The comprehensive commercial general liability (CGL) pollution exclusion was
not very effective in excluding very many pollution claims. Not only did that
exclusion have a built-in exception for "sudden and accidental"
pollution events, but many courts held that even gradual pollution extending
over many decades was covered.
As a backup, insurers asserted the 1973 "owned property"
exclusion, which reads as follows:
This insurance does not apply: …
(k) To property damage to
(1) Property owned or occupied by or rented to the insured,
(2) Property used by the insured, or
(3) Property in the care, custody or control of the insured or as to which
the insured is for any purpose exercising physical control[.]
This language seems clear enough. In the pollution context, any property
damage to the insured's own premises should have been excluded. See, e.g.,
E.I. du Pont de Nemours & Co. v. Allstate Ins.
Co., 686 A.2d 152 (Del. 1996) ("owned property" exclusions in
1967-1986 CGL policies barred coverage for cost to remediate pollution at the
insured's own site).
Six Exceptions
However, this exclusion was not very successful, either. Despite its
seemingly clear language, courts all over the country developed numerous common
law exceptions to the operation of the 1973 "owned property"
exclusion, which robbed it of much of its intended force. These exceptions
included the following.
- Groundwater Contamination
- Parens Patriae Theory
- "Government Cleanup" Theory
- Source Remediation Theory
- "Threatened" Off-Site Contamination
- "Alleged" Off-Site Contamination
These are discussed in more detail below.
Groundwater Contamination
The first exception that courts carved out from the operation of the 1973
"owned property" exclusion dealt with the contamination of
groundwater. Many courts drew a distinction between the subsurface soil and the
groundwater underneath the insured's premises. If the pollution reached the
groundwater, the question under the "owned property" exclusion became
who "owned" the groundwater.
Several states—including California, Idaho, Montana, Nevada, Oregon, and
others—enacted statutes that expressly state that groundwater is a natural
resource that is owned by the state government as trustee on behalf of the
people of the state. In these jurisdictions, courts hold that contamination of
the groundwater was not contamination of the insured's own property for
purposes of the 1973 "owned property" exclusion. See, e.g.,
Lane Elec. Co-Op, Inc. v. Federated Rural Elec. Ins.
Co., 114 Or. App. 156, 834 P.2d 502 (Ct. App. 1992) (groundwater
contaminated by gasoline in an underground storage tank was not within the
insured's control for purposes of an "owned property" exclusion
because "[a]ll water within the State of Oregon, which necessarily
includes the groundwater, belongs to the public."), citing Or. Rev. Stat.
§ 537.110.
A vast majority of states that did not have statutes governing the ownership
of groundwater reached the same result by judicial fiat. Courts in these
majority jurisdictions hold that landowners do not "own" groundwater,
so the "owned property" exclusion did not apply to the cost to
remediate the groundwater. For example, in Marrone v.
Harleysville Mut. Ins. Co., 283 N.J. Super. 411, 662 A.2d 562 (Super.
Ct. App. Div. 1995), the court reasoned:
Unlike other property that is normally considered as being within the four
corners of one's deed, groundwater not only 'flows or trickles or
runs or oozes through the land from one place to another …' but, other
than being a source of potable water, it is certainly not susceptible to the
custody or control of the property owner….[I]t is 'by its very nature, …
a migratory fluid which uncontrollably seeps through porous soil particles …
[and] is nearly impossible to naturally contain….' Suffice it to say,
groundwater does not clearly fall into the category of 'owned
property' for purposes of the exclusion.
In a small number of states, courts continue to cling to the "English
Rule," under which a landowner is held to own the groundwater percolating
beneath the surface of his land. In these minority jurisdictions, courts hold
that contamination of the groundwater was equivalent to contamination of the
insured's own property for purposes of the 1973 "owned property"
exclusion. See, e.g., Boardman Petroleum, Inc.
v. Federated Mut. Ins. Co., 269 Ga. 326, 498 S.E.2d 492 (1998)
("owned property" exclusions in 1977-1985 CGL policies applied
because under Georgia law, the insured owned the groundwater beneath the site;
therefore contamination of the groundwater was still contamination of the
insured's own property).
Parens Patriae Theory
The second common law exception that was developed to get around the
application of the 1973 "owned property" exclusion can be called the
Parens Patriae Theory. Parens patriae literally means
"parent of the country." At English common law, this doctrine
supported actions by the state to preserve the well-being of persons who,
because of their age or incapacity, were unable to care for themselves.
