pollution Exclusion Endorsement

This endorsement replaces Section I–Coverage A–Bodily Injury and Property Damage Liability, Paragraph 2. Exclusion f. Pollution. It is identical to Exclusion f. Pollution but it removes every exception.

• CG 21 55–Total Pollution Exclusion with a Hostile Fire Exception

This endorsement replaces Section I–Coverage A–Bodily Injury and Property Damage Liability, Paragraph 2. Exclusion f. Pollution. It is identical to Exclusion f. Pollution but it removes every exception except the hostile fire exception.

• CG 21 65–Total Pollution Exclusion with a Building Heating, Cooling, and Dehumidifying Equipment Exception and a Hostile Fire Exception

This endorsement replaces Exclusion f. under Paragraph 2. Exclusions of Section I Coverage A Bodily Injury and Property Damage. It is replaced with a total pollution exclusion with only two exceptions. It does not apply to injury from any smoke, fumes, vapor, or soot that building heating, cooling, or dehumidifying equipment releases. It also does not apply to injury or damage from heat, smoke, or fumes that result from a hostile fire.

There are two Products/Completed Operations (PCO) endorsements that make the pollution exclusion more absolute.

• CG 21-98–Total Pollution Exclusion Endorsement

This endorsement replaces the pollution exclusion in the Products/Completed Operations Liability Coverage Form with a total pollution exclusion. It is similar to CG 21 49–Total Pollution Exclusion Endorsement.

• CG 21 99–Total Pollution Exclusion for Designated Products or Work

This endorsement is identical to CG 21 98–Total Pollution Exclusion Endorsement except that it applies to only the product or work entered on the endorsement schedule. All other work or products remain subject to the policy level pollution exclusion.

There are four operation-specific pollution-related CGL endorsements and one operation-specific pollution-related PCO endorsement.

• CG 22 64–Pesticide or Herbicide Applicator–Limited Pollution Coverage

This broadening endorsement modifies the Pollution exclusion to not apply if the herbicide application operations described on the endorsement schedule are performed according to all applicable standards of any governmental entity’s laws or requirements.

• CG 22 73–Exclusion–Oil or Gas Producing Operations

This endorsement restricts coverage. It replaces paragraph (1) (d) of the pollution exclusion. It excludes all pollution coverage at sites, locations, or premises where operations are being performed. There are no exceptions.

• CG 22 78–Hazardous Material Contractors

This endorsement broadens coverage. It modifies the Pollution exclusion for contractors that remove, replace, repair, enclose, or encapsulate hazardous material or substances at a building or structure. It deletes paragraph (1) (e) that excludes pollution coverage at locations where such operations take place with respect to these contractors and activities.

• CG 22 93–Lawn Care Services–Limited Pollution Coverage

This endorsement broadens coverage. It provides an exception to the Pollution exclusion so that pollution coverage applies when an insured applies herbicides or pesticides to lawns. It includes all herbicides and pesticides, even those that require licenses and permits.

• CG 28 12–Pesticide or Herbicide Applicator–Limited Pollution Coverage

This endorsement broadens coverage. It is used with PCO to provide limited pollution coverage for pesticide and herbicide applicators. However, coverage applies only if they meet and comply with all federal, state, or local government statutes, ordinances, regulations, or licensing requirements that apply to such operations.

POLLUTION COVERAGE BUY-BACK ENDORSEMENTS

There are five optional CGL endorsements that provide “buy-back” coverage for parts of the pollution exclusion. Each requires an additional premium charge.

• CG 04 22–Pollution Liability Coverage Extension

This endorsement provides complete pollution liability coverage by deleting the pollution exclusion. However, it does not cover cleanup costs.

Note: This endorsement is not used very often because it provides such broad pollution liability coverage. Only a few insurance companies write pollution liability insurance coverage and do so using separate coverage forms or policies.

• CG 04 28–Pollution Exclusion–Named Peril Limited Exception for a Short-Term Pollution Event

This endorsement amends the pollution exclusion by providing coverage for pollution caused by or that results from specific causes of loss the endorsement lists. The pollution event must begin during the policy period, be definite in place and time, end within 48 hours after it began, and not originate in an underground storage tank in order for coverage to apply.

• CG 04 29–Pollution Exclusion–Limited Exception for a Short-Term Pollution Event

This endorsement is almost identical to CG 04 28 except that event does not have to begin with a specifically named cause of loss.

• CG 04 30–Pollution Exclusion–Limited Exception for Designated Pollutant(s)

This endorsement amends the Pollution exclusion. It provides coverage for bodily injury or property damage that arises out of any release of the pollutants listed on the endorsement schedule while used in conjunction with the insured’s operations.

