Expert Commentary

No CGL Pollution Exclusion Ambiguity Due to Breadth of Exclusion

Pollution exclusions in a contractor's commercial general liability (CGL) policies precluded a contractor from receiving reimbursement for its defense cost when it was sued for alleged property damage and bodily injuries resulting from its use of fly ash in a construction project. The Tenth Circuit Court of Appeals, applying Utah law, held that the pollution exclusions in the policy were clear and not ambiguous and that the allegations in the underlying complaints fell within the exclusions.

February 2015

In the litigation that subsequently gave rise to Headwaters Res., Inc. v. Illinois Union Ins. Co., 770 F.3 885 (10th Cir. 2014), residents of Chesapeake, Virginia, sued Headwaters Resources, Inc., and VFL Technology Corp. ("Headwaters") in Virginia state court, claiming that pollution generated by the defendants had caused them property damage and bodily injury. Specifically, the plaintiffs alleged that the defendants used toxic fly ash during construction of a golf course and that dispersal of the fly ash contaminated the air as well as ground and surface water.

During the years that the alleged property damage and personal injury occurred, Headwaters was insured under annual CGL insurance policies issued by Illinois Union Insurance Company and ACE American Insurance Company ("ACE"). These policies required ACE to reimburse Headwaters for expenses incurred in defending a suit when damages due to "bodily injury" or "property damage" within the scope of coverage were alleged. However, all of the policies had exclusions for injuries caused by pollution. Although the exclusions in the various policies were not identical, they were similar, and all were forms of the "total pollution exclusion."

ACE denied Headwaters' claim for reimbursement of the cost of defending the Virginia lawsuits, stating that the events giving rise to the claims fell within the pollution exclusions. Headwaters then filed a complaint against ACE in federal court in Utah, Headwaters' principal place of business, alleging breach of the insurance contracts and bad faith in denying coverage. ACE moved for summary judgment on the complaint, arguing that the pollution exclusions expressly precluded coverage. The district court found that, because the sole cause of the plaintiffs' claimed injuries was alleged pollution of the type that fell within the pollution exclusions in all of the policies, there was no coverage. The court granted summary judgment in favor of ACE. Headwaters appealed.

Headwaters' primary contention on the appeal was that the district court recognized, but failed to appreciate, the effect of ambiguities in each policy's pollution exclusion. According to Headwaters, those ambiguities precluded granting summary judgment in favor of ACE. The appeals court disagreed and affirmed the district court's ruling, finding that the pollution exclusions were not ambiguous, and the allegations in the underlying complaints fell within the pollution exclusions of the policies.

In discussing the case, the appeals court noted:

Since the 1970s, the extent to which pollution exclusions apply to preclude coverage in commercial general liability (CGL) policies has been a ubiquitous feature of insurance litigation. Generally speaking, jurisdictions that have addressed the scope of the "total pollution exclusion" fall into one of two camps: (1) courts that apply the pollution exclusions as written because they find them clear and unmistakable; and (2) courts that narrow the exclusions to "traditional environmental pollution," often because they find the terms of the exclusion to be ambiguous due to their broad applicability.

The Utah Supreme Court has not yet weighed in on this debate, and the district court did not pick a side on its behalf. Instead, the district court found that certain of the at-issue pollution exclusions unambiguously applied to bar coverage and that the remaining pollution exclusions, although possibly ambiguous, still applied because the complaints unquestionably alleged traditional environmental pollution.

The Eight-Corners Rule

In duty-to-defend cases, Utah applies the so-called eight-corners rule—an insurer's coverage liability is determined by comparing the allegations within the four corners of the complaint to the language contained in the four corners of the insurance policy. To avoid a duty to defend, the insurance company must demonstrate that none of the allegations in the underlying claim are potentially covered. However, before applying the eight corners rule in this case, the court had to address Headwaters' claim that the pollution exceptions were ambiguous.

Headwaters' Claim of Ambiguity

Headwaters argued that the pollution exclusions were so broad that they barred coverage for events arising from Headwaters' regular business activities and that such a broad exclusion on normal business practices results in ambiguity. The appeals court disagreed, stating that the fact that policy provisions may apply broadly to bar coverage does not make them ambiguous. The court also noted that they were unaware of a categorical rule that prohibits a normal business activity from also producing pollution, stating "we have frequently concluded that the routine commercial activities of the insured can occasion application of a CGL policy's pollution exclusion to bar coverage under Utah law."

The court cited to a Utah Supreme Court decision, Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 931 P.2d 127 (Utah 1997), which stated that when incidents of pollution appear to be more like normal business activities, the costs of cleanup should be included in the normal cost of business.

In rejecting Headwaters' argument that the comprehensiveness of the pollution exclusions revealed ambiguity within the policies because literal application of the exclusions abolished all coverage, the court noted that the pollution exclusions, while far-reaching, did not abolish all coverage. Specifically, the court noted that, while Headwaters' business might generate more pollution than the average CGL policyholder, it did not agree that Headwaters had no coverage under ACE's CGL policy because pollution from its normal business activities was not covered. The court pointed out that Headwaters had coverage for foreseeable claims in many instances, such as a pedestrian injured in a slip-and-fall on company property. The court also pointed out that Headwaters could purchase additional special-purpose coverage that provided more comprehensive coverage for the environmental pollution risks associated with its business.

Good Faith

Finally, the appeals court agreed with the district court that ACE had not violated its duty of good faith in refusing to defend the Virginia lawsuits. The court stated, "Where an insurance contract indicates that the scope of coverage is defined by the allegations in the underlying complaint, then the insurer's only obligation is to compare the complaint to the policy to determine whether the occurrence is covered." Thus, to meet its obligation of good faith, ACE only needed to compare the allegations in the complaints to the policies and timely communicate its coverage decision to the insured.

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