RISKVUE ARCHIVE | INDUSTRY WATCH > OIL

MTBE: Coverage For The Oil Industry’s “Spreading” Problem

By John N. Ellison, Robert E. Frankel, and Michael Conley

Methyl tertiary butyl ether (“MTBE”), a substance almost exclusively used as a fuel additive in motor gasoline, is one of a group of chemicals commonly known as “oxygenates” — they raise the oxygen content of gasoline. MTBE has been used in U.S. gasoline at low levels since 1979 to replace lead as an octane enhancer. Since 1992, MTBE has been used at higher concentrations in some gasoline to fulfill the oxygenate requirements set by Congress in the 1990 Clean Air Act Amendments. MTBE is currently added to about 87% of the gasoline that is marketed, sold and used in the United States.

With its growing use has come growing problems related to environmental liabilities associated with it. The principal cause of MTBE contamination is leaking underground fuel storage tanks. When MTBE spills or leaks into the ground, its chemical properties cause it to travel faster and further than other components of gasoline. The ultimate health impacts of exposure to MTBE are not known; however, it is a known animal carcinogen, and alleged in some quarters to be a possible human carcinogen.

There has been an ever increasing stream of litigation resulting from MTBE contamination. Throughout the United States, such litigation has included claims based on negligence, conspiracy, property damage, and product liability. By way of example, in April 2002, after an 11-month trial brought by a California public utility against MTBE producers, oil refineries, and gasoline retailers, a jury found that gasoline containing MTBE was a defective product, and that Lyondall Chemical Co., a manufacturer of MTBE, and Shell Oil Co., a refiner, acted maliciously by withholding information about MTBE’s potential hazards. As a result, in August 2002, Shell Oil Co. agreed to pay $28 million as part of an out-of court settlement, bringing the total settlement in that action to over $69 million. As evidence of the increasing notoriety of MTBE, and as a possible harbinger of what is to come, a number of plaintiff personal injury law firms now include information relating to MTBE on their websites.

As MTBE-based claims increase, disputes concerning insurance coverage for those claims will also most assuredly increase. This article provides a framework for use in helping to determine how your insurance policies cover MTBE-related claims.

Analysis

A. Cleanup For MTBE Contamination Should Trigger Insurance Coverage Under The Insuring Agreement.

The plain meaning of the insuring agreement of the standard-form comprehensive general liability insurance policy indicates that MTBE contamination caused by a spill or storage tank leak trigger the defense and indemnity obligations of the insurance company as claims by third parties for liability for property damage.

First, the large majority of jurisdictions that have addressed the issue of the “legal obligation to pay” hold that amounts paid to address government mandates in administrative enforcement actions are amounts for which the policyholder “is legally obligated to pay as damages.” Thus, investigation and remediation of MTBE contamination should be construed “as damages” for which a policyholder is legally obligated to pay. Second, environmental contamination that occurs from gasoline containing MTBE is “property damage,” and courts uniformly hold so. Third, “property damage” takes place, or “triggers” coverage, as long as the gasoline spill or leak was released into the environment at least in part during the policy period.

B. Various Exclusions Relied Upon By The Insurance Industry.

To deny insurance coverage for MTBE-related environmental contamination, the insurance industry has, with varying degrees of success, relied upon the following three exclusion/defenses to coverage: (1) the “expected or intended”/no “occurrence” defense; and (2) various forms of so-called pollution exclusions.

1. “Expected Or Intended” Defense — Based upon the typical “occurrence” definition, insurance companies routinely argue that coverage is barred because the policyholder “expected or intended” the property damage. There is a split of authority on the standard of proof applicable to this defense. Most courts hold that the relevant standard is a subjective one — namely, the policyholder must actually expect or intend the specific property damage and the resulting harm for coverage to be avoided. Other courts hold that the relevant standard is an objective one — namely, irrespective of the policyholder’s actual knowledge or intent, coverage is barred if the policyholder reasonably should have expected or intended the property damage to take place. Regardless, as long as the MTBE contamination was neither expected nor reasonably should have been expected, the “expected or intended” defense should not preclude coverage for MTBE-related events, and insurance companies have had marginal success with this defense.

