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POLLUTION EXCLUSIONS:
The Insurance Industry’s
Attempt to Limit Exposure

By Ronald A. Lowry

Ron Lowry is a former insurance defense attorney who now represents plaintiffs in serious injury and insurance cases, and frequently represents tort plaintiffs in coverage question litigation.

You are in your office and the telephone rings. A long-time client is calling you to report a horrible accident in which a family member has been seriously injured. He wants you to handle the case. You look into the matter further and discover the following facts: The tortfeasor is a trucking company which was operating an eighteen wheeler hauling muriatic acid in a tanker. The truck driver lost control going around a curve, the truck jack-knifed and rolled, and the tanker split open spilling its contents all over the roadway. Shortly thereafter your client’s wife round the curve, skids on the muriatic acid and crashes into a tree. You write to the insurer identified on the police report and ask to be advised, pursuant to Georgia law, of the amount of the liability insurance covering this incident. You receive a reply, authored by an attorney in a noted insurance defense firm, advising that the insurer is taking the position there is no coverage for this incident because muriatic acid is a "pollutant". Welcome to the world of pollution liability exclusions. The foregoing scenario is illustrative of what is going on in the United States today with the various pollution liability exclusions found in most insurance policies. Insurers are using the technical language of pollution exclusions to deny legitimate claims.

There are basically three pollution liability exclusions: the "standard pollution exclusion", the "absolute pollution exclusion", and the "total pollution exclusion". Many insurance companies doing business in the United States use forms which were developed by the Insurance Services Office ("ISO"). Even those that do not use ISO forms develop policy language virtually identical to ISO forms. In the 1960s and 1970s the insurance industry became very concerned about the potential exposure it was facing regarding pollution liability. ISO began looking at possible changes to the form contracts being used by its member insurance companies in an attempt to narrow the pollution cleanup exposure insurers were facing. Such cleanups were very costly (and in some cases, impossible to perform) and the damages arising therefrom often were staggering. ISO proposed to limit this exposure by the drafting of the "standard" pollution exclusion, 1 sometimes known as the "sudden and accidental" clause because it allowed coverage for pollution discharges which were sudden and accidental. This was the way the industry planned to exclude true pollution damage from coverage, while at the same time preserving coverage for legitimate casualty claims.

However, the insurance industry became concerned that the "standard" pollution exclusion was too broad and allowed coverage for incidents which were not only sudden and accidental, but in many cases not sudden or accidental. Work began in an effort to draft a new exclusion. This new exclusion, the "absolute pollution exclusion", 2 eliminated the exception allowing coverage for sudden and accidental pollution events. The "absolute pollution exclusion" began working its way into insurance policies in the middle to later 1980s. The net effect of this change in language allowed the insurer to claim non-coverage, not only for true pollution events, but also for many traditional casualty losses, like our hypothetical.

After several years of experience with the "absolute pollution exclusion" the insurance industry became dissatisfied with it leading to the drafting and inclusion in policies of the "total pollution exclusion," 3 an even more restrictive exclusion for pollution liability, beginning in the 1990s. Depending on the company issuing the insurance policy, the date of issuance of the policy and the date of the loss, any of these three exclusion forms could come into play in an incident like the one described above, although the standard pollution exclusion has, for the most part, been completely replaced in newer policies.

Georgia law states that insurance contracts are to be read in accordance with the reasonable expectations of the insured where possible. 4 Georgia courts have consistently held that the provisions of insurance policies are construed strictly as against the insurer which drafts the policy. 5 Ambiguities in the insurance contract are to be construes against the insurer:

This is particularly true when the ambiguity is contained in an exclusion, since the insurer "having affirmatively expressed coverage through broad promises, assumes a duty to define any limitations on that coverage in clear and explicit terms".6

Ambiguity in an insurance policy may be defined as duplicity, indistinctness and uncertainty of meaning or expression. 7

An excellent discussion of the history of pollution exclusions in liability insurance policies in the United States appears in Morton International Inc. v. General Accident Insurance Co., 134 N.J. 1, 629 A. 2d 831 (1993). That decision, a very scholarly opinion by Justice Stein of the Supreme Court of New Jersey, details misrepresentations made to New Jersey officials, and others, by ISO and the insurance industry in general in an effort to obtain approval of the "sudden and accidental discharge" (also known as "the standard") pollution exclusion.

