Excluding Pollution: New Jersey and Florida Courts Conflict

Posted on August 27, 2008 by Mike Aylward

Two recent opinions illustrate the on-going conflict with respect to whether pollution exclusions should apply to companies that do not cause pollution but nonetheless face pollution-related liabilities. At the heart of these cases is the question whether the literal wording of the policy should control or the insured’s expectation of coverage.


In Sealed Air Corp. v. Royal Indemnity Co., No. A-5951-06T3 (App. Div. August 15, 2008), the corporation sought coverage under its Directors & Officers policy for suits by shareholders who complained that the insured had failed to disclose its liability for environmental problems facing a corporate subsidiary. The Appellate Division of the New Jersey Superior Court ruled that a pollution exclusion in Royal’s D&O policy did not apply because the insured’s liability was the result of allegedly misleading financial statements, not as the result of airborne asbestos or other pollutants. The court declared that, “The gravamen of the securities holders’ complaint has its roots in securities fraud and misrepresentation, not pollution.”
The Appellate Division declined to adopt the insured’s argument that the New Jersey Supreme Court’s analysis of pollution exclusions in Navits was not limited to CGL policies and should bar such an expansive interpretation of a pollution exclusion in a D&O policy. The court held that it need not reach the applicability of Navits to D&O policies because it found that the wording in the policy at issue precluded Royal from disclaiming.

Although the Appellate Division refused to disregard the wording of the policy as a whole, as the insured had proposed based upon the Navits regulatory estoppel paradigm, it held that in this case “arising out of” should not be given the broad meaning proposed by Royal as in this case the words “arising out of” were included with a series of limiting clauses such as “based on” or “in any way involving” that required that there be a more direct causal relationship between the pollution and the excluded harm. In a case such as this, where the injuries were far too attenuated, the court held that giving effect to the exclusion would be unfair and contrary to the reasonably expectations of the insured.

In contrast to the New Jersey court’s approach, the Eleventh Circuit has recently declared in James River Ins. Co. v. Ground Down Engineering, Inc., No. 07-13207 (11th Cir. August 20, 2008) that such exclusions do apply to non-polluters. Ground Down Engineering sought coverage for a lawsuit brought against it by a client for its alleged negligence in failing to discover construction debris and fuel tanks during an environmental site assessment. Although its professional liability insurer disputed coverage on the basis of an absolute pollution exclusion in the policy, the Florida district court declared in 2007 that the customer’s claims arose out of the insured’s failure to carry out professional responsibilities, not out of pollution and that it would be “unconscionable at best” to interpret the policy as excluding from coverage claims relating to any form of pollution, regardless of causation. Since the insured had not caused the pollution, the district court found that the exclusion should not apply and that James River had therefore erred in failing to provide a defense.

This finding was reversed on appeal by the Eleventh Circuit on August 20, 2008. Unlike the District Court, the Eleventh Circuit held that the application of the exclusion did not depend on whether the insured itself had negligently caused pollution but rather applied to all losses arising out of pollution. In this case, the Eleventh Circuit observed that the Florida Supreme Court had given the term “arising out of” a broad and unambiguous meaning as applying to all losses that have some causal connection or relationship to something such that “arising out of” contemplates a more attenuated link than the phrase “because of.” Finally, the Eleventh Circuit rejected the insured’s contention that construction debris was not an excluded “pollutant.” In this case, the Eleventh Circuit found that the underlying complaint alleged that the construction debris had caused “environmental contamination.” Furthermore, the court ruled that the exclusion was not limited to “irritants” or “contaminants” but also included “waste which clearly encompassed construction debris.

The key distinction in these cases is the manner in which the courts interpreted the phrase “arising out of.” The Eleventh Circuit adopted the traditional view that “arising out of” has a far broader meaning than “because” or “caused by” and merely requires that a loss be connected to or somehow related to pollution in order to be excluded. Contrariwise, the New Jersey Appellate Division held that policies need not be given a literal reading if to do so would result in something “unfair and contrary to the reasonable expectations of the insured.”

