Oklahoma Court Enforces Terms of Pollution Buy-Back

In its recent decision in Star Ins. Co. v. Bear Prods., Inc., 2013 U.S. Dist. LEXIS 148559 (E.D. Okl. Oct. 16, 2013), the United States District Court for the Eastern District of Oklahoma had occasion to consider the coverage afforded under a pollution buy-back endorsement.

Star Insurance Company insured Bear Products under a primary general liability policy as well as an umbrella liability policy.  Bear was named as a defendant in a class action lawsuit alleging personal injury and property damage resulting from exposure to “produced fluid waste,” described as waste fluids and solids generated as a result of oil and gas drilling operations.  Specifically, produced fluid waste is described to include “saltwater, sand, acid, oil-based drilling fluids, water-based drilling fluids, completion flowback fluid, frack flowback fluid, workover flowback fluid, rainwater gathered on drilling and productions sites, drilling cuttings, pit water, including frack, mud, circulation and reserve pits, and numerous other fluids and solid wastes generated during the exploration and completion of oil and gas wells.”  Bear Products was identified as having transported produced fluid waste to a disposal pit located in the vicinity of the plaintiff class.

Both the primary policy and umbrella policies issued by Star Insurance contained a total pollution exclusion.  The primary policy also contained an endorsement giving back limited pollution liability at designated well sites for bodily injury, property damage or environmental damage caused by a “pollution incident.” The endorsement set forth the following limitations on coverage:

This insurance applies to "bodily injury", "property damage", and "environmental damage" only if:

(1)       The "bodily injury", "property damage", or "environmental damage" are caused by a "pollution incident"

(a) on or from a "designated well site" in the "coverage territory", and

(b) that begins and ends within 72 hours of the incident; and

(c) that is accidental; and

(d) that is reported within 90 days of the incident

(2)       The "bodily injury", "property damage", or "environmental damage" first occurs during the policy period[.]

The court agreed that produced fluid waste was a pollutant for the purpose of the policies’ respective pollution exclusions.  Bear Products nevertheless contended that at the very least, coverage was available under the primary policy’s pollution buy-back endorsement.  The court disagreed.  Looking to the allegations of the complaint, the court observed that the conditions necessary to trigger the pollution coverage under the buy-back were not satisfied.  Notably, the waste was alleged to have been generated and disposed of prior to the policy period, the pollution condition lasted more than 72 hours, and the pollution condition was not accidentally generated.  Bear Products argued that if strictly enforced, the buy-back would be rendered illusory, since the majority of pollution incidents for which it could be liable would not satisfy these conditions precedent to coverage.  The court rejected this argument, explaining:

…  Bear is a corporate business. It bargained for an exception to the pollution exclusion. Bear is entitled only to the coverage for which it negotiated and paid. Bear argues that read literally, the policies provide virtually no coverage for risks inherent to its business. In fact, the policies do provide coverage for some risks inherent to Bear's business. For example, the policies cover liability as a result of an accidental spill of waste (a "pollution incident") or an accidental collision of one of Bear's trucks with another vehicle, object or person. Though it is unfortunate that the policies do not cover liability for pollution as alleged in the Underlying Complaint, the court may not rewrite the policies.

Mississippi Court Holds Pollution Exclusion Applicable to Chinese Drywall Claim

In its recent decision in Prestige Properties, Inc. v. National Builders and Contractors Ins. Co., 2013 U.S. Dist. LEXIS 146738 (S.D. Miss. Oct. 10, 2013), the United States District Court for the Southern District of Mississippi had occasion to consider the application of a total pollution exclusion in a general liability policy to underlying claims involving Chinese-manufactured drywall.

The insured, Prestige Properties, was a Mississippi contractor hired to perform repairs on a client’s home that had been damaged as a result of Hurricane Katrina.  Part of these repairs involved replacing damaged drywall. Prestige later was named as a defendant in the Chinese drywall multidistrict litigation pending in the Eastern District of Louisiana.  Prestige’s client alleged that Prestige had used defective Chinese manufactured drywall in their home and that the drywall resulted in bodily injury (eye irritation, nausea, respiratory ailments, etc.) and property damage (corrosion and damage to appliances, wiring and object with metal surfaces).

Prestige was insured for the relevant time period under a commercial general liability policy issued by National Builders.  National Builders disclaimed coverage to Prestige on the basis of its policy’s total pollution exclusion barring coverage for:

f. Pollution.

(1)  "Bodily injury" or "property damage" which 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.

(2)  Any loss, cost or expense arising out of any:

(a)   Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants"; or

(b)  Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of, "pollutants."