The court writes:

The critical issue is whether the courts of this State should give effect to the literal meaning of an exclusionary clause that materially and dramatically reduces, the coverage previously available for property damage caused by pollution, under circumstances in which the approval of the exclusionary clause by State regulatory authorities was induced by the insurance industry’s representation that the clause merely "clarified" the scope of the prior coverage. Our resolution of that issue is heavily influenced by our recognition that this State’s regulatory review of the pollution-exclusion clause was incidental to the authority of the Commissioner of Insurance to determine the reasonableness of rates for insurance coverage. 8

The Morton court goes on further to state:

The material and substantial reduction in coverage proposed by the pollution-exclusion clause, if disclosed to regulators in New Jersey and elsewhere, undoubtedly would have affected adversely the industry’s rates for CGL coverage. Instead, because the industry’s failure, in its presentation to regulators, to acknowledge and emphasize the sharp reduction in coverage, insureds in New Jersey and perhaps throughout the country apparently have paid rates for CGL Policies incorporating the pollution-exclusion clause comparable to those paid for the prior "occurrence"-based policies that afforded substantially greater coverage…

This Court is now asked to construe CGL Policies containing the pollution-exclusion clause in a manner consistent with the clause’s literal language, ignoring the industry’s misleading presentation to State regulators over twenty years ago, and over looking the apparent unfairness that such an interpretation would impose on policy holders who were charged rates that did not reflect the radical diminution in coverage contemplated by the insurance industry. So to construe the pollution-exclusion would, in this Court’s view, violate this State’s strong public policy toward regulation of the insurance business in the public interest, and regard the industry for its misrepresentation and nondisclosure to State regulatory authorities.

In a non-regulatory context, this Court has long recognized the doctrine that an insurer who misrepresents the coverage of, or the exclusions from, an insurance contract to the insured's detriment may be stopped from denying coverage on a risk not covered by the policy…the proposition is one of elementary and simple justice. By justifiably relying on the insurer’s superior knowledge, the insured has been prevented from procuring the desired coverage elsewhere. To reject this approach because of a new contract is thereby made for the parties would be an unfortunate triumph of form over substance. The fact that the insurer has received no premium for the risk or peril as to which the loss ensured is no obstacle. Any additional premium due can be deducted from the amount of the loss. If the insurer is saddled with coverage it might not have intended or desired, it is of its own making, because of its responsibility for the acts and representations of its employees and agents. 9

The Morton Court puts its finger squarely on the legal principle involved:

Although we have not heretofore applied the estoppel doctrine in a regulatory context, its application to these circumstances is appropriate and compelling. A basic role of the Commissioner of Insurance is "to protect the interest of policyholders" and to assure that "insurance companies provide reasonable, equitable and fair treatment to the insuring public". (Cites omitted) In misrepresenting the effect of the pollution-exclusion clause to the Department of Insurance, the IBR misled the State’s insurance regulatory authority in review of the clause, and avoided disapproval of the proposed endorsement as well as a reduction in rates. As a matter of equity and fairness the insurance industry should be bound by the representations of the IRB, its designated agent, in presenting the pollution-exclusion clause to State regulators. 10

The Court then goes on to specifically hold that the insurer in that case was estopped from denying coverage in that case based upon the pollution exclusion:

Accordingly, we hold that not withstanding the literal terms of the standard pollution-exclusion clause, that clause will be construed to provide coverage identical with that provided under the prior occurrence-based policy, except that the clause will be interpreted to preclude coverage in cases where the insured intentionally discharges a known pollutant, irrespective of whether the resulting property damage was intended or expected. 11

It is appropriate to quote from the dissenting opinion of Justice Overton of the Supreme Court of Florida in the Dimmit Chevrolet case:

In rendering its decision, the majority has chosen to ignore the deceptive conduct of the insurance industry; ignore the windfall profits that will be derived by the insurance industry from premiums collected for coverage that the industry asserts is no longer provided despite the industry’s previous assertion to the contrary; and ignore the fact that the majority of State Supreme Courts that have considered this issue have interpreted in favor of coverage. (Cites omitted) Further, and equally as important, the majority totally ignores the fact that the insurance industry is now obtaining from this Court what that industry sought but was unable to obtain from the Florida Department of Insurance in 1984. 12

It is clear that the insurance industry as a whole, and certain insurers individually, are attempting to use the pollution exclusion in order to avoid not only pollution claims, but valid claims that should otherwise be covered. Indeed, there are many, many instances where insurers have been able to avoid coverage for incidents which one logically would believe should be covered, by use of pollution exclusions. 13

There have been several decisions defining Georgia Law on this subject. The leading cases are:

Clausen v. Aetna Casualty14 Perkins Hardwood Lumber co. v. Bituminus Casualty15 Daymar, Inc. v. U.S. Fire Insurance Co.,16Bituminus Casualty Corp., v. Advanced Adhesive Technology, Inc., 17 and American States Ins., Co. v. Zippro Construction Co.18

The Georgia cases provide mixed results. In Claussen, the attorneys for the insured were able to defeat the insurer’s attempt to avoid coverage by successfully arguing that the standard pollution exclusion clause in that case was capable of more than one reasonable interpretation and, therefore, the clause had to be construed in favor of the insured. However, the Georgia Court of Appeals in Perkins Hardwood Lumber Co. concluded that the pollution exclusion in that litigation, the "absolute pollution exclusion" was not ambiguous and that coverage did not exist for a motor vehicle collision because of the presence of smoke, a "pollutant" specifically included in the definition found in the subject policy, at the crash site. Likewise the Daymar, Inc. and American States cases found no ambiguities in the absolute pollution exclusion at issue in that litigation.

The most recent pollution exclusion decision applying Georgia law is the Advanced Adhesive Technology case, in that case the Eleventh Circuit affirmed the decision of the United States District Court for the Northern District of Georgia, Rome Division (Murphy, J.) finding that the absolute pollution exclusion in that case was ambiguous. 19

We know of no cases arising under Georgia law which interpret the "total pollution exclusion", due to the recent adoption of its language in insurance contracts. However, given the insurance industry’s proclivity to avoid coverage by use of pollution exclusions, it is certain that the "total pollution exclusion" language will be litigated in Georgia courts. The "total pollution exclusion" has been litigated in other courts, with mixed results. 20

What does one do when faced with a situation like the hypothetical recited earlier in this article? First, don’t give up. The insurance industry has gotten mixed results with its attempts to avoid coverage through the use of pollution exclusions.

The issue will most likely be presented in the form of a declaratory judgment action, probably filed by the insurer. If the insurance company files such an action against its own insured, but does not name the injured victim as a party to the declaratory judgment action, by all means the victim should move to intervene. Once in the case, there are numerous arguments which may be advanced.

AMBIGUITY

Lawyers fighting for coverage against pollution exclusions have met success most often with the ambiguity argument. A careful analysis should be made of the facts of the case in comparison to the exclusion itself.

There are two kinds of ambiguities:

  1. Patent ambiguity; and
  2. Latent ambiguity.

A patent ambiguity is one which is apparent from a simple reading of the words themselves. A latent ambiguity is one in which the court applies the facts to the written language, and the ambiguity then appears. 21 Strong possibilities for ambiguities, when applied to the include the "sudden and accidental" language, the terms "irritant" and "contaminant", as well as the "discharge, dispersal, release or escape" language. Careful attention should also be paid to the "arising out of" language of the exclusion. Using the hypothetical posed earlier in this article, an excellent argument could be made that the injury to your client’s wife did not arise out of pollution or any polluting event, but rather, the injury arose out of a tractor trailer overturning in a roadway. At minimum, does this not create a question of fact for the jury to decide at the trial of the declaratory judgment action, precluding summary judgment being granted to the insurer?

MULTIPLE CAUSES

The "concurrent cause doctrine" conceivably applies when a variety of causes, some covered and some not covered by the pollution exclusion, work together to create the incident or damage. 22 This argument has become disfavored recently. However, there are numerous state court decisions, particularly in California, which uphold coverage under this principle.

ESTOPPEL

Has the insurer done anything which would lead one to believe that there is coverage for such an incident? Very often a trucking company will have to provide a "Certificate of Insurance" to a corporate shipper in order to get its business. Such certificates are usually issued by the insurance agent, although they may be issued by the underwriting department of the insurer, as well. Even if the agent issues such a certificate, a duplicate is sent to the underwriting department of the insurance company and place in the underwriting file. Examine any such certificate carefully. Does anything on the certificate lead one to the belief that there is coverage for such an event? Likewise, scrutinize all insurance company files about this insured very carefully. Is there anything in the insurance company’s claim or underwriting files which is inconsistent with the position it is now taking? Have there been any previous claims, similar in nature, which the insurer paid? Finally, take the depositions of the claims personnel and the underwriters. Amazingly, they may admit that they thought there was coverage under the policy for such an incident, and had conversations with the insured where they expressed this opinion prior to the claim.

