Arguably one of the least understood and most litigated portions of the commercial
general liability (CGL) policy, the “pollution exclusion,” has vexed policyholders
and insurers alike for over 20 years. Why such confusion and controversy? What
exactly does the October 2001 edition of the Insurance Services Office, Inc.
(ISO), CGL policy exclude as pollution? What pollution coverage is left? This
article will offer some answers to those questions and attempt to provide some
straightforward explanations as to how the “pollution exclusion” applies.
A Historical Perspective
The late 1970s and early 1980s saw two major environmental laws enacted that
dramatically changed the way our society and the law viewed environmental contamination.
Responsibility that had never before existed was now being imposed on business
and industry with passage of the Resource Conservation and Recovery Act (RCRA)
and the Comprehensive Environmental Response, Compensation and Liability Act
The former regulated and tracked the life cycle of hazardous waste, the latter
forced just about anyone involved to clean up or pay for the cleanup of such
wastes. Liability was not only joint and several, it applied without regard to fault. While there is
just a bit more to these laws than stated, there was one clear affect—pollution
that had been tolerated for many years was not only to be stopped, it was to
be cleaned up right now!
Federal and state environmental authorities began sending out letters to
businesses and organizations as a gentle, friendly reminder of their legal obligations
to clean up the mess. If your name appeared on an RCRA manifest, you automatically
qualified—no purchase was necessary. But wait, there is more—cost was no object!
The Comprehensive General Liability Policy—Sudden and Accidental
Occasionally, a member of this large but select group handed in a claim to
their general liability insurance company, seeking defense of these government
orders and payment of remediation costs being imposed. Many insurers looked
at the claim, at the policy wording, looked at the claim again, looked at the
price tag and said “no coverage.” Their
legal position: “This pollution stuff has been going on for almost 100 years—and
you want us to defend you and pay for all of this! Forget it!”
As large sums were involved, litigation quickly followed. One of the many
legal arguments insurers put forth was that the CGL policy excluded pollution—unless
the pollution was sudden and accidental. Although many of the claims were the
result of years of accumulated contamination, initially many courts found CGL
coverage still applied as “sudden and accidental” was ambiguous and really meant
“unexpected or unintended.” Insurers were ordered by courts to pay hundreds
of millions in remediation costs.
Despite the fact some state insurance regulators produced explanatory memos
previously filed by insurance bureaus essentially stating that the phrase “sudden
and accidental” was intended only to reinforce the phrase “unexpected and unintended,”
insurers were incredulous. Feeling like the Red Sox in a World Series, they
needed to really exclude pollution from
the CGL and do it as soon as possible. The alternative was to not offer liability
coverage at all—contributing to the liability crisis of the mid- and late 1980s.
The So-Called Absolute Pollution Exclusion
Rushed to the market as an endorsement to the 1973 nonsimplified comprehensive
general liability policy in early 1985, the “absolute pollution exclusion” showed
that insurers meant business. Whether pollutants were released quickly or gradually
was now immaterial. Fearing judicial activism that would find a way to negate any pollution exclusion, ISO filed an extraordinarily
broad exclusion for pollution.
ISO Comments and Publications
Minutes of an October 25, 1984, ISO Underwriting/Legal Review Committee provide
some insight into the mindset of ISO when drafting this new “absolute pollution
The Committee agreed that the proposed language for this exclusion accomplishes
a ‘total pollution’ exclusion (except for ‘products’) in the CGL policy.
However, such an exclusion precludes some bona fide fortuitous loss which
should be insurable under a CGL policy.
Incorporated into the basic simplified commercial general liability policy
in 1986, ISO offered the following explanation of the new pollution exclusion
in their Commercial Lines Manual, Division Six—General Liability, 1985 (page
Liability—The new pollution exclusion differs from the old exclusion
in the following ways: |
- There is no distinction between sudden/accidental and gradual
- All pollution coverage for bodily injury/property damage is
excluded under most circumstances, including the following situations:
- The emission originates on the insured’s premises.