On motion for summary judgment, National Builders pointed out that the underlying suit alleged that the drywall was defective in that it emitted various sulfide and other noxious gases through off-gassing.  These allegations, argued National Builders, fell squarely within the terms of the exclusion.  While no Mississippi court considered the application of the exclusion on similar facts (i.e., to releases of gas indoors), National Builders cited to case law from other jurisdictions holding the exclusion applicable to indoor air quality claims.  National Builders also cited to case law from other jurisdictions holding the exclusion applicable to Chinese drywall claims.  See, e.g., Evanston Ins. Co. v. Germano, 514 F. App'x 362 (4th Cir. 2013), TravCo Ins. Co. v. Ward, 284 Va. 547, 736 S.E.2d 321 (Va. 2012); Granite State Ins. Co. v. American Bldg. Materials, Inc., 504 F. App'x 815 (11th Cir. 2013).  Prestige, on the other hand, cited to the decision in In re Chinese Manufactured Drywall Prods. Liab. Litig., 759 F. Supp. 2d 822 (E.D. La. 2010), in which the Eastern District of Louisiana, applying Louisiana law on the pollution exclusion, including the seminal decision in Doerr v. Mobil Oil Corp., 774 So. 2d 119 (La. 2000), held the exclusion inapplicable to Chinese drywall claims. 

The Prestigecourt distinguished the holding in In re Chinese Manufactured Drywall Prods. Liab. Litig. on the basis that the Louisiana court was considering coverage under homeowners policies rather than commercial general liability policies.  The Prestige court further reasoned that Mississippi’s Supreme Court would not follow the restrictive application of the pollution exclusion as set forth by Louisiana’s highest court in Doerr, but instead would apply the exclusion pursuant to its “plain terms.”  In other words, no distinction would be drawn between traditional and non-traditional environmental pollution.  As such, the court granted summary judgment in National Builder’s favor.

Michigan Court Holds Pollution Exclusion Applies to Emissions Permit Violation

In its recent decision in Arch Ins. Co. v. Commercial Steel Treating Corp., 2013 U.S. Dist. LEXIS 121574 (E.D. Mich. Aug. 27, 2013), the United States District Court for the Eastern District of Michigan had occasion to consider the application of a pollution exclusion in a D&O policy to a violation of an air emissions permit.

Arch insured Curtis Metal Finishing Company (“Curtis”) under a Private Company Management Liability and Crime Insurance policy.  Curtis operated a zinc-phosphate plating operation in Sterling Heights, Michigan.  As a result of a windstorm that damaged its exhaust equipment, Curtis operated its facility without the benefit of all required air emissions control technologies for a period of nearly three months, thereby violating its air use permit issued by the Michigan Department of Environmental Quality.  Following several inspections, the Michigan Department of Natural Resources and Environment (“MDNRE”) issued a Violation Notice to Curtis.   

Curtis forwarded a copy of the notice to Arch, and requested coverage for any subsequent criminal proceedings that might be brought by the state.  Arch, in turn, denied coverage based on a pollution exclusion arising from, based upon, or attributable to any:

a.   discharge, dispersal, release, escape, seepage, migration or disposal of Pollutants, . . . or any threat of such discharge, dispersal, release, escape, seepage, migration or disposal; or

b.   direction, request or voluntary decision to test for, abate, monitor, clean up, remove, contain, treat, detoxify or neutralize Pollutants . . . .

In fact, the Macomb County prosecutor later commenced criminal proceedings against Curtis, alleging a count for failure to report an equipment malfunction and a count for failure to comply with its emissions permit.  As a result of Arch’s denial of coverage, Curtis retained its own counsel and eventually negotiated a plea of no contest in return for payment of $90,000 to be used for an environmental study.  Arch later brought a coverage action against Curtis seeking a declaration that it had no coverage obligations with respect to the settlement or Curtis’ defense costs.

On motion for summary judgment, Arch argued that both subparagraphs of the pollution exclusion applied.  With respect to subparagraph b., Arch contended that the air use permit initially issued to Curtis was a “direction to … clean up … Pollutants,” and that the underlying criminal action, therefore, arose out of or was attributable to this direction.  Alternatively, Curtis argued that subparagraph a. of the exclusion was applicable since the underlying criminal action arose out of Curtis’ improper discharge of pollutants into the atmosphere.  Curtis, on the other hand, argued that the underlying complaint contained no allegation of a discharge of pollutants, and that because its facility is kept at a negative air pressure, any emissions would have been into its own building rather than into the atmosphere.  The court rejected Curtis’ argument, noting that the plain language of the exclusion applied to any discharge of pollutants, or any threatened discharge of pollutants, and that the exclusion did not specific the location of the discharge.   In other words, the court refused to read into the exclusion a distinction between traditional environmental pollution and indoor air pollution.

