Over the years, the pollution exclusion in commercial general liability (CGL) policies has provided something of a moving target for insureds, insurers, and underwriters.
CGL coverage for pollution-related losses has seen significant changes over the past 40 years. These changes have resulted both because of changes within the standard Insurance Services Office, Inc. (ISO), CGL policy and because of courts' inconsistent application of the term "pollution" in the CGL policy.
Historical Background on the Grandfather Pollution Exclusion
Up until 1973, CGL policies did not have a specific pollution exclusion. The 1973 edition CGL form was the first form to incorporate a specific "pollution exclusion" in the CGL policy. The 1973 form excluded bodily injury or property damage:
(1) arising out of pollution or contamination caused by oil or (2) arising out of the discharge dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon the land, the atmosphere or any water course of body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.
Source: Robert H. Jerry II and Douglas R. Richmond, Understanding Insurance Law, 4th ed. (2007), 535.
While this clause spans nearly 100 words, the last 3 words in the clause proved to be a hotly contested area between insurers and policyholders. The term "sudden and accidental" created scores of court decisions throughout the United States and resulted in various interpretations. Interestingly, though this language was eventually changed, a myriad of cases still arise today over the scope of the term "sudden and accidental."1
Birth of the "Absolute" Pollution Exclusion
Because of the confusion resulting from the 1973 policy and an increase in exposure caused by federal regulations such as the Comprehensive Environmental Response, Compensation, and Liability Act and other environmental cleanup issues, ISO responded in 1985 with a new pollution exclusion known as the "absolute pollution exclusion." This revised exclusion deleted the "sudden and accidental" language of the 1973 policy and revised the definition of "pollutants" to deny coverage for bodily injury or property damage arising out of the "actual, alleged or threatened discharge, dispersal, release or escape of pollutants." The policy defined pollutants as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed."
This language has remained largely intact since its inception in the 1985 form with three exceptions, all of which have broadened coverage over the years. These three exceptions are particularly important to owners, contractors, and subcontractors because the exceptions apply specifically to "any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing if the 'pollutants' are brought on or to the premises, site or location in connection with such operations by such insured."
The 1988 form included bodily injury and property damage from "heat, smoke or fumes from a hostile fire."
The 1996 form included bodily injury and property damage "arising out of the escape of fuels, lubricants, or other operating fluids which are needed to perform the normal electrical, hydraulic, or mechanical functions necessary for the operation of 'mobile equipment' or its parts, if such fuels, lubricants or other operating fluids escape from a vehicle part designed to hold, store or receive them."
The 1998 form included bodily injury and property damage "sustained within a building and caused by the release of gases, fumes or vapors from materials brought into that building in connection with operations being performed by you or on your behalf by a contractor or subcontractor."
As these exceptions to the absolution pollution exclusion indicate, the term "absolute pollution exclusion" is something of a misnomer because the exclusion does not apply absolutely. This has led many commentators to refer to the absolute pollution exclusion as the "broad form pollution exclusion."
The as-revised 1998 absolute pollution exclusion carried over verbatim to the 2007 form and will be incorporated in the soon-to-be-released 2013 form.
Total Pollution Exclusion
When ISO released the first exception to the absolute pollution exclusion in 1988, ISO offered a new endorsement called the "total pollution exclusion," which was designed to eliminate any coverage offered under the new 1988 form. Today, the total pollution exclusion is found in endorsement CG 21 49 09 99. This endorsement excludes coverage for all bodily and property damage that "would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time" (emphasis added).
There are also two "total pollution exclusion" endorsements that create some confusion because they are titled total pollution exclusion but maintain some exceptions. The first modified total pollution exclusion endorsement is the "Total Pollution Exclusion with a Hostile Fire Exception" (CG 21 55) endorsement. As its name suggests, this endorsement excludes all pollution-related exposures except for property damage and bodily injury "arising out of heat, smoke, or fumes from a 'hostile fire.'" The endorsement makes clear, however, that the endorsement does not include damages for hostile fires at hazardous-waste-type facilities. The second modified total pollution exclusion endorsement is found in the CG 21 65 endorsement. Like the CG 21 55 endorsement, this endorsement excepts hostile fires and also excepts "bodily injury" but not property damage if the bodily injury occurs within a building where insured contractors or subcontractors are working when the injury is caused by "smoke, fumes, vapor or soot produced by or originating from equipment that is used to heat, cool or dehumidify the building, or equipment that is used to heat water for personal use, by the building's occupants or their guests."