- The emission originates from a waste disposal or treatment
- The pollutants are handled or treated as waste.
- The emission comes from a site where operations are being
performed by the named insured or a subcontractor, and the pollutants
are brought onto the site in connection with the work being
done, or if the work involves containment or treatment of pollutants.
- Cleanup costs and similar costs are specifically excluded.
Pollution arising from Products/Completed Operations hazard is covered
under the new policy.
The above is still a useful guide for reference regarding the general scope of the CGL pollution exclusion.
Consideration needs to be given, however, to several subsequent changes to the
exclusion that further refine its scope and will be discussed later in this
From Ancient History to Present Day
Even a superficial understanding of today’s CGL pollution exclusion requires
some insight into the exclusion’s historical development. Thus, the preceding
history lesson is vital.
Several changes have been made to the CGL pollution over the past 18 years—first
to “strengthen the exclusion” and then to add exceptions to the exclusion to
provide what some might argue is coverage for “bona fide fortuitous loss which
should be insurable under a CGL policy.”
2001 CGL Pollution Exclusion—The First Paragraph (f. (1))
The first section of the pollution exclusion (f. (1)) does not exclude pollution—it excludes bodily injury or property
damage arising out of the release of a pollutant. While this at first may appear
to be semantics, the practical results of this become evident in view of a few
notorious insurer claim denials.
For example, insurers have denied claims and asserted in litigation that
the CGL pollution exclusion eliminated coverage for:
- Fumes from flooring material being applied by a contractor that damaged
food products stored on site.
- Carbon dioxide released by a leak in a vent stack of a boiler that resulted
in injury to others.
- Cooking equipment that releases fumes, causing patrons’ illness.
- Sulfuric acid splashes on a claimant when the bottle breaks.
- Smoke from a hostile fire that resulted in property damage.
But consider the following. Isn’t the CGL pollution exclusion intended to
apply to traditional environmental damage—such
as industrial pollution of the atmosphere, water, ground, or groundwater? Where
did this come from? This just doesn’t make sense!
“Pollution.” Actually, it does make sense.
When read literally, the pollution exclusion says nothing about environmental
damage or industrial polluters.
In fact, not only is the term “pollution” not defined, it does not appear
anywhere within the 695-word exclusion. Whether
the policyholder has caused pollution is irrelevant to the strict application
of this exclusion. While some courts have looked beyond such a strict
interpretation and have allowed coverage when no environmental damage occurred,
court interpretation is decidedly mixed on this issue.
“Pollutants.” What is very relevant and is
defined (in the CGL’s definition section) is the term “pollutant,” the understanding
of which is central to the pollution exclusion. “Pollutant” is a very expansive
term that includes just about any type of irritant or contaminant, whether it
is a solid, liquid, gas, or by heat (thermal). The definition specifically mentions,
but is not limited to smoke, vapor, soot, fumes, acids, alkalis, chemicals,
Substances that would normally be expected to be considered “pollutants,”
and which have been found by courts to be “pollutants,” include ammonia, asbestos,
benzene, carbon dioxide, carbon monoxide, chemical fumes, DDT, gasoline, heating
oil, insecticide, lead paint, PCB, and TCE.
Some substances, not normally considered “pollutants,” have been found by
courts in some circumstances to be “pollutants,” including dust, foundry sand,
manure, salt water, sewage, and skunk spray.
The First Paragraph (f.(1))—The Essence
The crux of the first part (f.(1)) of the 2001 CGL pollution exclusion is
quite simple—there is no coverage, subject to the exceptions noted below, for
any injury or damage arising out of a “pollutant.” What is considered a “contaminant
or irritant” is often an open question. Following are some noted exceptions.