Curtis also argued that the underlying criminal action pertained to permitting violations and failure to disclose rather than a discharge of pollutants.   The court rejected this argument, finding that Curtis could not ignore purpose behind the permit:

The purpose of the Air Use Permit was to prevent the release of potentially hazardous fumes ... A direct result of Defendants' operation of Lines 11 and 14 without a functioning scrubber, in violation of the Air Use Permit, is the release of fumes from Lines 11 and 14 into the Sterling Heights facility. There is thus "significantly more than a remote connection" between Defendants' permit violations and the actual or threatened release of pollutants from Lines 11 and 14 … Furthermore, even if there was no threatened or actual release of pollutants from Lines 11 and 14, the criminal charges arise out of a direction or request from MDNRE, via the Air Use Permit, to abate potentially hazardous pollutants. Accordingly, both subparagraphs a. and b. of the Pollution Exclusion apply to bar the criminal charges against Defendants.

The court also rejected Curtis’ arguments that the amount of actual emissions from the facility was insignificant, explaining:

Whether any pollutants actually leaked is immaterial where Defendants have clearly violated their Air Use Permit, which directed Defendants to abate pollutants. The Pollution Exclusion expressly applies to such criminal charges. Plaintiff thus properly denied coverage for Defendants' claims under the Policy, and Plaintiff is entitled to summary declaratory judgment that the Policy does not apply to the underlying criminal matters.

While the court held that the pollution exclusion operated to preclude Curtis’ right to coverage, the court also agreed in passing that the $90,000 payment made by Curtis to settle the underlying matter – an amount to be used to conduct a study of a nearby lake – did not qualify as “loss” under the Arch policy, a term specifically defined to exclude fines.

5th Circuit Holds Late Notice Bars Coverage Under Buy-Back Pollution Coverage

In its recent decision in Starr Indemnity & Liability Co. v. SGS Petroleum Service Corp., 2013 U.S. App. LEXIS 12425 (5th Cir. 2013), the United States Court of Appeals for the Fifth Circuit, applying Texas law, had occasion to consider the effect of an insured’s failure to give notice of a pollution incident within the time specified in a supplementary pollution liability coverage endorsement.

Starr Indemnity issued an umbrella liability policy to SGS.  While the policy form originally contained an absolute pollution exclusion, the exclusion was deleted by endorsement and replaced by a limited pollution liability coverage “buy-back,” stating that the pollution exclusion would not apply to certain pollution events, assuming that certain conditions precedent were satisfied.  One such condition was that SGS was required to report the pollution incident to Starr, in writing, within thirty (30) days of it first becoming aware of the incident.  Following an accidental release of various chemicals, SGS sought coverage for cleanup costs from Starr.  SGS, however, failed to report the pollution incident to Starr within the thirty-day reporting period, but instead reported the release to Starr fifty-nine (59) days after it first learned of the release.  Starr sought a judicial declaration that it was not obligated to provide coverage to SGS for the incident as a result of SGS’ non-compliance with the reporting provision.

The lower court and the Fifth Circuit both agreed that the Fifth Circuit’s decision in Matador Petroleum Corp. v. St. Paul Surplus Lines Ins. Co., 174 F.3d 653 (5th Cir. 1999) was determinative of the issue.  There, the Fifth Circuit, in considering a similar pollution liability buy-back, held that an insured’s eight-day delay in complying with the reporting provision was fatal to the insured’s right to coverage, regardless of whether the insurer was prejudiced by the delay. The Fifth Circuit concluded that because the policy language in the Starr policy was similar to the policy in Matador, its prior holding was determinative and as such, SGS’ failure to have reported the pollution incident within the time allotted barred its right to coverage, whether or not SGS’ delay resulted in prejudice to Starr.

SGS nevertheless argued that since the 1999 decision in Matador, the Texas Supreme Court heightened the notice-prejudice rule in its holdings in PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008) and Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009).  The Fifth Circuit rejected this contention, noting that the decisions in PAJ and Prodigy were premised on the fact that the notice provisions in the policies at issue were not an essential part of the “bargained for exchange.”  By contrast, the thirty-day notice provision in the pollution buy-back was “a specific endorsement, separately negotiated by the parties, and with a clear notice requirement.”  Thus, while the Fifth Circuit agreed that under ordinary circumstances, an insurer is required to demonstrate prejudice in order to disclaim coverage based on late notice, the court agreed that the notice provision in the buy-back was to be treated differently than the standard notice provisions.   As such, concluded the court, the holding in Matador was not disturbed by PAJ and Prodigy decisions, and Matador, therefore, was determinative of SGS’ right to coverage.

Minnesota Supreme Court Applies Pollution Exclusion to Carbon Monoxide

In its recent decision in Midwest Family Mut. Ins. Co. v. Wolters, 2013 Minn. LEXIS 304 (Minn. May 31, 2013), the Minnesota Supreme Court had occasion to consider whether an absolute pollution exclusion applies to bodily injury resulting from an indoor release of carbon monoxide.

Wolters was a general contractor that had been hired to build a home with an in-floor radiant heating system.  It was later determined that Wolters purchased and installed the wrong type of boiler for the project.  Further, the boiler itself was negligently installed.  As a result, and because the home’s carbon monoxide detectors also were negligently installed, the homeowners suffered injury as a result of severe carbon monoxide poisoning.   The homeowners later filed suit against Wolters. 