Recent Cases Interpreting "Pollution" under the CGL Policy
Given ISO's numerous endorsements specifying certain pollution-related perils that are covered or excluded, one may inaccurately assume that litigation over pollution exclusions in the CGL policy would have diminished, but recent court opinions demonstrate that confusion abounds concerning the definition of "pollutant." Universal application of the pollution exclusions remains an evasive target, and a consensus has not emerged from the numerous cases interpreting the absolute and total pollution exclusions. As one court interpreting a policy's pollution exclusion explained: "Our review and analysis of the entire body of existing precedent reveals that there exists not just a split of authority, but an absolute fragmentation of authority."2 In general, courts will either apply the exclusions literally because the terms are clear and unambiguous3 or limit the exclusions to situations involving traditional environmental pollution. These various interpretations can result in frustrating results for insurers and policyholders alike as total pollution exclusions in some jurisdictions can be interpreted more broadly than absolute pollution exclusions in other jurisdictions.
While not directly arising out of the construction context, a recent case from the Colorado Supreme Court, Mountain States Mut. Cas. Co. v. Roinestad, 2013 Colo. LEXIS 166 (Colo. Feb. 25, 2013), demonstrates a broad interpretation of the term "pollutant" under an absolute pollution exclusion. Roinestad involved a question of whether cooking grease could be considered a "pollutant" under the absolute pollution exclusion. There, the insured owned a restaurant that for years allowed employees to pour water and grease into the sewer system. Ultimately, the grease accumulated over time in the sewer and created a 5- to 8-foot clog in the system. Two noninsured workers went into the sewer system and eventually discovered the clog. When these workers tried to dislodge the clogged grease, they were "overcome by hydrogen sulfide gas" and "lost consciousness and fell into the manhole," resulting in bodily injuries.
The insurer successfully argued to the trial court that the cooking grease was a pollutant under the policy. The Colorado Court of Appeals reversed by finding that interpreting the absolute pollution exclusion in that manner deprived the policyholder of its reasonable expectations since a policyholder would not expect common cooking grease to be considered a pollutant. The Colorado Supreme Court, the final arbiter on the matter, agreed with the trial court and ruled in favor of the insurer, finding that cooking grease was a pollutant under the plain language of the policy.
By contrast, a Florida court interpreting a total pollution exclusion found in favor of the drywall subcontractor faced with claims for defective Chinese drywall in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Beta Const. LLC, 816 F. Supp. 2d 1256 (M.D. Fla. 2011). There, the insurer filed a motion for summary judgment that it did not owe any duties to the subcontractor because of the total pollution exclusion in the policy. The court disagreed and denied the insurer's motion for summary judgment as premature. It is interesting to note, however, that a different court in Florida found that the insurer was entitled to summary judgment in a similar defective Chinese drywall case in General Fid. Ins. Co. v. Foster, 808 F. Supp. 2d 1315 (S.D. Fla. 2011).
Given the different endorsements and interpretations of the absolute pollution exclusion and total pollution exclusion, it is important for owners, contractors, and subcontractors to understand the jurisdiction in which they are practicing and understand the terms of their policies and endorsements. Moving forward, owners, contractors, and subcontractors may want to consider purchasing specific contractors pollution liability insurance policies to ensure that the risks they are seeking to insure are protected.
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1 See, e.g., Wiseman Oil Co. v. TIG Ins. Co., 2013 U.S. Dist. LEXIS 14747 (W.D. Pa. Jan. 22, 2013); United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644 (N.M. 2012).
3 For a quintessential example that has been discussed by other contributors to IRMI, see Devcon Int'l Corp. v. Reliance Ins. Co., 609 F.3d 214 (3d Cir. 2010) (applying the terms of the policy to exclude coverage for dust-related injuries).