The Sudden and Accidental Pollution Coverage Myth

Pollution exclusions have been the cause of more litigated insurance coverage disputes than any set of words in the history of insurance. The words "sudden" and "accidental" are at the root of many of these coverage disputes.

Looking at the insurance marketing slang used to describe pollution exclusions, it is not surprising that there is so much insurance coverage litigation over denied pollution-related claims. Insurance coverage litigation is created when insurance buyers think they are covered for a loss that the insurance company thinks is excluded. It turns out that insurance sellers and buyers and their lawyers often have some very different ideas about what sudden and accidental pollution might mean.

Sudden and Accidental Pollution Coverage

Representing a "pollution exclusion" as "pollution coverage" is a great way to create coverage litigation. It is still common to hear in the insurance brokerage community that "this policy has sudden and accidental pollution coverage."

Much of the new insurance coverage litigation over pollution exclusions in property and liability insurance policies could be avoided if the insurance marketing spin doctors could be reined in from developing feel-good words to disguise the effects of pollution exclusions. Sudden and accidental pollution "coverage" has as its foundation an exclusion in the comprehensive general liability insurance policy that has not been used for over 30 years. In my opinion, the use of the words "sudden and accidental pollution coverage" on new insurance policies should go the way of Greek myths; both make interesting reads, but neither is based on facts.

History of the Pollution Exclusion

The introduction of the first pollution exclusion over 40 years ago came at a time when new media attention was being given to human-caused environmental damage and degradation. In the 1960s, the mainstream media began covering pollution story lines and the harmful effects on human health and the environment in general. Happenings such as the surface of the Cuyahoga River catching fire because it was so polluted were brought into the public eye by the 6 o'clock evening news. Similarly, Rachel Carson's Silent Spring was published in 1962 and brought the environmental effects of synthetic pesticides to the attention of the public.

These and many other incidences acted as driving forces to an overhaul of US environmental protection laws, public policy, and governmental agencies. New legislation like the Superfund law and the creation of new governmental agencies such as the Environmental Protection Agency meant drastic changes in the liability faced by businesses and industries for pollution and environmental loss exposures.

The insurance industry's very predictable response to the changing and, therefore, unpredictable public attitude to make polluters pay for the damage they may cause was to introduce an exclusion to minimize the insurance companies' loss exposure to contamination and pollution claims. Starting in 1970, insurance rating organizations introduced mandatory endorsements that were intended to exclude contamination and pollution claims under general liability (GL) insurance policies.

The original contamination and pollution exclusion endorsement for GL policies contained an exception to the exclusion; if the pollution discharge, release, or escape of pollutants was "sudden and accidental," the exclusion did not apply.

The original pollution exclusion (f.) itself was relatively short and seemingly simple. As a point of reference, this is the 1971 version of the contamination and pollution exclusion endorsement with a sudden and accidental pollution exception in the GL policy.

It is agreed that this insurance does not apply to bodily injury or property damage 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 land, the atmosphere, or any watercourse or body of water; but this exclusion does not apply if such discharge, release, or escape is sudden and accidental.

In 1973, the Insurance Services Office, Inc., incorporated the wording from the pollution exclusion endorsement into the new comprehensive general liability policy under Exclusion (f.) Pollution, which was introduced as the industry standard GL policy form in that year.

Due to the creative work of insurance marketers, this new exclusion came to be known as "sudden and accidental pollution coverage" in the insurance business in the United States. Importantly for this discussion, the US insurance market completely abandoned the sudden and accidental exception to the pollution exclusion by the late 1980s. Today, insurance policies do not use the words "sudden" and "accidental" to define an exception to a pollution exclusion.

In the 1971 Fire, Casualty, & Surety Bulletin introducing this standardized pollution exclusion endorsement for the GL policy, the authors referred to the new exclusion as the contamination or pollution exclusion.

There are two significant points contained in that title of the endorsement. First, the authors of the pollution exclusion never called the new exclusion "sudden and accidental pollution coverage." Insurance marketing folks trying to put a positive spin on a new form of exclusion must have come up with the idea that the new exclusion could be sold as a new form of coverage if the right spin was used to describe the change in coverage. By any objective measure, referring to a brand-new exclusion as some form of new "coverage" has been an insurance marketing scam from day one. Since when is a new exclusion new coverage?

The second important point in the title of the new pollution exclusion endorsement was evidenced by the title of the endorsement. From the beginning days of pollution exclusions, the authors intended to exclude losses from contaminants in addition to pollution, which explains why pollution exclusions can be applied to losses arising from bacteria-contaminated sandwiches today. Confusion on what is a "pollutant" in an insurance policy has led to decades of unnecessary insurance coverage litigation, brought by policyholders who were surprised that pollution exclusions eliminate GL coverage for contamination-related losses.

