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An “Absolute” Trend: D.C. and New York Join the Majority of Other Courts Limiting the “Absolute Pollution Exclusion”

By Susan C. Levy and Lorelie S. Masters

In seeking approval for the “absolute pollution exclusion” in the mid-1980s, the insurance industry confronted questions about the breadth of their proposed exclusion. Insurance regulators expressed concern that the proposed exclusion could be read literally to exclude coverage in an array of situations that did not involve pollution at all. The insurance industry’s representatives assured regulators that “no one would read it that way.” History has proven that representation false.

In the late 1980s, courts almost uniformly held, regardless of the factual situation, that “absolute” meant “absolute.” However, in part because of the insurance industry’s over-reaching and its representations to regulators in the 1980s, today, two-thirds of the state appellate and supreme courts to address the issue have limited the exclusion to its intended reach (at least as insurers represented it to state insurance commissioners) — true “industrial” pollution. In June and early July 2003, the District of Columbia Court of Appeals, D.C.’s highest court, and the New York Court of Appeals, New York’s highest court, became the most recent appellate courts to join this trend. Both found that the exclusion should be limited to its intended reach — precluding coverage only in those cases involving true environmental pollution.

The D.C. Court of Appeals’ Decision

In Richardson v. Nationwide Mutual Insurance Co., No. 0-SP-1451, 2003 D.C. App. LEXIS 418 (June 12, 2003), the D.C. Court of Appeals reversed a lower court’s decision relieving Nationwide of its duty to defend and indemnify a policyholder for serious personal injuries, including brain damage suffered as a result of exposure to carbon monoxide leaking from a faulty gas furnace. Nationwide sued the policyholder, National REO Management, in the United States District Court for the District of Columbia seeking a declaratory judgment that its general liability insurance did not apply to cover the injuries resulting from failure to properly maintain the furnace.

Answering a certified question regarding the scope of the pollution clause, the court considered whether the standard “absolute pollution clause” (APC) found in most comprehensive general liability (“CGL”) policies applied to be the policyholder’s claim. The “APC” excludes coverage for bodily injury or property damage “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants,” which is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot , fumes, acids, alkalis, chemicals and waste....”

The district court granted summary judgment in favor the insurer, concluding that the pollution exclusion barred coverage as a matter of law. On appeal, a majority of the three-member panel disagreed, holding that the clause did not apply because its intended purpose was to preclude coverage for traditional environmental pollution that was the subject of federal and state environmental laws.

In reaching its decision, the majority recognized that the courts are sharply divided regarding the meaning of the exclusion. However, the majority “rejected the purportedly literal approach” of some courts and aligned itself with the trend holding that the clause should apply only to traditional “environmental” pollution. The court chose to read the exclusion “in context,” in light of the historical circumstances in which the clause was drafted. The court found that the clause was drafted in response to and used the same terminology as CERCLA, 42 U.S.C. § 9601, and other federal and state environmental statutes and regulations. The panel therefore concluded, “The exclusion should not reflexively be applied to accidents arising during the course of normal business activities” simply because they involved a “discharge, dispersal, release or escape” of an “irritant or contaminant.” Id. at *44. The court therefore held that the case before it fell outside the exclusion because it did not involve the kind of situation for which the exclusion was designed. Id. at *80.

In a lengthy, impassioned dissent, one judge found that carbon monoxide fumes constitute “pollutants” because they are “gaseous” “contaminants” which includes “fumes.” Id. at *91. The dissent criticized the majority for looking to the history of the exclusion when, in the dissenting judge’s view, the language of clause was “plain and unambiguous.”

The New York Court of Appeals’ Decision

Like the court in Richardson, the New York Court of Appeals found that the “total pollution exclusion” is ambiguous when applied to a claim for bodily injury from inhalation of paint or solvent fumes. Belt Painting Corp. v. TIG Ins. Co., No. 86, 2003 N.Y. Lexis 1745 (July 1, 2003). Relying on two early decisions rejecting pollution exclusions in the context of asbestos bodily injury and lead-paint poisoning, the New York court reaffirmed that “the purpose of the exclusion was to deal with broadly dispersed environmental pollution.” Id. at *5.

The court in Belt Painting found that the exclusion “does not clearly and unambiguously exclude a personal injury claim from indoor exposure to a plaintiff-insured’s tools of its trade.” Id. at *13. The court found that the “drifting” of paint fumes did not meet the “environmental implications” of the terms, “discharge, dispersal, seepage, migration, release or escape” of “pollutants,” required by the clause. Id. at *15. The court was “reluctant to adopt an interpretation that would infinitely enlarge the scope of the term ‘pollutants,’ and seemingly contradict both a‘common speech’ understanding of the relevant terms and the reasonable expectations of a business person.” Id. at *13-14.

Conclusion

Both cases support efforts by policyholders to enforce CGL insurance when an insurance company seeks to exclude coverage for claims that involve something other than traditional environmental pollution. As shown by Belt Painting and other Appellate Division decisions, the New York courts have limited pollution clauses in a variety of factual contexts. Thus, although policyholders historically have considered New York law unfriendly, particularly when addressing the pollution exclusion, Belt Painting and other recent decisions bring New York into accord with the majority of courts that have rejected the insurance industry’s attempts to apply the exclusion far beyond their intended reach. The Richardson decision may also be relevant in any matter that involves the construction of a statute or contract, where the language must be read in context in order to give it the meaning that the drafter’s intent. 

ABOUT THE AUTHORS

Susan C. Levy is a partner at Jenner & Block, LLC, in Chicago. Lorelie S. Masters is a partner at Jenner & Block, LLC, in Washington, D.C. She is co-author of a treatise entitled Insurance Coverage Litigation and the Policyholder Chair of the Insurance Coverage Litigation Committee of the ABA’s Section of Litigation. Both Ms. Levy and Ms. Masters advise and represent policyholders in insurance coverage and litigation matters.

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October 2003