The parens patriae doctrine evolved under American law to give the
state an independent "quasi-sovereign" interest to bring an action to
redress undifferentiated harms to the health and well-being of the citizens in
general. Sometimes, states assert their parens patriae interest in
protecting natural resources when filing a suit to abate pollution.
In insurance cases, some courts cite this doctrine to hold that pollution
that contaminates the state's soil, air, and water implicates the
state's parens patriae interest, and that the cost to remediate
that pollution would not fall within the "owned property" exclusion.
See, for example, State v. New York Cent. Mut. Fire
Ins. Co., 147 A.D.2d 77, 542 N.Y.S.2d 402 (App. Div. 3d Dep't
1989).
Not all courts accept this theory, however. See, for example, Olds-Olympic, Inc. v. Commercial Union Ins. Co., 129 Wash.
2d 464, 918 P.2d 923, n.18 (1996) ("While the State undoubtedly has a
police power interest in regulating the environment, that interest does not
rise to the level of a property interest cognizable under the present insurance
contracts.").
"Government Cleanup" Theory
The third common law exception used by courts go avoid the 1973 "owned
property" exclusion was the "Government Cleanup" Theory. This
theory was advocated by Judge Richard Posner in Patz v.
St. Paul Fire & Marine Ins. Co., 15 F.3d 699 (7th Cir. 1994). In
that case, the judge hypothesized that the "owned property" exclusion
only applies to a claim to recover for the impairment of the value of the land
itself. The exclusion did not apply in this case because "the Patzes are
not seeking to recover for damage to their property; they are seeking to
recover the cost of the liability that the Department of Natural Resources
imposed on them for maintaining a nuisance."
Judge Posner's "Government Cleanup" theory has not been widely
followed. One reason may be that it is inconsistent with the terms of the CGL
insuring agreement. If the cost to remediate pollution was not truly
"property damage," it should not have qualified for coverage under
the insuring agreement in the first place. In Diamond
Shamrock Chemicals Co. v. Aetna Cas. & Sur. Co., 231 N.J. Super. 1,
554 A.2d 1342 (Super. Ct. App. Div. 1989), the court explained:
Suppose for example that a building has been [damaged] by fire. Suppose that
the building was located in a municipality whose ordinance required that it
be totally razed within a stated period of time. [Footnote omitted.] Despite
governmental compulsion on the owner to comply with such an ordinance, he
could not reasonably expect his comprehensive general liability insurer to
indemnify him for the costs of rebuilding or demolition. Rather,… it is a
claim against the insured for damage to property of someone other than the
insured which triggers the insurers' obligation to indemnify, not merely
a coercive claim by the government.
Source Remediation Theory
The fourth common law exception created by the courts to evade the 1973
"owned property" exclusion is the Source Remediation Theory. Under
this theory, courts reason that if the policy covers damage caused by pollution
that is actively contaminating the groundwater or surrounding properties, the
cost of entering the insured's property to remediate the source of that
contamination should be covered as well. See, for example, Domtar, Inc. v. Niagra Falls Ins. Co., 563 N.W.2d 724 (Minn.
1997) ("[I]f there is actual injury and an existing threat to third-party
property (whether private or public), then cleanup on the insured's own
property that is designed to protect third-party property is not
excluded.").
The Source Remediation Theory appears to have been based on public policy
concerns. Nothing in the text of the 1973 "owned property" exclusion
would appear to permit an exception where the insured has incurred a legal
obligation to correct damage to its own property for the sake of preserving
third-party property. However, applying the "owned property"
exclusion in such a manner as to permit coverage for the third-party damage but
denying coverage to remediate the source of that damage would arguably violate
public policy.
"Threatened" Off-Site Contamination
The fifth common law exception that courts developed to conduct an "end
run" around the 1973 "owned property" exclusion applies in
situations where remediation efforts are required on the insured's site to
prevent the spread of contaminants to third-party property or the groundwater,
even where the pollution has not reached them yet. In Vann v. Travelers Cos., 39 Cal. App. 4th 1610, 46 Cal. Rptr.
2d 617 (Ct. App. 1st Dist. 1995), the court reasoned:
Even if off-site migration has not yet occurred, as Travelers emphasizes, we
do not believe that the standard "owned property" exclusion should
automatically defeat coverage in suits seeking "cleanup" costs
designed to prevent damage to third parties. In the unique context of
environmental contamination, where immediate corrective action can be far
more economical than remediation and restoration of polluted property and
groundwater, it serves no legitimate purpose to assert that off-site
migration and groundwater pollution must actually occur before it can be said
there is a potential for coverage.