CONCLUSION

This article is an attempt to give you an overview of the growing problem of the use by insurers of pollution exclusions to avoid coverage for otherwise legitimate claims. Typically, the claim involves serious injuries, often times to multiple individuals. The avoidance of coverage by the insurer strips the injured victims of the source of compensation to which they are entitled and often pushes the insured into insolvency or bankruptcy. When this happens, no one profits but the insurer who accepted premiums and now has escaped without paying the claim. You, as the attorney for the injured victim or the insured tortfeasor, are the only means by which this unjust result can be avoided.

FOOTNOTES

  1. (The policy excludes) Bodily injury or property damage arising out of the discharge, dispersal, or release or smoke, vapors, soot, fumes, acids, alkalis, toxic chemical, 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; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

  2. (The policy excludes) "Bodily injury" or "Property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

    1. at or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured;
    2. at or from any premises, site or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of wastes;
    3. which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for any insured or any person or organization for whom you may be legally responsible; or
    4. at or from any premises, site or location on which any insuredred or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations:
    1. if the pollutants are brought on or to the premises, site, or location in connection with such operations by such insured, contractor or subcontractor;…Pollutants means 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.

  3. (The policy excludes) "Bodily injury" or "property damage" at any premises, site or location arising out of the actual, alleged, or threatened discharge, dispersal, release or escape of pollutants. This "bodily injury" or "property damage" that arises may be due to any of the insured’s operations including those which produce a "products-completed operations hazard". Any loss, costs, or expense arising out of any governmental direction or request that you 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, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

  4. Richards v. Hanover Insurance Company, 250 Ga 613 at page 615, 299 S.E. 2d 561 (1983).

  5. State Farm v. Morgan, 258 Ga. 276, 368 S.E.2d 509 (1988); Southern Guaranty v. Goddard, 259 Ga. 257, 379 S.E.2d 778 (1989).

  6. State Farm v. Seeba, 209 Ga. App. 328, 433 S.E.2d 414 at page 416 (1992). See also U.S. Fidelity v. Gillis, 164 Ga. App. 278 at page 281, 296 S.E.2d 253 (1982).

  7. Alley v. Great American Insurance Co., 160 Ga. App 597 at page 599, 287 S.E.2d 613 (1981).

  8. Morton International, 629 A. 2d at page 872.

  9. Morton International, 629 A. 2d at page 872-873.

  10. Morton International, 629 A. 2d at page 874.

  11. Morton International, 629 A. 2d at page 875.

  12. Dimmit Chevrolet v. Southeastern Fidelity, 636 So. 2d 700, page 712 (Fla. 1993).

  13. Park-Ohio Industries v. Home Indemnity Co., 785 F.Supp 670 (N.D. Ohio 1991);

  14. Larson Oil Co. v. Federated Service Insurance Co. 859 F.Supp. 434 (D. Ore. 1994);
    League of Minnesota Cities Insurance Trust v. City of Coon Rapids, 446 N.W. 2d 419 (Minn. App. 1989);
    United States Bronze Powders v. Commerce and Industry Insurance Co., 259 N.J. Super. 109, 611 A.2d 667 (1992).

  15. 259 Ga. 333, 380 S.E.2d 686 (1989; see same case 676 F. Supp. 1571, S.D. Ga. (1987), 865 F. 2d 1217 (11th Cir. 1989) and 754 F. Supp. 1576 (S.D. Ga 1990).

  16. 190 Ga. App 231, 378 S.E. 2d 40’7 (1989).

  17. 856 F. Supp. 679 (N.D. Ga 1993).

  18. 73 F. 3d 335 (1996).

  19. 216 Ga. App. 499 S.E.2d (1995).

  20. Other Georgia cases where either the "standard" or "absolute" pollution exclusions have been litigated include: Atlantic Wood Industries v. Lumberman’s Underwriting Alliance, 196 Ga. App. 503, 396 S.E.2d 541 (1990); South Carolina Ins. Co. v. Coody, 813 F.Supp. 1570 (M. D. Ga. 1993); Lumberman’s Mutual Gas. Co. v. Plantation Pipeline Co., 214 Ga. App. 23, 447 S.E.2d 89 (1994); and Colonial Oil Industries v. Underwriters, Civ. Act. No 494-010 (S.D. Ga. 1995).

  21. Red Panther Chemical Co. v. Insurance Company of the State of Pennsylvania, 43 F. 3rd 514 (10th Cir. 1994); Western World Insurance Co. v. Stack Oil Inc., 922 F. 2d 118 (2nd Cir. 1990).

  22. Capital ford Truck Sales, Inc. v, United States Fire Insurance Company, Inc., 180 Ga. App. 413- 349 2d 201 (1986).

  23. Pepper Industries v. Home Insurance Co., 67 Cal. App. 3rd 1012 (1977).


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