PARSING THE POLLUTION EXCLUSION
The statistics are startling; the role is now critical
The Court Decisions column is a popular part of Rough Notes magazine. One reason for this is that the court room is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. This column comes from the industry expert editors of Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from Rough Notes Company’s digital solutions. The editors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions and/or offer broader perspectives.
By Bruce D. Hicks, CPCU, CLU
The case Crown Energy Company v. Mid-Continent Casualty Company centers around the applicability of an exclusion, specifically, wording that was intended to bar coverage for losses involving polluting. If you’ve been involved in nearly any aspect of the insurance service sector, you’re likely familiar with an age-old issue—interpreting policy language.
The situation here? A gas/oil producer was among several who were sued. A group of plaintiffs sought compensation for damages caused by seismic activity. That activity and resultant damage, they argued, was due to the insured company (along with its peer defendants) injecting wastewater into storage wells. This created underground pressure and earth movement.
At the time the seismic activity occurred, the oil producer was insured under a Commercial General Liability (CGL) policy; it included a pollution endorsement. After receiving notice of the lawsuit, the oil producer filed a claim with its insurer. The insurer, in turn, denied the claim. Both parties went to the courts, requesting summary judgment. The company asked a court to rule that the seismic activity damage was eligible for coverage under its policy.
The insurer asked the court to recognize that it held no obligation to respond to the loss because the incident did not involve an occurrence (as defined by the policy) and coverage was also blocked by the policy’s pollution exclusion. The lower court ruled that the insurer must defend the suit on behalf of the oil producer. The insurer appealed—twice.
The agreement between an insured and insurer does require adherence to policy obligations. However, adherence does not mean an obligation to accept insurer coverage decisions at face value.
The higher court reviewed the matter and found similarly to the lower courts. In its view, the loss was due to how the wastewater was placed in storage. That process triggered a seismic incident that, in its opinion, did qualify as an occurrence and was not subject to the pollution exclusion. As the summary we featured made no mention of how it interpreted “occurrence,” let’s take a guess. The policy definition stated that the term referred to an accident, including ongoing or repeated exposure to a same set of harmful conditions. It may be that the ongoing process of creating underground pressure that triggered earth movement, in the court’s assessment, deemed it as an occurrence. The court did explain that the pollution exclusion was irrelevant since no element of polluting created the damage.
A business is dedicated to its own survival and purchasing insurance is among the most convenient methods to protect itself. The agreement between an insured and insurer does require adherence to policy obligations. However, adherence does not mean an obligation to accept insurer coverage decisions at face value. Both parties have the right to put forth their understanding of policy applicability. The onus is on the insurer (as the writer of the policy) to defend allegations that its language is reasonable and clear. It also is important to thoroughly assess loss circumstances before making a coverage decision.
If the situation is litigated, an insurer’s arguments in support of its position must be comprehensive. Those arguments are the primary basis upon which courts review the matter and render a decision. Yes, this is hindsight, but the initial decision to decline coverage may have involved tunnel vision.
Considering that three levels of court review resulted in adverse decisions, perhaps the insurer missed a big point. What’s your assessment? Look at the fuller court summary in “Court Decisions” and come back—we’ll wait!
Here are some questions that we had:
- Did the insurer take enough time to evaluate the central point of the loss?
- Was the pollution element of the incident the right focus?
- While the insurer did mention the wastewater storage as a deliberate process, did the policy contain a specific intentional act exclusion?
- Did the policy contain a concurrent causation exclusion in either the base policy or the endorsement?
Disputes over coverage may easily end up in the courtroom. Insufficient assessments can be costly and time consuming. Taking care in making coverage decisions is important for insurers as well as policyholders.
Bruce D. Hicks, CPCU, CLU, is senior vice president, Technical & Educational Products Division, at The Rough Notes Company, Inc. He has more than 30 years of property/casualty insurance experience, including personal and small business underwriting as well as compliance duties for several national and regional insurers. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and currently serves on its International Interest Group Committee.