• CG 24 15–Limited Pollution Liability Extension Endorsement

This endorsement buys back some pollution coverage by amending the exclusion. Coverage is limited to premises not used to handle, store, dispose of, process, or treat wastes. It still excludes any pollution that results from any storage tanks or containers, including ducts and piping below or partially below ground. A separate aggregate limit must be entered on the endorsement schedule.

POLLUTION-RELATED COURT CASES

“Absolute” Asbestos Exclusion Rules

Absolute Pollution Exclusion Held Applicable to Allergic Reaction to Paint and Glue Fumes

Absolute Pollution Exclusion Inapplicable to Death Caused By Pesticides

Absolute Pollution Exclusion Inapplicable to Fumes Injury

CGL Policy’s Effective Dates Bars Board’s Claim for Coverage of Clean-Up

City Seeks Damages from Defunct Company’s Former Insurers

City’s CGL Policy Excludes Claim for Pollution Loss

Cleanup Costs Held Not Within the Meaning of Damages

Contamination from Manufacturing Process Not Covered

Contamination of Property of Others Held Not “Sudden” Despite “Sudden” Release of Toxins

Contamination under Ground Held Not Covered When Caused By Known Discharge above Ground

“Contaminant” Clarified With Respect to Application

Denied Paint Fumes Claim Not Bad Faith

Environmental Cleanup Costs Held Not Covered By CGL

Hazardous Waste Disposal Not “Accidental”

Insured Challenges Pollution Exclusions

Insurer Denies Existence of 1960s Policy

Insurers Face Mixed Obligation for Insured’s Pollution Suit

“Known” Loss Exclusion Held Not Applicable

Landfill Owners Seek Coverage for Cleanup Costs

Landlord Asserts Tenant’s Contamination Constituted Trespass

Lead Exclusion Held Applicable to Lead Paint and Such Exclusions Were Further Held Not Discriminatory

Lead Paint Not a “Contaminant”

Paper Recycler Fire Damages Excluded

Pollution Claim By Insured for Damage Done to His Property by Former Tenant

Pollution Claims Arising From Emissions from Defective Furnaces

Pollution Cleanup Costs Incurred During Policy Period

Pollution Exclusion Applicability Held Not Affected By Explanatory Data Furnished to Insurance Department

Pollution Exclusion Applied

Pollution Exclusion Bars Recovery

Pollution Exclusion Held Applicable; “Sudden and Accidental”

Pollution Exclusion Held Applicable to Cigarette Smoke

Pollution Exclusion Held Applicable for Waste Disposal Site

Pollution Exclusion Not Applicable to Personal Injury Claim

Trespass Ruling Can’t Be Re-Argued

Use of Gas in Business Operations and Failure to Clearly Identify Gas as a Pollutant Obligates Insurer to Handle Fuel Spill Claim

“Voluntary” Environmental Cleanup Expenses Covered

Insuring contractors

Pacific Restorations made a mistake in the way they applied the waterproofing treatment which led to a serious injury. Contractors may believe they are experts and will never have a loss because of the care they take but we all know that accidents and mistakes can happen. Are you interested in writing a book of casual or artisan contractor business?

Pacific Restorations is a landscape contractor. Below you can review the Landscape Contractors Narrative in the Risk Survey Commercial to research the exposures and consider coverages to offer.

Category: Casual and Artisan Contractors

SIC CODE: 0781 Landscape Counseling and Planning

0782 Lawn and Garden Services

NAICS CODES: 541320 Landscape Architectural Services

561730 Landscaping Services

Suggested ISO General Liability Code: 97047, 97050

Suggested Workers Compensation Codes: 0042, 9102, 0106

Description of operations: Landscape contractors design, install, and maintain outdoor spaces, combining plants and architectural features in a manner attractive to customers. Services offered may include installation of sod for a lawn, planting of trees, bushes, shrubs, flowers, and other plants, or the installation of retaining walls, fountains, walkways, or other architectural enhancements. Some landscape contractors will change the contours of the grounds, while others will limit their work to planting new or maintaining existing lawns and plants. Additional operations may include installation or winterization of underground sprinkler systems, tree trimming, nurseries or lawn and garden shops.

Property exposures may be limited to an office and a storage yard for vehicles or equipment. Property exposures may include the use or sale of live and growing plants, shrubs, bushes, trees, or flowers. These may grow outside in a yard or in a structure such as a greenhouse. Both the structure and the growing stock are susceptible to damage by fire, wind, hail, and vandalism. The stock is also vulnerable to loss by frost and animals or insects. Specialty coverages designed specifically for growing stock may be needed. Older greenhouses may be subject to frequent glass breakage since they are typically made with the lowest grade of plate glass. Newer greenhouses are simply frames with plastic coverings which need frequent replacement as they tend to yellow or cloud in the weather and block out sunlight needed by plants. There may be backup systems or generators employed to prevent freezing or other temperature losses. Fire hazards can be high from the flammables used in the repair of vehicles or equipment, such as solvents and degreasers, and the chemicals in fertilizers and insecticides. These must all be well controlled, labeled, and separated with proper storage in the appropriate containers and storage facilities.