Midwest Family Mutual insured Wolters under a general liability policy.  Midwest provided Wolters with  defense in the underlying suit, but subsequently brought a coverage action seeking a declaration of non-coverage based on its policy’s pollution exclusion, which states in pertinent part:

9.   We do not pay for bodily injury or property damage:

a.   arising wholly or partially out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants: . . .

4)   at or from any premises where you or any contractor or subcontractor, directly or indirectly under your control, are working or have completed work:

    a)     if the pollutant is on the premises in connection with such work, unless the bodily injury or property damages arise from the heat, smoke or fumes of a fire which becomes uncontrollable or breaks out from where it was intended to be; or

    b)     if the work in any way involves testing, monitoring, clean-up, containing, treating or removal of pollutants.

The Midwest policy defined “pollutants” as:

a.   any solid, liquid, gaseous, thermal, electrical emission (visible or invisible) or sound emission pollutant, irritant or contaminant; or

b.   waste, including materials to be recycled, reclaimed or reconditioned as well as disposed of.

Midwest moved for summary judgment on the basis of its exclusion, and the trial court held that it would be inappropriate as a matter of law to rule the exclusion was applicable since Wolters did not cause “environmental pollution.”  On appeal, however, the Minnesota Court of Appeals observed that Minnesota courts have employed a “non-technical, plain-meaning approach” to the interpretation and application pollution exclusion.  As such, and concluding that carbon monoxide is a pollutant, the court reversed the lower court’s ruling.

On appeal to the Minnesota Supreme Court, Wolters urged the court follow the “majority rule” of courts across the country, limiting application of the exclusion to traditional environmental pollution.  Specifically, the insured argued that the definition of “pollutants” is ambiguous as applied to matters of indoor air pollution.  The Minnesota Supreme Court rejected this assertion, concluding that under the “non-technical, plain meaning” approach to interpreting the exclusion, as required by its prior decision in Board of Regents of the University of Minn. v. Royal Ins. Co. of America, 517 N.W.2d 888 (Minn. 1994), an indoor release of carbon monoxide qualifies as a pollutant.  As the court explained:

While there may be substances that are difficult to establish as "pollutants" for purposes of the absolute pollution exclusion, carbon monoxide is not one of them. It is enough for purposes of the present dispute to conclude that carbon monoxide is a pollutant under the terms of the absolute pollution exclusion; there are serious concerns associated with the breadth of the exclusion that we leave for another day, and we do not attempt to define the complete scope of the term "pollutant" in the absolute pollution exclusion. Instead, we only conclude that, based on our holding in Board of Regents, carbon monoxide qualifies as a pollutant in this case.

The court further held that the fact that the release was indoors as opposed to outdoors did not require a different outcome since the exclusion did not contain language limiting its application to traditional environmental pollution.  In so concluding, the court rejected the insured’s argument that the “reasonable expectations” doctrine required a different result since the exclusion was plainly and conspicuously labeled as such.  Such a broad application of the exclusion, noted the court, would prevent inconsistency in determining what constitutes a pollutant and under what circumstances.

Oklahoma Court Addresses Time Element Pollution Exclusion

In its recent decision in Colony Insurance Company v. Bear Products, Inc., 2013 U.S. Dist. LEXIS 43716 (E.D. Okl. Mar. 26, 2013), the United States District Court for the Eastern District of Oklahoma had occasion to consider the application of a pollution exclusion containing a limited exception for specifically defined pollution events.

Colony insured Bear Products under a primary general liability policy for the period March 16, 2007 to March 16, 2008.  While the policy originally contained a total pollution exclusion, Bear paid an additional premium to have the pollution exclusion deleted and replaced with an endorsement titled Pollution Exclusion – Limited Exception for a Pollution Event.  This revised exclusion contained the standard pollution exclusion language barring coverage for bodily injury or property damage resulting from a discharge, dispersal, seepage, migration release or escape of “pollutants,” but contained an exception for a “pollution event” resulting “from waste transported, handled, stored, treated, disposed of, or processed at saltwater disposal wells or sediment ponds, operated by you in conformance with applicable laws, rules and regulations … .”  The endorsement defined “pollution event” as:

… the actual and accidental discharge, release or escape of pollutants directly from the place, container, system or media designed to hold or handle such "pollutants" which:

a.   Begins during the policy period,

b.   Begins at an identified time and place,

c. Ends, in its entirety, at an identified time within forty-eight (48) hours of the commencement of the discharge, dispersal, release or escape of the "pollutants",

d.   Is not a repeat or resumption of a previous discharge, dispersal, release or escape of the same pollutant from essentially the same source within twelve (12) months of a previous discharge, dispersal, release or escape,

e.   Does not originate from an "underground storage tank",

f.    Is not heat, smoke or fumes from a "hostile fire", and

g.   You have discovered the occurrence of such "pollution event" within seven (7) days of its commencement[.]

