Risk Management

Pollution exclusion minefield

Determining whether a product is potentially a pollutant
or contains pollutants is getting more difficult

By Donald S. Malecki, CPCU

Most environmental impairment exposures can be difficult to identify and quantify. Transportation of pollutants, tank storage, and the industrial production of pollutants and waste disposal are a few well-known exceptions.

In fact, given the way in which the insurance industry applies the pollution exclusion today, it is far easier for producers to view every business as a candidate for some form of pollution coverage.

This is not an exaggeration! The development of the pollution exclusion through the years reveals that exposures to liability are extremely broad and all-encompassing. The pollution exclusion not only affects generators and haulers of industrial wastes but also invades many other activities, including toxic fumes from substances used to install carpets, operations exposures such as the buildup of nitrogen dioxide from Zamboni ice cleaning machines, carbon monoxide from apartment heating systems, the servicing of refrigeration equipment, and the existence of lead and asbestos.

Early development

There is no comparison between the early environmental pollution exclusions and their sheer numbers and applications encountered today. Those producers who are considered to be veterans of the business undoubtedly see the growth and application of pollution exclusions as nothing short of shocking.

The impetus for the environmental pollution exclusion was the offshore oil spills in the late 1960s that resulted in catastrophic losses to the natural resources of both private and public lands and water. The insurers reasoned then that, because the problem rested with the oil transportation and production industries and most spills were avoidable, the time was ripe for adding an exclusion to commercial liability policies.

The problem having to do with non-oil pollution claims quickly followed. On May 28, 1970, the Insurance Information Institute issued a news release from the Insurance Rating Board (predecessor to the Insurance Services Office [ISO]) titled “Insurers Act to Clarify Insurance Coverage of Hazards of Pollution.”

The release stated that two coverage exclusions applying to commercial liability risks—other than automobile liability—were being introduced. One related to pollution of water by oil, and the other was explained as being a clarification in the form of an exclusion.

The IRB explained in its release that “in most cases, under present policies, there is no coverage for what is usually referred to as damage caused by pollution or contamination. The reason there is no coverage is that such damages may be said to be expected and intended and therefore they are excluded by the definition of ‘occurrence’ in the policies.”

Parenthetically speaking, there were claims, even in the absence of this clarifying exclusion, that resulted in coverage because “expected or intended” aspects of the “occurrence” definition often were easily overcome by litigation.

A case in point is Grand River Lime Co. v. Ohio Casualty Co., 289 N.E.2d 360 (1972), a decision that followed implementation of the new pollution exclusion in many states. This was a class action by 200 residents of an Ohio village brought against a manufacturing and quarrying firm for property damage sustained as a result of air pollutants that were emitted by the company over a period of seven years.

At the time of this case, the standard 1966 edition of the comprehensive general liability policy was in use, which was prior to the introduction of the pollution exclusion. The appeals court held that while the process of the manufacturer may have been intended, the damages may have been unexpected or unintended, thereby triggering coverage for damages within the policy.

The court also stated that the policy was issued to Grand River by the insurer with its full knowledge as to the nature of the business operation in which Grand River was engaged. If it was the intention of the insurer to exclude any portion of Grand River’s operation from the policy, it could have done so. One has to wonder whether the pollution exclusion, had it been issued, would have acted to clarify the situation with the same conclusion.

It was further explained by IRB, in 1970, that the new exclusion made it “explicitly clear that coverage will not be provided for damages caused by pollution or contamination unless ‘the discharge, dispersal, release or escape is sudden and accidental.’”

While these changes were earmarked for implementation on June 10, 1970, the actual period varied by jurisdiction. The major obstacle to implementation proved to be the individual state insurance departments. Each state needed to accept and approve the filing, a task that proved to be monumental.

In fact, the state of Maryland did not approve the filing until October 1981. The Texas Commissioner of Insurance (among a few other state insurance departments) also questioned the filing. For example, the IRB was asked by the Texas commissioner to explain the extent to which premiums would be reduced in the wake of this obvious reduction in coverage. The response appeared to be that no reduc-tion was necessary because, prior to the approval of the pollution exclusions, coverage was not provided in most cases because the damages could be said to be expected or intended.