As these opinions make clear, courts continue to be sharply divided on the crucial issue of whether an insured’s expectations (or hopes?) of coverage should trump otherwise clear and unambiguous policy exclusions.
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Fifth Circuit Applies Pollution Exclusion to Explosion Caused by Gas Vapors

Posted on June 25, 2008 by Diane Polscer
Another court has determined that the total pollution exclusion is in fact “total.” In Noble Energy Inc. v. Bituminous Casualty Company, 2008 U.S. Dist. LEXIS 11757 (5th Cir. June 2, 2008), the court addressed the applicability of a pollution exclusion to bodily injury from an explosion. Workers were disposing of sediment and water from Noble’s petroleum storage tanks from two tanker trucks. Combustible vapors from the sediment and water caused the diesel engines in the truck to race which led to an explosion and fire. The sediment and water waste included gas condensate. Three employees were killed and several others injured. Bituminous Casualty argued that the pollution exclusion in its policy barred coverage for the claims. The policy included a pollution exclusion that defined pollutant as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Following Texas law, the Fifth Circuit determined that the exclusion was unambiguous. The Court first determined that the allegations in the complaint that combustible vapors emanating from the sediment and water qualified as a “pollutant.” The Court then found that the alleged injuries arose out of the discharge, release or escape of that pollutant. The Court rejected an argument that the vapors were not “acting as a pollutant,” but as an accelerant for the fire. The Court found inapplicable cases finding that liability must be based on a substance’s polluting qualities for the exclusion to apply. The Court noted that unlike other cases, the Bituminous policy defined pollutant, and did not restrict its application to pollutants entering the land, atmosphere, or water. Finally, the Court noted that the injury did arise out of the “hazardous quality of the vapors.” This last point seemed to be a throwaway for the Court since it had already determined that it was not the “quality” of the substance that mattered.

The Court also rejected arguments by the insured that pollution exclusion should not apply because that would be contrary to the reasonable expectation of the insured. The Court observed that that was not the test in Texas for unambiguous policy terms. The Court similarly rejected an argument that the hostile fire exception applied. The hostile fire exception only applied where there is a pre-existing fire that causes pollution, not where the pollutant itself causes a fire. The Court also rejected arguments that the vapors were not discharged into the environment because they were confined to the area of intended use. The Court found that the pollution exclusion was not restricted to situations where environmental harm occurred. In rejecting all of the insureds arguments that the scope of the exclusion should be limited, the court clearly held that liability from any substance that falls within the definition of pollutant is excluded by this form of the pollution exclusion. This decision may help to reinforce that the most recent version of the pollution exclusion is actually “total.”
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Total Pollution Exclusion Applies to Remediation and Non-remediation Damages

Posted on January 20, 2008 by Kevin Merriman
The total pollution exclusion was held to apply to property damage resulting from the release of home heating oil in Nascimento v. Preferred Mut. Ins. Co., (1st Cir. (Mass.) Jan. 18, 2008). The claim arose from soil contamination to an adjacent property from an UST used by the insured to store home heating oil to heat his business. The insured was sued by subsequent property owners for costs incurred in remediating the property, and for property damages. The insured conceded that section (f)(2)(a) of the exclusion barred coverage for remediation damages; however, he argued that the underlying complaint also sought damages to the property apart from the cost of remediation to which the exclusion do  not apply. The court disagreed, holding that section (f)(1)(a) of the exclusion, which bars coverage for “ ‘property damage’ arising out of the actual ... discharge, dispersal, seepage, migration, release or escape of pollutants ... at or from any premises, site, or location ... which is or was at any time ... occupied by ... any insured,” also applied to the claim. Though the insured did not own the adjacent lot, he did "occupy" the UST within the meaning of (f)(1)(a). Relying on McGregor v. Allamerica Ins.Co., 449 Mass. 400 (2007), decided after the district court's opinion and while this appeal was pending, the court held that once the oil becomes a pollutant, the total pollution exclusion of the CGL policy is triggered and coverage for remediation and non-remediation claims is barred.
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