Common Law Exceptions to the 1973 "Owned Property" Exclusion

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.

1. Groundwater Contamination
2. Parens Patriae Theory
3. "Government Cleanup" Theory
4. Source Remediation Theory
5. "Threatened" Off-Site Contamination
6. "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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