Today's basic or unendorsed Insurance Services Office, Inc. (ISO),
commercial general liability (CGL) coverage form policy (the April 2013
edition) provides very little pollution coverage. Policyholders would do well
to either extensively amend their CGL or obtain separate pollution coverage for
more than minimal or incidental pollution exposures.
One of the most litigated portions of the CGL policy, the "pollution
exclusion," has vexed policyholders and insurers alike for over 30 years.
Why such confusion and controversy? What exactly does the CGL policy exclude as
pollution? What pollution coverage, if any, is left? This article will offer
some responses to those questions and attempt to provide some explanations as
to how the "pollution exclusion" applies.
A Historical Perspective
The late 1970s and early 1980s saw two major environmental laws enacted that
dramatically changed the way our society and the law viewed environmental
contamination. Responsibility for the environment that had never before existed
was now being imposed on business and industry with the passage of two federal
laws: the Resource Conservation and Recovery Act (RCRA) and Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA).
The former regulated and tracked the life cycle of hazardous waste, the
latter provided the US Environmental Protection Agency (EPA) broad authority to
respond to releases of hazardous substances. CERCLA, also known as Superfund,
imposed liability, without regard to fault, on those deemed
responsible for environmental contamination, including strict liability for the
cost of cleanup and remediation. The liability imposed was also joint and
several, meaning everyone that was deemed responsible was liable for the full
amount of the cost—both separately and collectively. State environmental laws
and resulting regulations with similarities to the federal laws and regulations
soon followed. While these environmental laws are far more complex than is
pertinent here, their effect was clear—environmental contamination that had
been tolerated for many years was not only to be stopped but had to be cleaned
up.
In accordance with the new laws, federal and state environmental authorities
began sending out letters to businesses and organizations, called potentially
responsible party (PRP) letters (or the state equivalent), putting all on
notice of their potential legal obligations to clean up the entire contaminated
site. If your business or organization's name appeared on an RCRA manifest,
it was inescapable that you would receive a PRP letter.
This was the backdrop for testing of the then-current sudden and accidental
CGL pollution exclusion, as well as an impetus for the development of the
absolute CGL pollution exclusion.
The Comprehensive General Liability Policy—Sudden and Accidental
Testing of the sudden and accidental CGL pollution exclusion began when the
businesses or organizations started to tender to their insurers' demands
pursuant to the new environmental laws and regulations, seeking defense of
these government orders and reimbursement of remediation costs being imposed.
Insurers began to review these claims and frequently determined contamination
had been taking place over an extended period of time—in some cases, for almost
100 years—and concluded that such claims were not "sudden and
accidental" and, therefore, denied coverage.
As large sums were involved, litigation quickly followed. Although many of
the claims were the result of years of accumulated contamination, some courts
found CGL coverage still applied and found that "sudden and
accidental" pollution exclusion wording was ambiguous or should be read to
mean "unexpected or unintended." The following is an example.
If the foregoing readings of the words "sudden" and
"accidental" are given effect, the phrase "sudden and
accidental" could be synonymous with the phrase "unintended and
unexpected." St. Paul Fire v. McCormick & Baxter
Creosoting, 923 P.2d 1200,1217 (Ore. 1996)
In a few other states, policyholders' counsel asserted that insurers
should be prevented from applying the pollution exclusion unless the insured
intentionally discharged a pollutant. This position stemmed from
representations made to regulators that adding the "sudden and
accidental" pollution exclusion to the CGL policies in 1970 did not
decrease coverage. In short, several courts adopted this "regulatory
estoppel" approach,1 concluding the insurance
industry cannot assert one coverage position when filing the policy change and
another when a claim is made by a policyholder.
In misrepresenting the effect of the pollution-exclusion clause to the
Department of Insurance, the IRB misled the state's insurance regulatory
authority in its review of the clause, and avoided disapproval of the
proposed endorsement as well as a reduction in rates. As a matter of equity
and fairness, the insurance industry should be bound by the representations
of the IRB, its designated agent, in presenting the pollution-exclusion
clause to state regulators. Morton Intern. v. General Acc. Ins.,134
NJ 1, 76 (NJ 1993)
In such states, insurers were ordered by courts to pay hundreds of millions
in remediation costs. Perhaps more importantly, insurers concluded what was
needed was a "bulletproof" pollution exclusion—one that would be
upheld by the courts. As the insurers saw it, absent an enforceable pollution
exclusion, the alternative was to not offer any liability
coverage—contributing to the liability crisis of the mid- and late 1980s.