To be a "pollution event, the discharge, dispersal, release or escape of "pollutants" need not be continuous. However, if the discharge, dispersal, release or escape is not continuous, then all discharges, dispersals, releases or escapes of the same "pollutants" from essentially the same source, considered together, must satisfy Provisions a. through f. of this definition to be considered a "pollution event"[.]

Bear was named as a defendant in a class action regarding disposal of hazardous waste materials resulting from oil and gas well drilling operations.  The underlying complaint specifically alleged that beginning in 2003, and for a period of seven years, Bear and other defendants transported and disposed of hazardous waste materials at a disposal pit in the vicinity of plaintiffs’ homes.

The court agreed that the underlying complaint contained allegations of discharges of pollutants and thus initially fell within the pollution exclusion.  Bear argued, however, that it paid an additional premium for “pollution event” coverage, and that as such, Colony was obligated to defend it in the underlying action.  The court disagreed, noting that the “pollution event” exception to the exclusion is limited to discrete pollution events that happen during the policy period, that are not continuous in nature, and that are discovered within seven days.  Given that the use of the disposal site was alleged to have begun in 2003 – prior to the policy’s commencement – the first of the “pollution event” prongs was not satisfied.  The court further concluded that even if each separate transfer of materials to the disposal facility could be considered a separate event, these separate events would still be considered “repeat” events within a twelve (12) month period, which would not satisfy prong (d) of the definition of “pollution event.”  The court also held that Bear’s discharge of hazardous materials could not be considered “accidental” as required by the definition of “pollution event,” but instead was intentional conduct, even if the subsequent bodily injury and property damage was not intended.  

Missouri Federal Court Holds Pollution Exclusion Inapplicable to Exposure to Fumes

In its recent decision in United Fire & Casualty Co. v. Titan Contractors Service, Inc., 2013 U.S. Dist. LEXIS 10716 (E.D. Mo. Jan. 28, 2013), the United States District Court for the Eastern District of Missouri, applying Missouri law, had occasion to consider the application of a total pollution exclusion to claims arising out of what would not ordinarily be considered traditional environmental contamination.

The insured, Titan, is a company that specializes in cleaning construction project sites.  Three individuals that worked in an office space adjacent to where Titan had performed a cleanup project sued Titan.  They alleged that Titan had used an acrylic floor sealant, TIAH, as part of its cleanup operations, and that the fumes from the sealant caused plaintiffs to suffer various physical ailments.  Titan’s general liability insurer, United Fire, provided Titan with a defense in the underlying suit subject to a reservation of rights to deny coverage based on its policy’s pollution exclusion stating:

This insurance does not apply to:

f.  Pollution

(1)       "Bodily injury" or "property damage" which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants" at any time.

This exclusion does not apply to "bodily injury" or "property damage" arising out of heat, smoke or fumes from a "hostile fire" unless that "hostile fire" occurred or originated:

(a)   At any premises, site or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste; or

(b)  At any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations to test for, monitor, clean up, remove, contain, treat, detoxify, neutralize or in any way respond to, or assess the effects of, "pollutants."

(2)       Any loss, cost or expense arising out of any:

(a)    Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of "pollutants"; or

(b)   Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing, or in any way responding to, or assessing the effects of, "pollutants".

United Fire argued that the exclusion unambiguously applied since the underlying suit involved allegations of bodily injury caused by exposure to pollutants.  Titan countered that the exclusion was inapplicable to products put to their intended use, and instead applied only to matters traditionally considered environmental pollution. 

Having determined that Missouri law governed the policy, the court observed that Missouri’s highest court had not yet addressed the meaning and scope of the total pollution exclusion.  The court, therefore, concluded that it would have to predict how the Missouri Supreme Court would rule on the issue, looking for guidance to decisions by Missouri’s Court of Appeals to help determine whether TIAH is a pollutant for the purpose of the exclusion, and if so, whether the exclusion applied.  Looking to cases such as Hocker Oil Co., Inc. v. Barker-Phillips-Jackson, Inc., 997 S.W.2d 510 (Mo. Ct. App. 1999); Casualty Indemnity Exchange v. City of Sparta, 997 S.W.2d 545 (Mo. Ct. App. 1999); Boulevard Investment Company v. Capitol Indemnity Corporation, 27 S.W.3d 856 (Mo. Ct. App. 2000), the court gleaned several guiding principles for determining the application of the exclusion.  First, Missouri courts take a “common sense, situational approach” in determining whether a substance qualifies as a pollutant.  Second, this common sense determination is necessarily “fact intensive.”  Third, and most notably, the court observed that “whether an insurance policy’s language is plain and unambiguous is determined by what the layman who brought and paid for the policy would ordinarily have understood.”  As such, explained the court:

… the insured is entitled to characterize the allegedly polluting substance in a manner consistent with the insured’s daily activities, particularly if the alleged pollutant belongs in the environment in which the insured routinely works.

