270.6-3

POLLUTION EXCLUSION AND LIMITED COVERAGE

(February 2008)

INTRODUCTION

The language used in the pollution exclusion in the Insurance Services Office (ISO) Commercial General Liability (CGL) coverage form has been scrutinized closely and has generated considerable controversy since its introduction. Court interpretations of the language have varied widely between jurisdictions. As a result, the original intent of the language has eroded. Because of this, the current pollution exclusion used in both the occurrence and claims-made CGL coverage forms eliminates most types of pollution, whether gradual or sudden and accidental. However, the exclusion is accompanied by several important exceptions that provide coverage in certain circumstances and under specific conditions. A number of endorsements have been developed to provide coverage for the basically excluded exposure. The review of events that led to the major insurance changes, included in the discussion that follows, was prepared by Victor B. Levite, a San Francisco attorney and resident partner in the California law firm of Barger & Wolen.

FEDERAL LEGISLATION

The sinking of the Torrey Canyon and the Santa Barbara oil spill brought environmental pollution to the forefront of national concern, even though pollution has existed for years as a by-product of industrialization and economic growth. Congress enacted the Resource Conservation and Recovery Act (RCRA) in 1976. This Act attempts to protect the environment by prohibiting open dumping and by regulating the handling of hazardous solid waste. Regulations under the act apply to approximately 400 specifically named substances, to other substances that can be ignited and to substances that are corrosive, reactive, explosive or toxic.

Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, also known as Superfund) in 1980. This Act provides funds for emergency response and cleanup when hazardous substances are released into the environment. The major fund created by the act is the Hazardous Substance Response Trust Fund. This Fund will eventually total $1.6 billion for emergencies involving unidentified owners or operators. The Act provides for direct action by a claimant against an insurance company and imposes strict, retroactive and joint and several liability.

Other pertinent federal laws and regulations exist, in addition to the laws that address pollution liability passed by many states.

PREVIOUS POLLUTION EXCLUSION

The standard language in the Comprehensive General Liability Policy was revised in 1973. The revision attempted to exclude gradual pollution while continuing to provide pollution coverage on sudden and accidental occurrences and events.

ADVERSE COURT DECISIONS

Several important court decisions have been rendered that deal with the pollution exclusion and with pollution liability.

An example of a case enforcing the exclusion as intended, representing a distinct minority view, is American States Insurance Company vs. Maryland Casualty Company, 487 F. Supp. 1549, U.S.D.C., E.D. Michigan (1984). In this case, the United States District Court denied insurance coverage in four suits arising out of the dumping of toxic waste materials. It was alleged that the toxic wastes were dumped continuously since 1966 and caused water contamination. The plaintiffs claimed harm to themselves and to the use of their property. The court held that the release of toxic materials was continuous and not sudden or accidental. As a result, the insurer did not have to defend or indemnify the insured.

Unfortunately for the insurance industry, courts have reached different conclusions in most cases. For example, in the case of Waste Management of Carolinas, Inc. vs. Peerless Insurance Company, 323 S.E. 2d 726 (Court of Appeals of North Carolina, December 28, 1984), the court held that the words "sudden" and "accidental" were ambiguous. It decided that the damages that occurred were neither intended nor expected from the standpoint of the insured. The case involved a suit by the United States Government under RCRA that sought injunctive relief and reimbursement of costs from groundwater contamination. The owners of the landfill sought indemnity and contribution from the insured because of negligence in not preventing deposits of hazardous waste from 1973 to 1979.

REVISED POLLUTION EXCLUSIONS

As a result of the court decisions, ISO revised the CGL pollution exclusion in the 1986 edition that contained the ”absolute" pollution exclusion. All pollution was excluded, whether gradual, or sudden and accidental.

Several subsequent revisions have been made. While the most current edition of the CGL coverage form no longer contains an absolute pollution exclusion, ISO has defined it broadly in an attempt to make it as comprehensive as possible. This is in order to exclude as many types of potential occurrences as possible. The exclusion makes no reference as to whether or not the pollution event is accidental or gradual. All pollution incidents are excluded, other than the exceptions reviewed and analyzed below.

POLLUTION DEFINED

The first step is to define pollutants. This is the same definition used in all ISO coverage forms and policies in an attempt to name as many potential pollutants as possible without being unreasonable. Pollutants are any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. However, these are not the only pollutants because ISO uses the word “including” in the definition. Waste includes materials intended for recycling, reconditioning or reclamation.

WHAT IS EXCLUDED AND WHERE

Insurance does not apply to pollution at or from any premises, site or location now or ever owned, occupied by or rented or loaned to any insured.

