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.
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.
For the reasons explained herein, 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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