As it turned out, the pollution exclusion was eventually approved and implemented in commercial liability policies. As the insurance and legal annals reveal, however, insurers were not always successful in precluding cov-erage based on this earlier exclusion.

As a matter of fact, the broader exclusions of today still are being rejected by the courts from time to time, as being ambiguous. The usual basis is that the exclusion attempts to go far beyond its original intent, which was aimed at generators of industrial waste.

It was with the introduction of the 1986 standard ISO commercial general liability policy provisions that the pollution exclusion was enlarged. Some purchasers of insurance must have been shocked to learn that they were without liability protection based on the exclusion dealing with contamination and pollution.

Some of the insurance buyers in this category might have been the following:

• Admiral Insurance Co. v. Feit Management Co., et al., 321 F.3d 1326 (U.S. Ct. App. 2003). Policy’s pollution exclusion precluded coverage for an apartment house owner for death and injury caused to residents by carbon monoxide fumes from the building’s hot water heater.

• Bituminous Casualty Corp. v. RPS Company, et al., 915 F.Supp. 882 (U.S. Dist. Ct. W.D. KY 1996). Liability policy precluded coverage for the insured’s accidental release of ammonia while servicing a refrigerating system at a customer’s plant.

• Richland Valley Products, Inc. v. St. Paul Fire & Casualty Co., Ct. App. WI 1996. Pollution exclusion precluded coverage for loss caused by clogging of cooling system for manufacturing ice cream products. The mixing of brine with ammonia was contamination, which was excluded, along with clogging that ensued from the contamination.

Situation today

When one stops to consider the number of different standard and nonstandard pollution and contamina-tion exclusions being issued by insurers and the coverage options available (ISO offers 11 endorsements), the situation today regarding pollution exposures and insurance coverage is, in reality, a minefield for many and a nightmare to some.

Insureds in the market for buy-back coverage need to be careful, too, because they could end up buying nothing back. In Certain Underwriters At Lloyd’s London, et al., v. C.A. Turner Construction Co. 112 F.3d 184 (U.S. Ct. App. 1997), for example, a “Seepage and Pollution Buy-Back Clause” in a liability policy that restored coverage for some unintentional and unexpected releases reported within 90 days was held to be inapplicable.

The reason coverage did not apply was that the absolute pollution exclusion applicable to the policy, which precluded coverage for injuries suffered by a worker when he was exposed to phenol gas, was broader than the buy-back clause’s coverage.

Pollution exclusions often are a moving target. What this means is that new exclusions are continually being introduced, making coverage narrower and narrower. For example, one of the 2007 commercial general liability changes introduced by ISO is Total Pollution Exclusion Endorsement CG 21 98 for use with the products-completed operations coverage forms (occurrence and claims-made). This same exclusion was introduced in 1988 with regard to the products-completed operations coverage included in the commercial general liability forms.

What begs the question here is why an exclusion with such broad potential application is necessary for the specialty coverage afforded by the products-completed operations coverage forms, or even for products and completed operations coverage included in the CGL forms.

To the extent that underwriters issue this endorsement instead of simply rejecting the risk, insureds should ask the following question in their defense of a claim denial:

“When you wrote this products-completed operations coverage form, you based your premium charge on a rate that applied to receipts or sales. The more products sold, the higher the insurance cost. The question is: When did the product become a pollutant?”

Juries will never understand the answer.

Considering how many products are potentially pollutants or contain pollutants, it would be less painful for underwriters to simply underwrite the risk and refuse to insure it, rather than accept the risk and deny the coverage. The prospective insured would at least have the option to seek coverage elsewhere.

If there is any conclusion here, it is that it is virtually impossible for producers to determine with any precision whether an insured is confronted with a pollution exclusion. By becoming familiar with the markets, such as those listed in The Insurance Marketplace, published annually by The Rough Notes Company, producers may be able to get some of the exposures of businesses covered, but it is impossible to determine the pollution and contamination exposures of all insureds.