Coverage does not apply at or from any premises, site or location now or ever used by any insured or others for handling, storing, treating, disposing, processing or treating of waste. This includes waste that is or was transported, handled, stored, treated, disposed of or processed as waste by or for any insured or any party for whom the named insured is legally responsible.

There is no coverage at or from any premises, site or location on which any insured or contractors or subcontractors working directly or indirectly on behalf of any insured are performing operations if the pollutants are brought to the premises, site or location in conjunction with such operations.

There is also no coverage at or from any premises, site or location on which any insured or contractors or subcontractors working directly or indirectly on behalf of any insured are performing operations involving the testing for, monitoring, cleaning up, removal, containment, treatment, detoxification or neutralization, response to or assessment of the effects of pollutants.

Loss, costs or expenses due to any request, demand, order or statutory requirement on any insured or others to test for, monitor, clean up, remove, contain, treat, detoxify neutralize, respond to or assess the effects of pollutants are not covered. This includes claims or suits brought by or on behalf of a government authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating detoxifying, neutralizing, responding to or assessing the effects of pollutants. This does not apply to liability for damages due to property damage the insured has without such requests, demands, orders or regulatory requirements, or claims or suits brought by or on behalf of a government authority.

SUDDEN OR ACCIDENTAL

An important point to keep in mind is that all pollution events are excluded, other than those to which coverage applies because of one of the exceptions to the exclusion. This includes sudden or accidental events in addition to events that occur gradually over time.

EXCEPTIONS TO THE POLLUTION EXCLUSION

Pollution from building heating, cooling or dehumidifying equipment

This exception to the pollution exclusion covers bodily injury sustained inside a building and caused by smoke, fumes, vapor or soot from equipment used to heat, cool or dehumidify the building. This includes equipment used to heat water for use by occupants of the building and their guests.

Note: Coverage applies only to injuries sustained inside the building. Coverage does not apply if the same events release smoke, fumes, vapor or soot outside the building that injures a person passing by.

Contractors that add owners as additional insureds

This exception to the pollution exclusion covers bodily injury or property damage for which the named insured as a contractor may be liable if it has added the owner or lessee of the location as an additional insured on its policy concerning ongoing operations performed for that additional insured at that location. This is subject to the location never having been owned, occupied by or rented or loaned to any insured except for that additional insured.

Hostile fire

This exception to the pollution exclusion covers bodily injury or property damage caused by or arising out of heat, smoke or fumes from a hostile fire. A hostile fire is an unfriendly fire not confined to its normal habitat.

Specific operating fluids released by contractors at job sites

This exception to the pollution exclusion covers bodily injury or property damage arising out of the escape of fuels, lubricants and other operating fluids on the job site needed to conduct the normal operations of mobile equipment. This is subject to a limitation that the operating fluids must escape from the vehicle part or receptacle designed to hold them. This exception does not apply if the operating fluids are released intentionally or if they are brought on the job site with the intent to release them.

Note: Older editions of the CGL coverage form did not have this exception. Also note that this exception applies only to fluids needed for the proper operation of mobile equipment and not to any other polluting liquids.

Pollution from materials required to be brought into a building

This exception to the pollution exclusion covers bodily injury or property damage sustained inside a building caused by the release of gases, fumes or vapors from materials brought into the building. This is subject to the requirement that the materials be used in conjunction with operations performed by the named insured or by contractors or subcontractors working on behalf of the named insured.

Example: This includes materials such as paint, cleaning solvents, chemical treatments, carpet glue or tile glue brought into a building by the insured or its contractor and used to repair or service the building.

EXCLUSION ENDORSEMENTS

Three endorsements are available that broaden the pollution exclusion and make it more total and absolute.

• CG 21 49–Total Pollution Exclusion Endorsement replaces Section I–Coverage A–Bodily Injury And Property Damage Liability, Paragraph 2., Exclusion f., Pollution. Under the revised exclusion, coverage does not apply to bodily injury that would not have occurred at all except for the actions of pollutants. Coverage also does not apply to any loss, cost or expense arising out of any requirement that any insured or others respond to or assess the effects of pollutants or to claims or suits by or on behalf of a governmental authority for damages because of any response to or assessment of the effects of pollutants.
• CG 21 55–Total Pollution Exclusion With A Hostile Fire Exception completely excludes bodily injury or property damage that would not otherwise have occurred at all but for the action of any pollutants at any time. It includes a limited exception for bodily injury or property damage arising out of heat, smoke or fumes from a hostile fire unless it originated or occurred at certain premises and under certain conditions. It also excludes loss, costs and expenses arising out of any requirement to test for or clean up pollutants and claims or suits from governmental authorities to test for or clean up pollutants.
• CG 21 65–Total Pollution Exclusion With A Building Heating, Cooling and Dehumidifying Equipment Exception And A Hostile Fire Exception replaces Exclusion f. under Paragraph 2. Exclusions of Section I–Coverage A–Bodily Injury And Property Damage. Coverage does apply to injury from any smoke, fumes, vapor or soot released by building heating, cooling or dehumidifying equipment as well as to injury or damage from the heat, smoke or fumes resulting from a hostile fire.