The Absolute Pollution Exclusion
Rushed to the market as an endorsement to the 1973 nonsimplified
comprehensive general liability policy in early 1985, the absolute pollution
exclusion changed the CGL policy wording to remove coverage for bodily injury
or property damage that arose from the release of pollutants, regardless of
whether pollutants were released quickly or gradually. However, fearing some
courts may negate any pollution exclusion wording and still find
coverage, ISO felt compelled to file an extraordinarily broad exclusion for
pollution—one that potentially eliminated coverage for claims that were
traditionally intended to be provided by a CGL policy.
ISO Comments and Publications
Minutes of an October 25, 1984, ISO Underwriting/Legal Review Committee
provide some insight into the mindset of ISO when drafting this new “absolute
pollution exclusion.”
The Committee agreed that the proposed language for this exclusion
accomplishes a ‘total pollution’ exclusion (except for ‘products’) in the CGL
policy. However, such an exclusion precludes some bona fide fortuitous loss
which should be insurable under a CGL policy.
Incorporated into the basic simplified CGL policy in 1986, ISO offered the
following explanation of the new pollution exclusion in their Commercial Lines
Manual, Division Six—General Liability, 1985 (page 4).
Pollution Liability—The new pollution exclusion
differs from the old exclusion in the following ways:
- There is no distinction between sudden/accidental and gradual
events.
- All pollution coverage for bodily injury/property damage is
excluded under most circumstances, including the following
situations:
- The emission originates on the insured’s premises.
- The emission originates from a waste disposal or treatment
site.
- The pollutants are handled or treated as waste.
- The emission comes from a site where operations are being
performed by the named insured or a subcontractor, and the
pollutants are brought onto the site in connection with the work
being done, or if the work involves containment or treatment of
pollutants.
- Cleanup costs and similar costs are specifically excluded.
Pollution arising from Products/Completed Operations hazard is
covered under the new policy.
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The above is still a useful reference guide regarding the general
scope of the CGL pollution exclusion. Because several subsequent changes were
made to the CGL pollution exclusion, a complete analysis of the exclusion
requires giving full consideration to the actual wording, including all of the
numerous subsequent changes, all of which refine the scope of coverage.
From Ancient History to Present Day
While a few of the changes that have been made to the CGL pollution over the
past 30 years have been to "strengthen" the exclusion, most of the
changes were an exception to the certain sections of the exclusion necessitated
in response to a number of overreaching coverage denials. But such exceptions
aside, misuse of such a broadly drafted "absolute" pollution
exclusion was both foreseeable and inevitable—and continues today, perhaps a
little less frequency than when first introduced. After all, ISO's
committee did voice the concern that the "absolute" pollution
exclusion, as drafted, "precludes bona fide fortuitous loss which should
be insurable under a CGL policy." To add context, at the time, it appears
ISO was willing to sacrifice coverage that should have been provided by the CGL
policy as a trade-off for developing a pollution exclusion that would be
enforceable.
All of this is to say that an understanding of today's CGL pollution
exclusion requires some insight into the exclusion's historical
development. Thus, the preceding history lesson may be as important today as it
was in the 1980s.
The CGL Pollution Exclusion—The First Paragraph (f. (1))
Bodily Injury or Property Damage Arising out of Pollution.
The first section of the pollution exclusion f. (1) does not exclude
pollution—it excludes bodily injury or property damage arising out of
the release of a pollutant. This is no small matter—the exclusion may still be
applied when there is no pollution, at least in the general sense of
the word, which usually involves some form of environmental contamination. And
the resulting bodily injury or property damage must only arise out of
the release of the pollutant. "Arising out of" indicates a wider
range of causation than proximate causation.2 Most
courts have determined that "arising out of" requires only some
causal relationship or connection between the bodily injury or property damage
and the excluded risk. In this instance, the excluded risk is the release of a
pollutant.
Slip and Fall. Consider a container of motor oil that is
accidentally knocked off the shelf of an auto parts store, bursting open when
hitting the floor and releasing the motor oil. When a passing patron slips on
the motor oil, falls, and suffers bodily injury, the patron's claim against
the auto parts store would not normally be considered a pollution claim but
rather a slip and fall claim. In other words, a release from a small container
of motor oil can be easily cleaned by using absorbent materials and would
hardly be deemed environmental contamination. Nonetheless, this claim is bodily
injury that arises out of the release of a pollutant—and insurers have argued
the auto parts store's CGL policy pollution exclusion eliminates coverage
for this slip and fall claim. This is but one example of the peculiar
consequences of applying a literal reading of the CGL absolute pollution
exclusion to certain claims.