2. The Various So-Called Pollution Exclusions — From the early 1970s through 1985, most general liability insurance policies contained a limited pollution exclusion which purported to exclude coverage for “releases” and “discharges” of “pollutants” unless they were “sudden and accidental.” The primary dispute centers on whether the word “sudden” means “unintended and unexpected,” or “abrupt, immediate, or of short duration.” Irrespective of the approach taken, an unintentional spill resulting in MTBE contamination should not be excluded under the “sudden and accidental” pollution exclusion. If a court reads a temporal component into the exception (i.e., “abrupt, immediate, or of short duration”), then damage occurring over an extended period of time — of the type for which governmental authorities typically seek remedy under environmental statutes and the normal scenario for a leaking underground storage tank — may not be covered even if the pollution is unexpected and unintended.

Based on the insurance industry’s representations to regulators that this exclusion would only bar intentional pollution, a number of courts throughout the country rejected the insurance industry’s attempts to escape these liabilities. The most comprehensive analysis of the history of the insurance industry’s efforts to secure regulatory approval for the “sudden and accidental” pollution exclusion occurred in the New Jersey Supreme Court’s decision in Morton International, Inc. v. General Accident Insurance Co. The Morton court ruled that the standard form “sudden and accidental” polluters exclusion does not bar insurance coverage except when the policyholder intentionally discharges a known pollutant.

Another area of contention concerns whether the particular injury producing agent is a “pollutant.” Although there are no decisions resolving application of the so-called “sudden and accidental” polluters exclusion to MTBE contamination, an argument could be made that because MTBE is a useful, environmentally friendly product, it is not a “pollutant,” “irritant,” or “contaminant” and, therefore, is not excluded under the “sudden and accidental” polluters exclusion. Such an argument has been accepted by some courts for gasoline itself and lead paint, which is merely paint plus a paint additive — lead. If these useful products are not “pollutants,” the useful gasoline additive, MTBE, should likewise not be deemed a “pollutant.”

From 1985 forward, the insurance industry will also rely upon the so-called “absolute” or “total” pollution exclusions to exclude coverage for MBTE contamination. These exclusions eliminate the “sudden and accidental” language. The main areas of litigation concern: (1) the term “pollutant;” which is the same as discussed previously; and (2) whether there has been an “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape” of the purported “pollutant.”

As for the second issue, the insurance industry made clear that these exclusions were designed to reach environmental issues like those addressed by federal environmental laws; i.e., regular, long-term industrial pollution. For instance, at a 1985 hearing before the Texas State Board of Insurance, representatives of the insurance industry stated that the so-called absolute exclusion was not intended to bar coverage in all instances. These representatives discussed several examples of passive pollution which were not intended to be barred from coverage, including leaking underground tanks. In fact, the Liberty Mutual representative said specifically that the manufacturer of leaking underground storage tanks should not lose coverage for “pollution”:

You can read today’s CGL policy and say that if you insure a tank manufacturer whose tank is put in the ground and leaks, that leak is a pollution loss. And the pollution exclusion if you read it literally would deny coverage for that. I don’t know anybody that’s reading the policy that way.

Thus, policyholders should be able to hold insurance industry to its words to insurance regulators: pollution exclusions should not apply in the normal circumstances that would give rise to “releases” or “dispersals” of MTBE into the environment.

Conclusion

While coverage for MTBE-related liabilities will not come easily, policyholders should be heartened to know that strong evidence and arguments exist that support a claim for MTBE coverage. Your insurance company may say no, but Make Them Be E ! 

ABOUT THE AUTHORS

John N. Ellison is the Managing Shareholder and Robert E. Frankel and Michael Conley are Shareholders in the Philadelphia office of Anderson Kill & Olick, P.C. Anderson Kill regularly represents policyholders exclusively in insurance coverage disputes with insurance companies. John N. Ellison can be reached at 215-568-4710 or jellison@andersonkill.com, Robert E. Frankel can be reached at 215-568-4295 or rfrankel@andersonkill.com and Michael Conley can be reached at: 215-568-4707 or mconley@andersonkill.com.

riskVue | The webzine for risk management professionals
July 2004