Notwithstanding these principles, however, the court also observed that Missouri courts do not reflexively limit application of the exclusion “to traditional environmental pollutants.”

With these guiding principles in mind, the court acknowledged that application of the exclusion to the claims against Titan “is not an easy case,” but ultimately found it ambiguous whether United Fire’s pollution exclusion applied to Titan’s use of TIAH.  Central to the court’s analysis was that Titan routinely used TIAH as part of its normal operations, thus influencing Titan’s expectations of coverage.  As the court noted, under the circumstances it “is reasonable for Titan to expect that its work in sealing concrete floors would be covered by its commercial general liability policy, and that TIAH would not be deemed a pollutant.” 

Kentucky Court Holds Pollution Exclusion Applicable to Release of Diesel Fuel

In its recent decision in Hardy Oil Co. v. Nationwide Agribusiness Ins. Co., 2013 U.S. Dist. LEXIS 4760 (E.D. Ky. Jan. 11, 2013), the United States District Court for the Eastern District of Kentucky had occasion to consider the application of the pollution exclusion and under what circumstances it will be deemed ambiguous under Kentucky law.

Hardy Oil Company sought coverage under a general liability policy issued by Nationwide for a release of diesel fuel on its premises. Nationwide denied coverage on the basis of the lack of an occurrence and lack of third-party property damage.  Nationwide also denied coverage on the basis of its policy’s pollution exclusion, applicable to:

f. Pollution

(1) "Bodily Injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

(a) At or from any premises, site, or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.

                                [...]

(2)       Any loss, cost or expense arising out of any:

(a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, "pollutants"; [...]

By endorsement, the term “pollutants was defined as:

(a) Any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

(b) Gasoline, diesel fuel and all other petroleum products.

The court acknowledged that while the pollution exclusion was unambiguous on its face, Kentucky courts have nevertheless deemed the exclusion ambiguous as applied in certain contexts.  For instance, in Motorists Mut. Ins. Co. v. RSJ, Inc., 926 S.W.2d 679 (Ky. App. 1996), Kentucky’s Court of Appeals held the exclusion ambiguous as applied to carbon monoxide fumes emanating from a dry cleaner to two neighboring businesses.  Likewise, in Certain Underwriter's at Lloyd's, London v. Abundance Coal, Inc., 352 S.W.3d 594 (Ky. App. 2011), Kentucky’s Court of Appeals held the exclusion ambiguous as applied to allegations of “negligent trespass” of coal dust from the insured’s property to the plaintiff’s property.  In both cases, explained the Hardy court, the Kentucky Court of Appeals, looking to the historical use and understanding of the exclusion, concluded the exclusion was ambiguous in the context of “accidental, small-scale scenarios.”  The court distinguished these scenarios from that involving Hardy:

In contrast to these cases, Hardy Oil's claim involves a classic environmental catastrophe that led to a government-ordered cleanup. As Kentucky courts have recognized, these are exactly the type of situations that the pollution exclusion historically sought to exclude from coverage. … Therefore, the pollution exclusion is not ambiguous as applied to the factual circumstances of this case, and Hardy Oil cannot claim coverage under the Liability Policy.

The court further concluded that even if the exclusion was ambiguous under the circumstances, the lack of any third-party property damage further precluded coverage under the policy.

Eleventh Circuit Affirms Duty to Defend Legionnaires’ Disease Lawsuit

In its recent decision in Westport Ins. Corp. v. VN Hotel Group, 2012 U.S. App. LEXIS 22187 (11^th Cir. Oct. 25, 2012), the United States Court of Appeals for the Eleventh Circuit, applying Florida law, had occasion to consider whether a pollution exclusion and a fungi/bacteria exclusion operated to bar coverage for an underlying wrongful death claim involving Legionnaires' Disease.

The underlying lawsuit involved three individuals staying at a Quality Suites in Florida, all of whom contracted Legionnaires’ Disease while guests.  One of these individuals died while the two others required significant medical attention.  Two lawsuits were brought against VN Hotels, as the owner and operator of the Quality Suites.  The suits alleged that the plaintiffs contracted the disease as a result of exposure to legionella bacteria contained in shower water in their own rooms, or from steam generated by the hotels’ outdoor spa.  The plaintiffs later conceded, however, that the source of the bacteria was from the hotel’s outdoor spa.  VN Hotels tendered its defense to its general liability insurer, Westport Insurance.

Westport brought a coverage action against VN Hotels, seeking a declaratory judgment that its policy’s pollution exclusion and fungi/bacteria exclusion precluded a finding of coverage.  The pollution exclusion applied to:

"Bodily injury" . . . arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

                                                * * *

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste . . . .

Additionally, the policy’s fungi/bacteria exclusion applied to:

"Bodily injury" . . . which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of any "fungi" or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage. 