“Your Premises.” Exclusion f.(1)(a) applies
to releases or emissions of “pollutants” at or from any premises owned, occupied,
rented, or loaned to any insured at any time. Express exceptions to this portion
of the exclusion are:
- Building Heating Equipment Exception. Bodily injury is sustained within a building caused by fumes, smoke, vapor
or soot from equipment used to heat the building is covered. The exception
does not appear to apply to equipment used for air conditioning or ventilation
and is thus a very limited exception. If pollutants are dispersed by the
ventilation system, resulting injuries or illness are probably not covered.
- Owner as Additional Insured Exception. Bodily injury or property damage away from the named insured’s premises
is covered if the named insured is a contractor and applies even if the
site’s owner is listed as an additional insured. Absent this exception,
a contractor would not have coverage under their own CGL policy for operations
away from the contractor’s premises solely because the owner is listed as
an additional insured on contractor’s CGL policy.
- Hostile Fire Exception. Coverage applies
to bodily injury, or property damage arising from heat, smoke or fumes from
a “hostile fire.” A “hostile fire” is a fire which becomes uncontrollable
or breaks out from where it is intended to be. For instance, if a chemical
plant catches fire, releasing toxic fumes into the neighborhood, resulting
bodily injury is covered.
“Waste.” Exclusions f.(1)(b) and (c) apply
to waste, which includes but is not limited to materials to be recycled, reconditioned,
or reclaimed. This portion of the exclusion has no exceptions—waste is excluded
regardless of where or how it causes injury or damage.
“Away From Your Premises.” Exclusion f.(1)(d)
applies the pollution exclusion to the locations
of others where any insured (or any of the insured’s contractors or subcontractors)
are performing (present tense) operations if the
pollutants are brought to the premises by the insured or their contractors
or subcontractors in connection with the operations. Express exceptions to this off-premises portion of the exclusions are:
- Mobile Equipment Exception. Coverage applies
to releases from the insured’s mobile equipment if the pollutants are for the normal operation of the mobile equipment, such as diesel fuel, motor oil, or hydraulic fluid if they escape from a vehicle part designed to hold such pollutants. This exception does not apply if the release is intentional, such as oiling
down a road prior to paving. As an example of how this exception might apply,
consider a contractor who hits a large boulder with a bulldozer and rips
open the diesel fuel tank. Coverage applies to damage caused by the diesel
fuel to a newly poured foundation (if poured by another contractor).
- Operations Within Building Exception. If an insured contractor (or subcontractors of the insured) is performing
operations, releases of fumes, gases, or vapors from materials brought into
the building in connection with the operations are covered if the bodily injury or property damage is
sustained within the building. Say, for example, a flooring contractor
brings varnish in to finish a floor of an office building. The flooring
contractor will have coverage if fumes from the varnish make an upstairs
- Hostile Fire Exception. The “hostile fire”
exception also applies away from the premises—if bodily injury or property
damage arises from heat, smoke or fumes from a hostile fire away from an insured’s premises, coverage
Away From Your Premises—Environmental Contractors. Exclusion f.(1)(e) eliminates coverage if any insured or an insured’s contractors
or subcontractors are involved in performing environmental operations, such
as testing, clean up, treating, or responding to pollutants. There are no exceptions
to this portion of the exclusion.
Products and Completed Operations. Bodily injury
or property damage arising out of an insured’s products or completed operations
is not expressly eliminated by the pollution exclusion. Therefore, coverage
applies by implied exception, to the extent other portions of the exclusion
do not apply. For instance, if an insured’s product is considered waste, coverage
would be excluded, despite the implied exception for products.
2001 CGL Pollution Exclusion—The Second Paragraph (f.(2))
As the second paragraph of the Pollution Exclusion, f.(2), is an independent
clause that stands alone, all of the previously noted express and implied exceptions
to paragraph f. (1) are limited by f.(2).