Here are a couple of additional examples of rather notorious insurer
coverage denials citing the CGL "absolute" pollution exclusion, all
of which have resulted in ISO drafting additional exceptions to the pollution
exclusion.
- Fumes from flooring material being applied by a contractor that damaged
food products stored on-site
- Carbon dioxide released by a leak in a vent stack of a heating boiler
that resulted in injury to others
- Smoke from a hostile fire that resulted in property damage
Traditional Environmental Damage. Some courts have
responded to a literal reading of the pollution exclusion—for example, the slip
on the motor oil—by ruling the exclusion applies only to bodily injury or
property damage that results from traditional environmental damage. Traditional
environment damage would be typified by industrial pollution of the atmosphere,
water, ground, or groundwater. Such courts would not apply the CGL pollution
exclusion to the motor oil slip and fall claim. The following is an
example.
Our review of the history of the pollution exclusion amply demonstrates
that the predominate motivation in drafting an exclusion for
pollution-related injuries was the avoidance of the "enormous expense
and exposure resulting from the 'explosion' of environmental
litigation." We would be remiss, therefore, if we were to simply look to
the bare words of the exclusion, ignore its raison d' etre, and
apply it to situations which do not remotely resemble traditional
environmental contamination.
Given the historical background of the absolute pollution exclusion and
the drafters' continued use of environmental terms of art, we hold that
the exclusion applies only to those injuries caused by traditional
environmental pollution. The accidental release of carbon monoxide in this
case, due to a broken furnace, does not constitute the type of environmental
pollution contemplated by the clause. American States Ins. Co. v.
Koloms, 687 N.E.2d 72,81,82 (Ill. 1997).
Of course, the pollution exclusion says nothing about traditional
environmental damage or industrial pollution of the atmosphere, water, ground,
or groundwater.
In fact, not only is the term "pollution" not defined in the CGL
policy, it does not appear anywhere within the exclusionary wording.
Whether the policyholder has caused pollution is irrelevant to the strict
application of this exclusion. While some courts, as above, have looked
beyond such a strict interpretation and have allowed coverage when no
environmental damage occurred, court interpretation is decidedly mixed on this
issue. Some courts have outright rejected the notion that the pollution
exclusion applies only when environmental damage takes place.
Looking through the prism of what one might expect to find based on this
previously determined "purpose" and "historical
evolution," the dissenters concluded that the pollution exclusion clause
"can" reasonably be read as being "limited to what is
commonly or traditionally considered environmental pollution." Nothing
in the text of the pollution exclusion clause supports such a reading. In
short, the dissenters' focus on extra-textual sources of interpretation
led them to find ambiguity in the pollution exclusion clause where there is
none. Reed v. Auto-Owners Ins. Co., 667 S.E.2d 90, 92 (Ga. 2008)
"Pollutants." What is very relevant and is
defined (in the CGL's definition section) is the term
"pollutant," the understanding of which is central to the pollution
exclusion. "Pollutant" is a very expansive term that includes just
about any type of irritant or contaminant, whether it is a solid, liquid, gas,
or by heat (thermal). The definition specifically mentions but is not limited
to smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.
Substances that would normally be expected to be considered
"pollutants," and which have been found by courts to be
"pollutants," include ammonia, benzene, chemical fumes, DDT,
petroleum, diesel fuel, oil, waste oil, insecticide, PCB, and TCE.
Some substances that may not normally be considered "pollutants"
have been found by courts in some circumstances to be "pollutants,"
including cement dust, foundry sand, manure, salt water, sewage, and skunk
spray.
The Pollution Exclusion—Part One—f. (1)
At the outset, the very first paragraph of the pollution exclusion
establishes that, in order to activate the exclusion, there must first be a
pollutant that has some causal connection to bodily injury or property damage.
And that the pollutant can travel in any number of ways, as expressed in the
wording "actual, alleged or threatened discharge, dispersal, seepage,
migration, release or escape." But this first paragraph only provides the
preliminary measure for applying the exclusion—subparagraphs (a) to (e) and the
exceptions in each subparagraph, when read together with paragraph f. (1),
provide the specific circumstances to which the exclusion applies.