The fungi/bacteria exclusion, however, also contained an exception applicable to:

This exclusion does not apply to any 'fungi' or bacteria that are, are on, or are contained in, a good or product intended for bodily consumption.

On motion for summary judgment, the Middle District of Florida found in favor of VN Hotels, concluding that bacteria is not a “pollutant” for the purpose of the pollution exclusion.  The district court further held that the bacteria exclusion was inapplicable since the bacteria was not “within” a structure, and that in any event, the exception applied as the bacteria was contained in a good or product intended for bodily consumption.

On appeal, the Eleventh Circuit agreed with the lower court’s logic that bacteria did not qualify as a pollutant, at least under Westport’s policy, as such a ruling would render meaningless the policy’s fungi/bacteria exclusion.  Turning to the issue of the policy’s exclusion for bacteria, the Eleventh Circuit found persuasive the lower court’s reasoning that an outdoor spa is not clearly part of the hotel’s “structure,” which the court agreed must be defined narrowly, explaining:

In this Policy, the term "building" modifies the term "structure" and shows that "structure" is to be narrowly construed …  Thus, we, like the district court, conclude that an outdoor spa would not qualify as a "structure" for purposes of the exclusion.

Importantly for insurers and insureds alike, neither the district court nor the Eleventh Circuit held the bacteria exclusion unenforceable.  Rather, the two holdings appear limited to the language of the exclusion – requiring the bacteria to be on or within a building or structure – and the unique facts involved.  Further, other Florida courts, including the Eleventh Circuit, have held that similar claims are barred by the pollution exclusion.  See, e.g., Markel Ins. Co. v. Florida West Covered RV & Boat Storage, LLC, No. 8:09-cv-2427-T-27TGW (M.D. Fla. Mar. 9, 2011), aff’d, 2011 U.S. App. LEXIS 16552 (holding that pollution exclusion applied to bacterial infection caused by millings from roadwork); First Specialty Ins. Corp. v. GRS Mgmt. Assocs., 2009 U.S. Dist. LEXIS 72708 (S.D. Fla. Aug. 17, 2009) (concluding virus in swimming pool excluded by pollution exclusion); Nova Cas. Co. v. Waserstein, 424 F. Supp. 2d 1325 (S.D. Fla. 2006).

Florida Court Allows Extrinsic Facts for Determining Duty to Defend

In its recent decision in Composite Structures, Inc. v. Cont'l Ins. Co., 2012 U.S. Dist. LEXIS 147320 (M.D. Fla. Oct. 12, 2012), the United States District Court for the Middle District of Florida considered if and when an insurer can rely on facts extrinsic to a complaint for the purpose of determining a duty to defend.

The insured, Marlow Marine Sales was named as a defendant in an underlying suit brought by two individuals claiming bodily injuries as a result of exposure to carbon monoxide fumes while working aboard a yacht designed, manufactured and sold by Marlow.  Marlow subsequently tendered the matter to its general liability insurer, Continental.  One month after suit was filed, during which time Continental was still in the process of investigating Marlow’s right to coverage, plaintiffs in the underlying suit filed a memorandum of law specifying the time period during which they were exposed to the fumes.  Continental learned of this filing and relied on the information contained therein to deny coverage based on a pollution exclusion that only applied if the insured did not learn of the occurrence within seventy-two (72) hours of its commencement.   Continental relied on the information contained in the subsequently filed memorandum, which was not otherwise in the complaint, to conclude that this exception to the exclusion was inapplicable.

Marlow agreed that it did not learn of the occurrence within the seventy-two hour window.  It nevertheless contended that it was entitled to a defense since Continental only learned of the facts relevant to the coverage defense from a pleading filed subsequent to the complaint.  Marlow argued that Continental could not rely on such extrinsic facts in determining its defense obligation, but instead its duty to defend could only be determined by the complaint, which contained no facts one way or the other relevant to the application of the exception to the exclusion.  In light of this silence, Marlow contended that Continental was required to have provided a defense.

The court agreed that under Florida law, consideration of the duty to defend is typically restricted to the allegations in the complaint.  Citing to the Florida Supreme Court decision in Higgins v. State Farm Fire & Cas. Co., 894 So. 2d 5(Fla. 2004), however, the court acknowledged an exception to this rule where the insurer’s defense to coverage “is based on factual issues that would not normally be alleged in the underlying complaint.”  While the underlying suit against Marlow contained allegations relevant to the pollution exclusion, it did not contain allegations bearing on the issue of when Marlow became aware of the alleged occurrence.  The court nevertheless went on to consider whether these facts should have been asserted in the underlying suit.  The court answered this question in the negative, explaining that such facts were irrelevant in a products liability suit alleging causes of action for negligence and strict liability:

Neither cause of action requires a plaintiff to allege the specific date on which he informed the defendant of his injuries or the specific date on which the defendant informed its insurer. Indeed, before filing suit, an injured plaintiff is unlikely to be privy to information regarding the date on which a defendant informs its insurer of the incident. Those facts "would not normally be alleged in the underlying complaint," and therefore, the duty to defend can only be determined by examining outside evidence.