Not all courts agreed that costs to remedy the threat that pollution would
spread to other property would escape the operation of the 1973 "owned
property" exclusion. The court in State v. Singo
Trading Int'l, Inc., 130 N.J. 51, 612 A.2d 932 (1994), gave three
reasons for this. First, a 1973 CGL policy only covers "property
damage" that occurs during the policy period. Therefore, the "owned
property" exclusion could not be used to expand coverage to the threat of
future property damage that may occur after the policy
period. Second, the definition of "property damage" in the CGL
pertains only to existent property damage, and "does not
encompass 'threatened harm' even if that threat is 'imminent'
and 'immediate.'" Third, "public policy considerations alone
are not sufficient to permit a finding of coverage in an insurance contract
when its plain language cannot fairly be read otherwise to provide that
coverage."
"Alleged" Off-Site Contamination
The last common law exception to the 1973 "owned property"
exclusion is perhaps the most controversial. Some courts (particularly in
California) held that CGL insurers must defend insureds where the complaints
against them merely alleged that the pollution reached third-party
property or the groundwater. To these courts, it does not matter whether the
insurer has evidence that the pollution in fact was confined to the
insured's premises, particularly where the policy requires a defense of
"groundless, false, or fraudulent" claims. See, e.g.,
Wausau Underwriters Ins. Co. v. Unigard Security Ins.
Co., 68 Cal. App. 4th 1030, 80 Cal. Rptr. 2d 688 (Ct. App. 2d Dist.
1998); A-H Plating, Inc. v. American Nat'l Fire
Ins. Co., 57 Cal. App. 4th 427, 67 Cal. Rptr. 2d 113 (Ct. App. 2d Dist.
1997); Reese v. Travelers Ins. Co., 129 F.3d
1056 (9th Cir. 1997) (applying California law).
Insurance Services Office, Inc. (ISO), Policy Fixes
Courts poked so many holes in the 1973 "owned property" exclusion
that it hardly ever ended up excluding anything. Therefore, ISO began
introducing new policy language that was designed to counteract many of the
theories the courts had developed. Among others, ISO implemented the following
policy fixes in a 1984 pollution endorsement (CG 21 33) and/or the 1986 version
of the CGL coverage form itself.
-
ISO modified the text of the pollution exclusion so that it applied to
"actual, alleged, or threatened" discharges of
contaminants.
-
ISO revised the pollution exclusion to state that there was no coverage
for pollution discharges "[a]t or from premises owned, rented or
occupied by the named insured." The "at or from" language
foreclosed coverage under several common law theories, including
groundwater contamination emanating "from" the insured's
premises.
-
ISO added a new paragraph to the pollution exclusion prohibiting
coverage for "[a]ny loss, cost or expense arising out of any
governmental direction or request that the named insured test for, monitor,
clean up, remove, contain, treat, detoxify, or neutralize pollutants."
The new language foreclosed the "government cleanup" theory, that
the "owned property" exclusion did not apply to the legal cost of
cleaning up a nuisance as required by a governmental agency.
-
ISO eliminated the phrase "groundless, false, or fraudulent"
from the CGL duty to defend provision. Therefore, if independent evidence
showed that the allegations of actual contamination of groundwater or
neighboring property were false, the insurer could now bring an
interlocutory declaratory judgment action to defeat the duty to defend.
More Information
Subscribers to Pollution Coverage
Issues in IRMI Online or Vertifore ReferenceConnect can access
additional information on this subject, including the following:
A full analysis of each of the common law exceptions outlined here,
including all known cases to have adopted or opposed each exception (IRMI Online;
Vertifore ReferenceConnect)
A complete listing of the state statutes declaring that groundwater is owned
by the public (IRMI
Online;
Vertifore ReferenceConnect)
A complete description of all of the ISO policy fixes discussed here plus
several others (IRMI Online;
Vertifore ReferenceConnect)
A table showing which states have adopted one or more of these exceptions.
(IRMI Online;
Vertifore ReferenceConnect)
A hyperlinked map allowing the subscriber to click on a state and be taken
to a table listing and describing pertinent cases from that state; and
(IRMI Online;
Vertifore ReferenceConnect)
A series of charts citing and summarizing the holdings of approximately 85
cases on this subject. (IRMI
Online;
Vertifore ReferenceConnect)
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