Crime exposures are from employee dishonesty. Background checks, including criminal histories, should be obtained on each employee prior to hiring. Ordering, billing, and disbursement should be handled as separate duties with reconciliations occurring regularly. There should be appropriate procedures in place when employees accept payments off site.

Inland marine exposure includes accounts receivable if the landscaper offers credit to customers, contractors’ equipment, goods in transit, and valuable papers and records for customers’ and suppliers’ information. Equipment may include mowers, sprayers, cherry pickers for tree trimming and trenchers for underground work. Goods in transit may be damaged by fire, collision or overturn. While the transport of fully grown trees for planting is rare, the stock may be of high value. Vehicles containing stock should be attended at all times.

Premises liability exposures can be light at the landscaper’s own premises if there is no public access. If there is a nursery, the exposure increases as customers may slip or fall on wet flooring or dirt or trip over equipment. Plants and equipment stored in the open can present an attractive nuisance. At job sites, hazards include injury or damage from stones or other debris thrown by power mowers, trimmers, and other equipment. Tree trimming may result in falling tools, branches or debris that may injure persons, damage vehicles or other property, or fall onto power or communication lines. Use of chain saws on trunks or limbs and the use of chippers for disposal may result in flying debris that can cause serious bodily injury. The areas of operation should be restricted by barriers and proper signage to protect the public from slips and falls from spills and equipment and supplies impeding access. The application of lawn chemicals presents both a premises and completed operations hazard that could result in serious long-term injury, illness, or disease to customers and passersby. Overspray from operations could result in small but frequent property damage losses. Contractors who do not obtain and keep proper licensing and certification for chemical applications create a serious liability exposure to themselves.

Environmental impairment exposure is significant. The application of chemicals can result in damage to air, soil, or groundwater. The landscaper must comply with all federal, state, and municipal regulations regarding the use and disposal of chemicals and waste products. Employees who handle chemicals must have the appropriate licenses and certifications individually.

Automobile exposures can be very limited if the service is maintenance only and does not supply plants. If plants and large trees are transported, the exposure increases due to the possibility of the load being involved in a collision or overturn. Vehicles may be custom designed with specialty equipment, such as lifts, cherry pickers, and tree planting or removal equipment. Drivers should be aware of and be able to perform cleanup procedures in the event of a collision or vehicle overturn. All drivers must be well trained and have valid licenses for the type of vehicle being driven. MVRs must be run on a regular basis. Random drug and alcohol testing should be conducted. Vehicles must be well maintained with records kept in a central location.

Workers compensation exposures are high due to the operation of machinery and equipment, work at heights, work on uneven ground, and exposure to underground or above ground cables and lines. Use of power-cutting equipment can result in cuts and possible amputations. Back injuries, hernias, sprains, and strains can result from lifting. Chemical applications may cause lung problems along with allergic reactions and other more serious complications. Casual labor, seasonal workforce, and high turnover present a significant loss control challenge.

Minimum recommended coverage:

Business Personal Property, Employee Dishonesty, Contractors’ Tools and Equipment, General Liability, Employee Benefits Liability, Umbrella Liability, Automobile Liability and Physical Damage, Hired and Nonownership Auto, Workers Compensation

Other coverages to consider:

Building, Business Income with Extra Expense, Crop Insurance, Earthquake, Flood, Hail Insurance, Leasehold Interest, Real Property Legal Liability, Accounts Receivable, Computers, Goods in Transit, Installation Floater, Valuable Papers and Records, Cyberliability, Employment-related Practices Liability, Environmental Impairment Liability, Stop Gap Liability

Asking the questions

Once you have identified contractors you would like to pursue, contact is essential. The good news is that you can provide a survey of their operations to help the two of you design a complete insurance program.

Here is a Business Building Letter you could mail to potential clients.

Dear [Name]:

As I am sure you are aware, the [disastrous, serious] fire [explosion, tornado loss, etc.] that happened [next door, down the street, etc.] the other day could happen to any business including, unfortunately, yours.

Property insurance is a complicated business and securing proper coverage requires not only expertise, but also diligence. Here at [agency] we pride ourselves in our commitment to carefully survey our clients’ needs and then check frequently to ensure that the insurance coverage we recommend keeps pace with these needs.

We would like to provide this same commitment to your business. May we have an opportunity to review your present loss prevention program and your property insurance needs? There is absolutely no cost or obligation on your part.

I’ll call you in a few days for an appointment at your convenience.

Sincerely,