The court agreed that these facts extrinsic to the underlying complaint conclusively established that Marlow was not aware of the alleged occurrence within the seventy-two hour period necessary to trigger the policy’s exception to the pollution exclusion.   Thus, underlying the circumstances, the court held that “Continental was well within its rights to deny coverage.”

Missouri Federal Court Affirms Denial of Coverage Based on Pollution Exclusion

In its recent decision in Doe Run Resources Corp. v. Lexington Ins. Co., 2012 U.S. Dist. LEXIS 140981 (E.D. Mo. Sept. 28, 2012), the United States District Court for the Eastern District of Missouri had occasion to consider whether the total pollution exclusion is ambiguous for failure to define the term “pollutants,” or for failure to include this term to include specific constituents.

The insured, Doe Run Resources Corporation, was named as a defendant in two lawsuits resulting from its mining, milling and smelting operations.  Specifically, both suits alleged bodily injuries resulting from Doe Run’s release of lead, cadmium and other toxic substances from chat and tailing piles located at two different facilities in Missouri.  Doe Run sought coverage for these suits from its general liability carrier, Lexington, which insured Doe Run under successive policies dating back to 1995.  Lexington denied coverage on the basis that the suits did not allege “bodily injury” or “property damage” arising out of an occurrence, as well as on the basis of the application of its policies’ pollution exclusion. 

For the policies issued from 1995 through 2003, the Lexington policies contained a pollution exclusion applicable to:

… bodily injury or property damage (including the loss of use thereof) caused by, contributed to or arising out of the actual or threatened discharge, dispersal, release, or escape of smoke, vapors, soot, fumes, acids, alklis, toxic chemicals, liquids or gases, waste materials or other irritants, pollutants or contaminants into or upon the land, the atmosphere or any course of body of water, whether above or below ground.

Notably, these policies did not define the term “pollutants.”  For the policies issued beginning in 2004, the pollution exclusion barred coverage for:

… "bodily injury" or "property damage" which 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.

These policies define “pollutants” in relevant part as “any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

After concluding that Missouri law governed the Lexington policies, the court considered Doe Run’s arguments on summary judgment as to why the pollution exclusions were inapplicable.  Doe Run argued that the policies did not specifically exclude lead or other commercial products or commercial materials, and that the Lexington policies did not define “pollutants” to include lead and the other constituents at issue.

The court began its decision by noting that the language policies’ pollution exclusions were clear and unambiguous, even the pre-2004 exclusions that did not specifically define “pollutants.”  Relying on a standard dictionary definition, the court agreed that that the term “pollutants” is commonly understood as something that pollutes or contaminates the environment, especially with man-made waste.  Finding that the underlying suits alleged releases of pollutants from Doe Run’s facilities, thereby contaminating the environment, the court agreed that the suits “describe pollutants, as that term is used in its typical and ordinary sense.” 

Doe Run nevertheless argued that the decision in Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., 997 S.W. 510 (Mo. Ct. App. 1999) required a different outcome.  Hocker involved the application of the pollution exclusion to an insured gas company’s accidental release of 2,000 gallons of gasoline into the ground.  The Missouri Court of Appeals held the exclusion was ambiguous as to whether gasoline was a “pollutant” for the purpose of a pollution exclusion, since in the eyes of that particular insured, gasoline was not a pollutant but instead the only product it sold.  The Doe Run court nevertheless found Hockerto be distinguishable since it involved “the onetime release of Hocker Oil’s finished product, gasoline, into the ground.”  By contrast, the underlying suits filed against Doe Run alleged negligent and careless releases of lead, cadmium and other toxic materials into the environment over a number of years.  The court found this to be a critical distinction:

That is, unlike Hocker's isolated accident, the [underlying lawsuits] allege the continual and systematic release of pollutants into the environment. Moreover, despite Doe Run's pleas to the contrary, the products involved here are not finished products. Even if some of these raw materials are marketable (as Doe Run claims), their continued release of these contaminants into the community constitutes pollution. In sum, "the Court believes that contamination caused by a gasoline leak resulting from a failed plug is quite different from contamination resulting from lead concentrate abandoned on a landowner's property."

The court also distinguished a Missouri trial court decision relying on Hocker in which Doe Run was a party.  That decision concluded that the pollution exclusion did not clearly apply to claims involving releases of lead, arsenic, cadmium or sulfur dioxide since the policies at issue (not issued by Lexington) did not define “pollutants” to include those materials.  The Eastern District of Missouri found the reasoning of the state trial court’s decision to be flawed, concluding that the mere fact that lead or other constituents were not included in the definitions of pollutants did not “undermine” the application of the exclusion or otherwise render its application ambiguous.