From the beginning (in this case, 1985), f.(2) has removed coverage for “cleanup
and similar costs.” A revision to f.(2) in 1988 strengthened this portion of
the exclusion to eliminate coverage for “any loss, cost or expense arising out of any ... request, demand or order that any insured ... clean up, remove, contain, treat, detoxify
... or in any way respond to ... pollutants.” Further, also expressly excluded
are claims or suits “by a governmental authority for damages because of testing
for, monitoring, cleaning up, removing ... or in any way responding to ... the
effects of pollutants.” There is no coverage for the clean up of pollutants—implied
or express exceptions not withstanding.
An Illustration. A manufacturer of valves sells
its product to a chemical distributor. Unfortunately, one of the valves purchased
and put to use by the chemical distributor malfunctions, releasing toxic chemicals
into the soil and groundwater. A court finds the valve was defective and orders
the manufacturer to pay $500,000 of remediation costs as required by the state
The manufacturer looks to their CGL insurer to pay for such costs, relying
on the implied “products” exception. Their insurer denies coverage for the cleanup,
citing the plain meaning of the wording of paragraph f.(2) of the pollution
exclusion. The insurer does, however, offer to pay for the chemical distributor’s
loss of use (property damage) and any resulting bodily injury. Neither has resulted
from this release.
The valve manufacturer brings suit against the insurer and attempts to introduce
into the litigation a half dozen ISO publications that contain statements such
as “under our new [pollution] exclusion, coverage is provided in the basic policy
for products and completed operations.” Unfortunately, the court rules the ISO
publications cannot be admitted as evidence. The publications are not part of
the policy and act only to contradict the plain
meaning of the policy exclusion; the cost of cleanup or remediation is
flatly and totally excluded, regardless of the nature or location of the release
A Riddle. How can pollution coverage be provided
in the CGL (by the limited exceptions) and yet completely exclude any and all
cleanup costs? More to the point—how can ISO’s representations of pollution
coverage be reconciled with a total exclusion for any pollutant cleanup? This
is all the more puzzling when considering that the basic ISO Business Auto Coverage
grants full cleanup coverage (in limited circumstances only) within the definition
of “Covered Pollution Cost and Expense.”
A Partial Solution. First introduced in the
July 1998 edition of the CGL, and included in the 2001 ISO CGL policy, is a
paragraph added to f.(2). According to accompanying ISO Circular, “Coverage
is also clarified with respect to certain third-party property damage claims
with respect to cleanup by indicating paragraph (2) of the exclusion does not
nullify coverage not excluded by paragraph (1) of the exclusion.”
The paragraph being added, however, is not quite as broadly worded as the
Circular would indicate. In reference to f.(2), the 1998 and 2001 ISO CGL pollution
However, this paragraph does not apply to liability for damages because
of “property damage” that the insured would have in the absence of such
request, demand, order or statutory or regulatory requirement, or such claim
or “suit” by or on behalf of a governmental authority.
Cleanup coverage exists in the CGL (triggered by an exception to the exclusion,
such as products) if the costs are property damage and the obligation for remediation
of the property exists outside of any statute,
regulation, or government order to remediate.
A Troubling Situation. As a practical matter,
due to the expansive nature of environmental laws and regulations, a vast majority
of liability for cleanup costs will be imposed on an insured because of such laws or regulations. This
puts insurers in the awkward position of determining whether or not the insured—who
may be clearly liable due to statute or regulation—would
be liable if the statute or regulation didn’t
exist. This “guessing game” determination of coverage leaves a policyholder
in limbo, without any genuine promise of coverage.
The basic 2001 ISO CGL policy provides very little pollution coverage, particularly
in the area of cleanup or remediation—perhaps the most important aspect of pollution
coverage. A policyholder with any significant pollution risk, even in the area
of an exception to the exclusion, such as products and completed operations,
does not have adequate coverage under the basic ISO 2001 edition of the commercial
general liability policy. Risk managers, brokers, and agents would do well to
either extensively amend the CGL or obtain separate pollution coverage for any
of their policyholders who have more than minimal or incidental pollution exposures.