By Rory Eric Jurman and Steven S. Cula
As appeared in Law360 Expert Analysis on November 18, 2016
For nearly 50 years, insurers have employed various iterations of the "pollution exclusion" to limit or eliminate coverage for damages resulting from pollution. Each iteration has been met with extensive litigation, making the effectiveness of the exclusion a somewhat unpredictable factor.
Background: Various Iterations of the Pollution Exclusion
Sudden and Accidental Exclusion
In 1970, the National Bureau of Casualty Underwriters established a standard pollution exclusion, adopted in the form of an endorsement by numerous trade groups. This initial endorsement was incorporated as Exclusion F in the 1973 re-issuance of the commercial general liability policy. It stated that the policy did 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 water course or body of water." However, the exclusion did not apply if such discharge,dispersal or escape was sudden or accidental.
The object of the exclusion was to limit coverage under the policy for tort claims for bodily injury or property damage, specifically those that arose from sudden accidents.After the exclusion began to be promulgated, Congress and some state legislatures acted to impose strict liability on private parties to clean environmental contamination.Coupled with this, many jurisdictions held that Exclusion F was ambiguous, and limit edits effect. The result was that the initial pollution exclusion was rapidly becoming toothless, and the insurance industry needed to both clarify and strengthen the endorsement.
Absolute Pollution Exclusion
In the early 1980's, a new pollution exclusion endorsement was crafted. The Insurance Services Office (ISO), in 1984, released Form IL 09 28, which provided in pertinent part:
It is agreed that the exclusion relating to 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 is replaced by the following:
1. To bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:
a. At or from premises owned, rented or occupied by the named insured;
b. At or from any site or location used by or for the named insured or others for the handling, storage, disposal, processing or treatment of waste;
c. Which are at any time transported, handled, sorted, treated, disposed of, or processed as waste by or for the named insured or any person or organization for whom the named insured may be legally responsible; or
d. At or from any site or location which the named insured or any contractors or subcontractors working directly or indirectly on behalf of the named insured are performing operations:
(i) if the pollutants are brought on or to the site or location in connection with such operations; or
(ii) if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.
2. To any 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.
Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkilis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
The effect of this endorsement was to exclude coverage for bodily injury or property damage liability arising out of pollutants whether the introduction of the pollutants was sudden or gradual. In general, coverage was excluded where the pollution was at or from property owned or controlled by the insured, or where the pollution was the result of handling or transporting waste, or merely testing for it.
The endorsement was incorporated into the 1988 re-issuance of the commercial general liability policy. This purportedly "absolute" exclusion, however, was met with controversy regarding its scope. Courts commonly found it to be ambiguous and issued conflicting interpretations of it. The need for a further clarified exclusion was again apparent.
Total Pollution Exclusion
In the early 1990s, insurers began to adopt an exclusion which barred coverage for any loss that would not have occurred "but for" a release or discharge of pollutants. Insurers began to ultimately achieve success in eliminating coverage for environmental liability exposures, and the focus shifted from tailoring the exclusion to valuating the benefits to policy holders of removing the exclusion. Brokers increasingly urged carriers to carry pollution risks, and in 1997, the Insurance Services Office proffered new forms for CGL coverage for some environmental liabilities. While most insureds began to purchase pollution legal liability policies supplemental to their CGL insurance, some insurers began to offer environmental liability coverage as an endorsement to a typical CGL policy.
Over time, insurers have enjoyed diminishing success in litigation of the pollution exclusion. The forum is primarily a state appellate forum, due to the fact that most cases center around releases on the insured's premises, and many of the cases correspond with pending state tort cases. Treatment of the exclusion in all jurisdictions tends to be one of two types. Courts tend to emphasize either the scope and purpose of the exclusion, or the language of the exclusion.
Some courts analyzing the scope and purpose of the pollution exclusion have held that it is and should be limited to traditional sorts of environmental contamination —involving property damage to the ambient environment. However, more recently, courts give the exclusion much broader scope and have barred coverage for claims based on indoor exposures and toxic exposure bodily injuries.
Some courts, including the Supreme Courts of California, Illinois, Massachusetts and others in the Northeast, have ruled that the exclusions apply only to claims arising out of industrial or environmental pollution. In contrast, state supreme courts in many Western and Southern states have found that there is no such limit. See, e.g., Deni Assocs. of Fla. Inc. v. State Farm Fire & Cas. Insurance Co., 711 So. 2d 1135 (Fla. 1998).
Wording: What is a Pollutant? What Constitutes Discharge?