Exclusion f. 1. (a)—"Premises." The first set of
circumstances in which the exclusion applies is related to premises or site
pollution. That is, exclusion f.(1)(a) applies to releases or escapes of
pollutants at or from any premises, site, or location owned, occupied, rented,
or loaned to any insured at any time. This premises exclusion is very
broad—the insured's connection to the premises does not have to be
current—it could involve a past location or site that was rented or owned
decades ago. But there are three exceptions to the "premises"
pollution exclusion—meaning the exclusion would otherwise apply but does not
apply to the circumstance described in the exceptions. The three exceptions are
the following.
- Building Heating Equipment Exception—f. (1)
(a)(i). Bodily injury sustained within a building caused by fumes,
smoke, vapor, or soot from equipment used to heat, cool, or dehumidify the
building is covered. The exception also applies to equipment used to heat
water, but only water for personal use by the building's occupants or
guests. The commonly litigated claim made by tenants against landlords for
bodily injury caused by fumes from a faulty boiler or furnace is no longer
excluded—and thus, this is an important exception.
- Owner as Additional Insured Exception—f. (1)
(a)(ii). Bodily injury or property damage away from the named
insured's premises is covered if the named insured is a contractor, and
the exception applies even if the site's owner is listed as an additional
insured on the named insured contractor's CGL policy. Absent this
exception, a contractor may not have coverage under its own CGL policy for
operations away from the contractor's own premises solely because the
owner is listed as an additional insured on the contractor's CGL policy.
Recall the premises pollution exclusion applies to any insured that occupied
any site at any time—this exception restores coverage for the circumstances
described here.
- Hostile Fire Exception—f. (1) (a)(iii). Coverage applies
to bodily injury or property damage arising from heat, smoke, or fumes from a
"hostile fire." A "hostile fire" is a fire that becomes
uncontrollable or breaks out from where it is intended to be. For instance,
if a chemical plant catches fire, releasing toxic fumes into the
neighborhood, any resulting bodily injury is covered.
Exclusions f. (1) (b) and f. (1) (c)—"Waste." The
second set of circumstances to which this exclusion applies is to waste. Waste
includes but is not limited to materials to be recycled, reconditioned, or
reclaimed. This portion of the exclusion has no exceptions—waste is excluded
regardless of where or how it causes bodily injury or property damage. For
example, it is customary for an auto repair shop or an auto dealership to
handle and store small quantities of motor oil that have been removed from
customers' motor vehicles. Any bodily injury or property damage arising
from this used motor oil is excluded, including at an off-site oil disposal
facility owned by others but used by the auto repair shop or dealer.
Exclusion f.(1)(d)—"Away from Your
Premises." This portion of the exclusion applies to the third set
of circumstances. It applies to the site, location, or premises of
others where any insured (or any of the insured's contractors or
subcontractors) are performing (present tense) operations if the pollutants
are brought to the premises by the insured or their contractors or
subcontractors in connection with the operations. In other words,
unlike the first set of circumstances (f. (1) (a)), which applies to almost any
activity or use of your premises, subparagraph f. (1) (d) of the exclusion is
significantly more limited. This section of the exclusion applies only to
circumstances when the insured (or the insured's contractor or
subcontractor) has brought the pollutants to the site, location, or premises of
others to do a job and the pollutants are released while the job is
being performed. This section of the exclusion is sometimes applied to a
painting contractor that spills or oversprays paint that ends up in well water.
There are, however, at least three instances when this section of the exclusion
does not apply, even if the insured brings pollutants to the location or site.
The three exceptions are the following.
- Mobile Equipment Exception—f. (d) (i). Coverage applies
to releases from the insured's mobile equipment if the pollutants are
for the normal operation of the mobile equipment, such as diesel fuel,
motor oil, or hydraulic fluid if they escape from a vehicle part
designed to hold such pollutants. This exception does not apply if the
release is intentional, such as oiling down a road prior to paving. As an
example of how this exception might apply, consider a contractor who hits a
large boulder with a bulldozer and rips open the diesel fuel tank, causing
the diesel fuel to wash into the nearby wetlands. Coverage applies to
property damage caused by the diesel fuel.
- Operations within Building Exception—f. (d) (ii). If an
insured or its contractors (or subcontractors) are performing operations,
releases of fumes, gases, or vapors from materials brought into the building
in connection with the operations are covered if the bodily injury or
property damage is sustained within the building. This exception would
provide coverage if fumes from varnish make tenants ill after a flooring
contractor has brought the varnish into the building to finish the hardwood
floors of an office building.
- Hostile Fire Exception—f.(d) (iii). The "hostile
fire" exception also applies away from the premises—if bodily injury or
property damage arises from heat, smoke, or fumes from a hostile fire
away from an insured's premises, coverage applies.
