CGL Policy Held To Cover Oil Spill Cleanup Costs
April 2010
Certain cleanup costs may be covered as property
damage under the exception to the pollution exclusion in a commercial general
liability (CGL) policy when those costs constitute an appropriate and reasonable
recovery that would have been obtained under common law in the absence of any
environmental statute or legal strict liability.
by J.
Kent Holland Jr.
ConstructionRisk.com
LLC
In the case of Clean Harbors Envtl. Servs., Inc.
v. Boston Basement Techs., Inc., 916 N.E.2d 406 (Mass. 2009), a contractor
(Boston Basement Technologies) broke a heating oil line while installing a waterproofing
system in a home. This caused 150 gallons of heating oil to leak into the basement
where it collected into a sump pump which pumped it into the home's backyard.
The Massachusetts Department of Environmental Protection (DEP) issued a notice
of responsibility to the contractor naming it as a potentially responsible party
(PRP) under the state statute. This rendered the contractor strictly liable
for the remedial response actions to clean up the oil. The contractor hired
Clean Harbors to perform the clean up action and then sought payment of the
Clean Harbor invoices from its CGL insurer, Admiral Insurance. The insurer denied
coverage based on the pollution exclusion of the policy.
In the litigation that followed, the trial court agreed with the insurer
that there was no coverage. This was reversed on appeal, however, with the court
concluding that the pollution exclusion was not absolute but instead provided
an exception for common law damages, and the contractor's responsibility and
its damages fell within that exception which rendered the costs in question
to be covered by the policy.
The Pollution Exclusion Language
The CGL policy excludes 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."
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.
(Emphasis added).
The policy defined "property damage" as "Physical injury to tangible property,
including all resulting loss of use of that property."
Interpreting the Exception to the Exclusion
The issue in dispute was whether the language of the exception that is emphasized
above caused the coverage for common-law property damage caused by the oil spill
to be extended to the cost of the cleanup services provided by Clean Harbors.
No prior case precedent addressing such an issue could be found by the court.
In analyzing the situation, the first thing the court did was determine that
the term "property damages" must be understood to include not only diminution
in value of property, but also the reasonable costs of curing the property and
restoring its value, i.e., the cleanup costs. The court explained that when
the injury to property is temporary and reasonably curable by repairs, "the
expense of the repairs, if less than the diminished market value, is the measure
of recovery." Nothing in the policy, said the court, suggested that restoration
costs would not be covered when they were a more reasonable measure of damages
that diminution of value.
Having determined that the costs of remediation would be an appropriate measure
of property damages, the court next analyzed whether such damages were covered
due to the common-law exception to the pollution exclusion. As seen by the court:
The plain language of the exception, directly on the heels of the pollution
exclusion, indicates that what matters in determining coverage under this
policy is the distinction between response actions imposed pursuant to environmental
statutes versus remedies imposed at common law to redress a property owner's
loss.
This, said the court, "makes sense when we consider the differences in the
insured's liability and, hence, the insurer's ability to assess risk when issuing
a liability policy."
Several statutes are noted by the court as imposing strict liability without
regard to fault and without regard to any common law duty of care. In contrast
to common law responsibility, the response costs that can be imposed by the
strict liability statutes can far exceed the actual diminution of property value
or the cost of cleaning up the property. This is in part because the legislative
aim of the statutes is to protect the environment and not just to redress lost
property value or response costs. A far different result occurs when recovery
for contaminated property is based on negligence principles of common law where
the focus is on liability for damage to the property itself.
Conclusion
For the reasons explained above, the court concluded there was no rationale
in the policy language or case precedent for excluding common law restoration
costs from coverage. The fact that there may be an overlap between an insured's
liability for common law property damages and the insured's statutory obligations
to assess, contain, and remove the pollutants (as occurred here when the contractor
was named a PRP), doesn't render the insured any less liable for those damages
under common law. The exception to the pollution exclusion that makes common
law pollution damages covered therefore applies to make the damages in this
case covered under the policy.
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