Alternatively, courts have examined the exclusion in a grammatical way, looking at the definition of "pollutant." Some courts have emphasized that the subject substance should have a contaminating effect under the facts of the underlying claim. Other courts have held that the substance must be generally harmful, or else the word "pollutant" is ambiguous.
Many courts have centered their analysis on whether the subject substance was in fact discharged, dispersed, or released. Some courts have held that those terms arenecessarily industrial, and thus limit the application of the exclusion to claims resulting from industrial pollution in the ambient environment. Other courts have held that thewords convey motion of the substance, and have held that the exclusion does not apply where the subject substance does not escape the area in which it was meant to be usedor stored.
In 1998, the Eleventh Circuit held that, under Florida Law, an APE in a roofing contractor's general liability policy excluded coverage for injuries that resulted from breathing vapors emitted by the roofing products. The court found that the APE was unambiguous, and gave no consideration to whether or not the roofing products had been used appropriately or improperly. See Technical Coating Applicators Inc. v. United States Fidelity & Guaranty Co., 157 F. 3d 843 (11th Cir. 1998). The APE in the policy excluded bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at or from 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 operations. Id. The APE also excluded coverage where any pollutant was brought on to the premises, site, or location in connection with such operations by such insured,contractor, or subcontractor. Id. The court emphasized that the pollution exclusion did not nullify essential coverage, and that the policies still provided coverage for a variety of accidents. Id.
Several other cases in Florida have upheld the APE. In Deni Associates of Florida Incorporated v. State Farm Fire & Casualty Insurance Company, 711 So.2d 1135 (Fla.1998), the court held that the pollution exclusion language was clear and unambiguous,and must be enforced by courts which interpret it. The court also held that, under astringent reading of the policy language, the exclusion is not limited to environmental or industrial pollution, Therefore, the court found that the insurer had no duty to defend the insured after the insureds spilled ammonia inside a building and over-sprayed insecticide, causing injury. Id. Deni Associates has become the seminal Florida case on pollution exclusions and has been persuasive in Florida's treatment, which favors strict interpretation of the policy and, as a result, accommodates insurers. For example, in West American Insurance Company v. Band & Desenberg, 138 F.3d 1428 (11th Cir.1998), the Eleventh Circuit relied on Deni Associates when it held that the pollution exclusion precluded the insurer's duty to defend where the insured's air conditioning system introduced contaminants into an office building. The Eleventh Circuit then relied on Deni Associates and West American to hold that, under a pollution exclusion identical to the one in West American, injury arising from ingestion and inhalation of lead was excluded. Auto Owners Insurance Co. v. City of Tampa Hous. Auth., 231 F.3d1298 (11th Cir. 2000).
One Florida case addressed the pollution exclusion in the context of a first party claim,in Florida Farm Bureau Insurance Co. v. Birge, 659 So. 2d 310 (Fla. 2nd DCA 1994).There, the court held that the exclusion was ambiguous, and that an average homeowner expected coverage for damage caused a sewer malfunction (as was the case there). Id. Birge demonstrates a potential road Florida courts could have traveled in their treatment of pollution exclusions. Specifically, that of interpreting the exclusions according to the expectation of coverage by the insured under the policy. Instead, Demi Associates ensured that Florida adopt the minority view that pollution exclusions be strictly construed.
Florida has expanded the application of pollution exclusions to almost anything. For example, an insurer was not required to provide coverage to insured homeowner's association for injuries sustained by a guest who came in contact with contaminants while swimming in the insured's improperly kept swimming pool. First Specialty Insurance Corp. v. GRS Mgmt. Associates Inc., No. 08-81356-CIV (S.D. Fla. 2009). In GRS, the court cited cases wherein the court held that raw sewage, battery acid, living organisms, microbial populations, indoor allergens and more, fall within the definition of pollutant and/or contaminant, and are therefore excluded under the pollution exclusion.See Philadelphia Indemnity Insurance Co. v. Yachtman's Inn Condo Ass'n Inc., 595F.Supp.2d 1319 (S.D. Fla. 2009); Nova Casualty Co. v. Waserstein, 424 F.Supp.2d1325 (S.D. Fla. 2006).
Florida truly outdid itself in Chestnut Associates Inc. v. Assurance Co. of Am., 17 F.Supp. 3d 1203 (M.D. Fla. 2014). In what is perhaps the most shocking case calling for the application of a pollution exclusion, the court in Chestnut held that, under Florida law, the exclusion applied where a pool technician "sexually pleasured himself" in the client's pool and caused property damage to the swimming pool with his bodily fluids. Id.The decision in Chestnut expressly states that, in Florida, bodily fluids qualify as pollutants that contaminated the pool. Id.