Beginning in the early 1980s and continuing on to this day, policyholders submit claims under the GL policies that were in place when the environmental damage was incurred. In some cases, that includes GL policies that expired many decades ago.

Courts Respond

The ambiguity of the phrase "sudden and accidental" in the GL policy's pollution exclusion led to an onslaught of litigation over the meaning of the word "sudden." Courts were asked to determine, does sudden mean really darn quick? No one knew the answer. In insurance coverage litigation that could go on for over a decade, many courts gave up on trying to define sudden and took the stance that accidental meant "unexpected and unintended," and by doing so, found coverage under GL policies for pollution releases that took place over many years, if the claim resulting from pollution and, not the pollution itself, was unexpected and unintended.

Once the words "sudden and accidental" were made irrelevant by the courts in insurance coverage litigation, the insurance companies needed to come up with another way to exclude pollution losses from ongoing business.

The 1986 and Later Versions

In response to an onslaught of pollution and asbestos-related claims in the early 1980s and the general demise in the courts of the sudden and accidental wording in the pollution exclusion (f.), in 1986 the comprehensive general liability (CGL) policy was replaced with the more simplified and easier-to-use commercial general liability (still CGL) policy. With this policy form overhaul came a completely revamped pollution exclusion, which remains in use to this day after many modifications over 30 years.

The pollution exclusion in the 1986 CGL policy, titled Exclusion (f.) Pollution, expanded the pollution exclusion in the CGL policy from six lines to a full page, making it much more complex than the 1973 version. This new version of the pollution exclusion is often referred to in insurance slang as the "absolute pollution exclusion," even though the term "absolute" is never used in the policy itself and the exclusion does not absolutely exclude all losses arising from contamination or pollution.

The 1986 pollution exclusion also totally eliminated the use of the words "sudden and accidental."

The modern pollution exclusion in GL policies basically precludes coverage for bodily injury or property damage "arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants" in the following situations.

• At or from any premises, site, or location that is or was at any time owned or occupied by, or rented or loaned to, the insured
• At or from any premises, site, or location that is or was at any time used by or for the insured or others for the handling, storage, disposal, processing, or treatment of waste
• That are or were at any time transported, handled, stored, treated, disposed of, or processed as waste
• At or from any premises, site, or location on which any insured is performing operations if the "pollutants" are brought on or to the premises, site, or location in connection with such operations by such insured, contractor, or subcontractor
• At or from any premises, site, or location on which any insured is performing operations if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify, or neutralize, or in any way respond to or assess the effects of, "pollutants"
• Any loss, cost, or expense arising out of any of the following.
  • 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"
  • 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."

Exclusions/Exceptions to Pollution Coverage

Many of the specific exclusions paraphrased above have coverage givebacks that are essentially exclusions to the exclusion, with the double negative creating coverage for the narrowly defined set of circumstances. For example, section 4 of the exclusion above has a coverage giveback if the bodily injury or property damage arises out of the escape of fuels, lubricants, or other operating fluids 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.

However, there is another exception built into this section of the GL policy that amounts to an exclusion to the exclusion to the exclusion. The exception to the exclusion to the exclusion does not apply if bodily injury (BI) or property damage (PD) arises out of the intentional discharge, dispersal, or release of the fuels, lubricants, or other operating fluids, or if these materials are brought on or to the premises, site, or location with the intent that they be discharged, dispersed, or released as part of the operations being performed by the insured.

The other "exclusions to the pollution exclusion" to create coverage givebacks within exclusion (f.) are almost as complex and unpredictable in their effect on coverage. But none of these exceptions to the pollution exclusion are dependent upon pollution being sudden and accidental.

The above discussion reveals how complex and unpredictable it is to rely on exceptions to an exclusion for "pollution coverage."

Exceptions to exclusions are unpredictable in their effect. The exceptions to modern pollution exclusions found in GL policies enable insurance buyers to play the thrilling game of insurance roulette. In insurance roulette, the insurance coverage available to pay for a loss can only be predicted after a loss, based on a completely random and uncontrollable set of facts established by the exact cause of the loss. No other insurance product enables insurance buyers to purchase such utterly unpredictable insurance coverage.

For example, a pollution loss arising from a hostile fire or lightning is not excluded in one section of the pollution exclusion, but there is no mention of windstorm as a cause of loss. A windstorm can cause a much bigger pollution loss than a fire; fires through rapid oxidation can reduce the contaminating effects of a material. A windstorm spreads the material around in its original form and can cause much greater pollution-related damages. Yet, the pollution exclusion applies to a windstorm but not a fire.