Exclusion f. (e)—Away from Your Premises—Environmental
Services. This fourth set of circumstances eliminates coverage if any
insured or an insured's contractors or subcontractors are involved in
performing certain environmental services, such as testing, cleaning up,
treating, or responding to pollutants. There are no exceptions to this portion
of the exclusion.
Products and Completed Operations.
Bodily injury or property damage arising out of an insured's products or
completed operations is not eliminated by the paragraph f. (1), subparagraphs
(a) to (e), of the CGL pollution exclusion. In other words, if pollutants
escape or are released from an insured's product or from an insured's
completed operations—both defined in the CGL policy—and that release or escape
results in bodily injury or property damage, in most cases, the pollution
exclusion does not apply. As noted in the text box, ISO offered this
explanation of the "absolute" pollution exclusion: "Pollution
arising from products/completed operations hazard is covered under the new
policy."
However, even the exception to the exclusion for products or completed
operations is not without qualification—based on the facts, it is conceivable
the exclusion may apply. For instance, if an insured's product is
considered waste, coverage would be excluded, despite the exception for
products, as subparagraph f. (1) (b) and (c) applicable to waste sweeps
broadly.
The Pollution Exclusion—Part Two—f. (2)
As the second paragraph of the pollution exclusion, f. (2), is an
independent clause that stands alone, all of the previously noted exceptions to
paragraph f. (1) are potentially limited by f. (2).
The full text of paragraph f. (2) is the following.
- (2) 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."
From the beginning (in this case, 1985), f. (2) has removed coverage for
"cleanup and similar costs." A revision to f. (2) in 1988
"strengthened" this portion of the exclusion to eliminate coverage
for "any loss, cost or expense arising out of any …
request, demand or order that any insured … clean up, remove, contain,
treat, detoxify … or in any way respond to … pollutants." Further, also
expressly excluded are claims or suits "by a governmental authority for
damages because of testing for, monitoring, cleaning up, removing … or in any
way responding to … the effects of pollutants."
The Dilemma. At first blush, exclusion f. (2) appears to be
a total exclusion for any cleanup of pollutants. How can pollution coverage be
provided in the CGL (by the limited exceptions) and yet seem to completely
exclude all cleanup costs? More to the point—how can ISO's representations
of coverage based on exceptions to the pollution exclusion—for example, the
exception for products and completed operations—be reconciled with the
exclusionary wording in f. (2)? More than one insurer has pointed to paragraph
f. (2) of the CGL pollution exclusion to deny coverage for property damage that
clearly falls into an exception to f. (1).
A Potential Solution. First introduced in the July 1998
edition of the CGL, and included in today's ISO CGL policy, is a paragraph
added to f. (2). According to the accompanying ISO circular, "Coverage is
also clarified with respect to certain third-party property damage claims with
respect to cleanup by indicating paragraph (2) of the exclusion does not
nullify coverage not excluded by paragraph (1) of the exclusion." The
added paragraph that modifies f. (2) states the following.
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.
Simply stated, the above property damage exception to f. (2) of the
pollution exclusion means f. (2) does not apply to damages resulting from
property damage (as defined in the CGL and that fall within an exception to f.
(1)) if liability for those damages was may be imposed in the absence of
environmental laws or regulations—or a government authority acting in
accordance with those environmental laws or regulations.
That exclusion f. (2) applies only to government-mandated cleanup costs
pursuant to environmental laws or regulations and not to tort damages has been
recognized by the courts.
Obviously not excluded [by paragraph f. (2)] are any pollution-related costs,
or expenses that do not arise "out of any request, demand or order that
[an insured] monitor, clean up, remove [etc.] pollutants." The
complaint, however, also alleges Blue Cross was damaged by having to …
dispose of and recycle contaminated soil, and repair damage to its property
where the leak occurred. None of these activities were requested, ordered, or
demanded by the Los Angeles Fire Department, or any other agency as far as
the evidence is shows. Therefore, these activities do not fall within the
[paragraph f. (2)] pollution exclusion. Charles E. Thomas v. Transamerica
Ins. Group, 62 Cal. App. 4th 379, 383, (Cal Ct. of App. 2d
Dist. 1998)
An Illustration.3 A
construction contractor is performing operations for a chemical manufacturer
whose facility is located on a lake. In the course of the operations, the
contractor's equipment ruptures a chemical storage tank and causes toxic
chemicals to spill out onto the land.