POLLUTION COVERAGE BUY-BACK ENDORSEMENTS

Two endorsements are available for use by insurance companies to provide "buy-back" coverage for parts of the pollution exclusion. Both of these endorsements are for optional use and require additional premium charges.

• CG 24 15–Limited Pollution Liability Extension Endorsement modifies Section I–Coverages–Coverage A–Bodily Injury And Property Damage Liability, 2. Exclusions, Item f. Pollution. It provides some pollution coverage but limits it to premises that were never used to handle, store, dispose of, process or treat wastes. The exclusion continues to apply to storage tanks and containers and related ducts and underground piping. It also provides a separate Aggregate Limit.
• CG 04 22–Pollution Liability Coverage Extension provides complete pollution liability coverage by deleting the pollution exclusion but does not cover cleanup costs.

Note: This endorsement is rarely used. It provides such broad pollution liability coverage that most insurance companies are reluctant to use it. Only a few insurance companies write pollution liability insurance coverage and they do so on separate policies or coverage forms.

COURT CASE REFERENCES RELATING TO POLLUTION

Please refer to PF&M Section 270_C016, Contaminant Clarified With Respect To Application Of Pollution Exclusion, in Court Cases.

Please refer to PF&M Section 270_C029, Environmental Cleanup Costs Held Not Covered By CGL Insurance, in Court Cases.

Please refer to PF&M Section 270_C053, Pollution Claim By Insured For Damage To His Property By Former Tenant Held Not Covered, in Court Cases.

Please refer to PF&M Section 270_C055, Pollution Cleanup Costs Incurred During Policy Period By Subsidiary Acquired Thereafter Held Not Covered, in Court Cases.

Please refer to PF&M Section 270_C056, Pollution Exclusion Applied Although Toxic Waste Was Turned Over To Transporter For Disposal, in Court Cases.

Please refer to PF&M Section 270_C058, Pollution Exclusion Held Applicable To Cigarette Smoke, in Court Cases.

Please refer to PF&M Section 270_C072, "Sudden" Temporal Connotation Precluded Coverage For Long Term Pollution, in Court Cases.

Please refer to PF&M Section 270_C090, Contamination Of Property Of Others Held Not "Sudden" Despite "Sudden" Release Of Toxins, in Court Cases.

Please refer to PF&M Section 270_C092, Contamination Under Ground Held Not Covered When Caused By Known Discharge Above Ground, in Court Cases.

Please refer to PF&M Section 270_C093, Pollution Exclusion Applicability Held Not Affected By Explanatory Data Furnished To Insurance Department, in Court Cases.

Please refer to PF&M Section 270_C130, Pollution Exclusion Held Applicable For Waste Disposal Site, in Court Cases.

Please refer to PF&M Section 270_C141, Lead Paint Not A "Contaminant", in Court Cases.

Please refer to PF&M Section 270_C160, CGL Policy's Effective Dates Bars Board's Claim For Coverage Of Cleanup, in Court Cases.

Please refer to PF&M Section 270_C161, City's CGL Policy Excludes Claim For Pollution Loss, in Court Cases.

Please refer to PF&M Section 270_C165, Use Of Gas In Business Operations And Failure To Clearly Identify Gas As A Pollutant, in Court Cases.

Please refer to PF&M Section 270_C189, Denied Paint Fumes Claim Not Bad Faith, in Court Cases.

Please refer to PF&M Section 270_C204, Contamination From Manufacturing Process Not Covered, in Court Cases.

Please refer to PF&M Section 270_C208, CGL's Non-Cumulation Clause Unenforceable, in Court Cases.

Please refer to PF&M Section 270_C209, Absolute Pollution Exclusion Inapplicable To Fumes Injury, in Court Cases.

Please refer to PF&M Section 270_C210, Absolute Pollution Exclusion Inapplicable To Death Caused By Pesticides, in Court Cases.