The Total and Absolute Pollution Exclusions

To add to the insurance coverage roulette excitement, there is also a separate endorsement called a "Total Pollution Exclusion" that can be slipped into the CGL policy. This exclusion endorsement eliminates the handful of exceptions to Exclusion (f.) Pollution. What makes it exciting is the majority of insurance practitioners completely underestimate the effects of the total pollution exclusion endorsement. For example, a total pollution exclusion knocks out coverage for products and completed operations for a loss caused by "pollutants"—which Exclusion (f.) Pollution is silent on.

The double negative exclusions found in Exclusion (f.) Pollution can, under the right fact pattern, create positive coverage for BI and PD plus defense costs, for a completely unpredictable set of circumstances. However, if there is a total pollution exclusion, most, if not all, of these coverage givebacks are eliminated. Trying to figure out which pollution incidents are covered and which ones are not gets very difficult very quickly. For this reason, I like to say in the continuing education classes I teach on pollution exclusions, "If you think you can accurately predict the effects of a pollution exclusion pre-loss, that is only because you're confused."

Superimpose on a modern GL policy containing an "absolute" and a total pollution exclusion endorsement with another endorsement to try to provide the policy holder with "sudden and accidental pollution coverage," and it is easy to see why pollution exclusions are the most litigated words in the history of insurance. This practice invariably produces insurance coverage with the predictability of a roulette wheel.

Time Element Pollution Coverage

True "sudden and accidental" exceptions to the pollution exclusion as detailed above in the 1971 form above have not been available to purchase in the US insurance market place for decades. When you see or hear about "sudden and accidental" coverage givebacks on a GL policy today, they are actually time-element-based exceptions to the pollution exclusion, regardless of what an insurance marketing spin doctor titles the endorsement in a guise to turn an exclusion into a facade of coverage. A coverage giveback for pollution-caused damages in a GL policy will virtually always be defined by specific time frames today.

In a time-element-based endorsed exception to a pollution exclusion, covered damages arising from a pollution release that begins and ends within a discrete time frame, usually measured in hours, and is discovered and reported to the insurance company within a set time, usually measured in days, will not be excluded from coverage for bodily injury and property damage. Any covered damages in the GL policy that arise from a pollution release or condition that lasts longer than the allotted time frame or a claim that is not reported to the insurer within the set time period will not qualify for coverage.

Time-element-based exemptions to pollution exclusions are clearly not the same as the sudden and accidental-based exception to the pollution exclusion used between 1970 and 1986.

Summary

The importance of full and accurate descriptions of pollution coverage givebacks is apparent when it is considered that, at its core, "sudden and accidental pollution coverage" was a misleading insurance marketing trick from the beginning. The GL policies in the 1960s did not have pollution exclusions at all; the insurance companies introduced a new exclusion in the 1970s, which the insurance marketing spin doctors called "pollution coverage."

In the late 1980s, the US-based insurance industry completely abandoned the use of "sudden and accidental" coverage givebacks in the pollution exclusion on GL policies. Thirty-plus years later, insurance marketers still refer to limited exceptions to pollution exclusions in GL policies as "sudden and accidental pollution coverage," instead of time element exceptions. What is wrong with that picture? It's no wonder pollution exclusions are the most litigated words in the history of insurance.

Time-element-based exceptions to pollution exclusions continue to be represented as "sudden and accidental pollution coverage" even though the entire coverage determination must be based on an exclusion in the GL policy that does not contain the words sudden and accidental. Because of the common use of insurance slang, which often represents a pollution exclusion as "pollution coverage," there are needlessly uninsured insurance buyers who are forced to turn to the courts to try to collect on the "pollution coverage" they thought they were buying.

There is no reason for contamination and pollution losses to be unintentionally uninsured today. There has been a surplus supply of real environmental insurance capacity available over the past 25 years that can cover virtually any type of business activity. Some of these policies can erase the insurance coverage flaws of the past. The surplus supply of environmental insurance exists to this day.

Elimination of the words "sudden and accidental" in the insurance business, less reliance on remnant coverage in the form of exclusions to the pollution exclusion in insurance program designs, and the more informed use of real environment insurance policies designed to cover losses arising from pollution and contamination would go a long way in reducing the amount of coverage litigation on needlessly uninsured contamination and pollution losses today. With the widespread availability of low-cost environmental insurance, there is no reason to leave it up to the Greek gods or to equally mythical "sudden and accidental pollution coverage" to insure losses arising from contamination events.