Because the contractor did not bring the pollutants to the premises, none of
the subparagraphs found in paragraph f. (1) of the pollution exclusion apply to
this release of pollutants—the first section of the pollution exclusion does
not apply. As a result of this incident, the contractor ultimately faces the
following three legal actions.
- The contractor is sued by the chemical manufacturer, who must incur
considerable expense in having the contaminated soil removed from the
premises for the land to be usable again. The contractor's CGL insurer
will pay these cleanup expenses, as the cleanup costs represent damages
because of property damage, and the source of the contractor's liability
is not an environmental regulation or order but rather common law negligence.
This is the purpose of the above-noted property damage exception to f.
(2)—paragraph f. (2) should not be used to nullify coverage not excluded by
any of the subparagraphs of paragraph f. (1) of the pollution exclusion. In
other words, the CGL policy applies in exactly the same manner as it would
if, instead of polluting the claimant's land, the insured had
accidentally damaged the claimant's house with a bulldozer.
- Because of the possible release of escaping chemicals into the lake, the
state environmental authority orders the manufacturer to conduct tests and
establish an ongoing monitoring operation to detect possible water pollution.
The manufacturer seeks recovery of the cost of these operations from the
contractor. As these costs constitute a "demand that any insured or
others test for pollutants," f. (2) of the pollution exclusion
applies. The contractor's CGL insurer will not be responsible for paying
the government-ordered monitoring and testing costs.
- After the presence of chemicals in the lake is detected, the state
environmental authority hires an environmental services company to treat the
water in an attempt to neutralize the effects of the pollutant. Having
determined that the contractor has caused the pollution incident, the state
environmental authority demands, pursuant to the appliable environmental
regulation, the contractor pay the cost of the cleanup operation. This claim
is also excluded by f. (2) as it is a "claim by or on behalf of an
environmental authority for damages because of … cleaning up …
'pollutants.'"
A Troubling Situation. As a practical matter, due to the
expansive nature of environmental laws and regulations, a vast majority of
liability for cleanup costs may be imposed on an insured because of
such laws or regulations.
In the above illustration, it may be more common for the environmental
authorities to not only order testing and cleanup of the lake but also to order
the contractor to comply with appliable environmental laws and clean up the
contaminated soil. Of course, because the immediate source of the liability for
the soil remediation would not be tort damages but rather government-mandated
cleanup costs, a coverage denial may seem justified.
But such coverage denials overlook the limitations on f. (2) and read out of
the exclusion entirely the property damage exception to f. (2), which ISO
explained was to avoid nullifying coverage not excluded in the first section of
the exclusion—paragraph f. (1) and its subparagraphs. The better interpretation
of paragraph f. (2), when considered in light of the property damage exception,
is that f. (2) does not apply if the insured would have had liability
in tort for the damages because of the property damage. After all, the property
damage exception does state paragraph f. (2) does not apply to liability for
property damage that the insured would have in the absence of
statutory or regulatory requirements or claims by a governmental authority.
Just because the insured was ordered by a government authority to clean up the
pollution does not mean that the insured would not also have liability pursuant
to tort law for the cleanup costs. Stated differently, if the facts are that
the insured would have tort liability for the property damage,
exclusion f. (2) does not apply, even if the immediate liability for the
cleanup is by government order, regulation, or the law.
In the illustration, the contractor would have had liability for
the cleanup expenses, even if the manufacturer never filed a tort complaint
against the contractor. Coverage should not turn on the fact that the
environmental authority issued its order before the manufacturer filed a tort
complaint against the contractor. In other words, the insurer should not be
able to exclude coverage for the contractor based on the mere fortuity as to
whether the cleanup was initially imposed by an environmental authority issuing
a cleanup order instead of a private third-party seeking reimbursement for tort
damages.
Conclusion
The basic or unendorsed ISO CGL policy provides very little pollution
coverage. And, for the pollution coverage that may be afforded, insurers may be
tempted to apply the cleanup exclusion more broadly than warranted, despite the
applicable property damage exception. A policyholder with any significant
pollution risk, even in the area of exceptions to the exclusion, such as
products and completed operations, may not have adequate coverage under the CGL
policy.
Further, many insurers routinely replace the absolute pollution exclusion
found within the ISO CGL policy with a "total pollution exclusion"
endorsement, which has the effect of removing most, if not all, of the express
exceptions applicable to f. (1), subparagraphs (a) to (e). In any event,
policyholders would do well to either extensively amend the CGL or obtain
separate pollution coverage for more than minimal or incidental pollution
exposures.