Some four decades after the advent of the first pollution exclusion, the insurance industry continues to attempt to apply the exclusion far beyond what any reasonable policyholder would expect when purchasing coverage. Despite drafting history that reflects a rather narrow intent when the exclusion was first developed, insurer “creativity” is seemingly limitless in subjecting the term “pollution” to remarkably twisted definitions.
For policyholders who think the term “pollution” is subject to a common sense reading of the word, a few Florida decisions may come as quite a shock. In Certain Interested Underwriters at Lloyds London v. Jindani, 2009 U.S. Dist. LEXIS 119801 (M.D. Fla., Dec. 23, 2009), a Florida court found that a pollution exclusion barred coverage for bodily injury relating to the consumption of Slush Puppies, allegedly contaminated with gasoline. Another Florida court found that a claim for exposure to allegedly dirty swimming pool water was not covered due to a pollution exclusion. See First Specialty Ins. Corp. v. GRS Mgmt. Assocs., 2009 U.S.Dist. LEXIS 72708 (S.D. Fla. 2009). It is remarkable that folks survive summer fun surrounded by such dangerous “pollution” as frozen drinks and swimming pools!
Perhaps even more remarkable was the Wisconsin Supreme Court’s ruling earlier this year in Hirschorn v. Auto Owners Ins. Co., 338 Wis.2d 761 (2012). The Hirschorn family maintained a homeowners policy that covered their vacation home. Unfortunately for the Hirschorns, some bats decided to move into their home and a significant amount of bat guano began to accumulate. After several unsuccessful attempts to remove the bats (and bat guano), the Hirschorns eventually had to demolish their home and construct a new one.
While bat guano may not be pleasant, it is unquestionably a naturally occurring substance which the Hirschorns played no part in creating. Nevertheless, the Wisconsin Supreme Court found that the “penetrating and offensive” odor of bat guano “make impure or unclear the surrounding ground and air space” and cause “inflammation, soreness, or irritability of a person’s lungs and skin.” 338 Wis.2d at 777. The Wisconsin Supreme Court further noted that bat guano is a “unique and largely undesirable substance” (query in what situations bat guano would actually be desirable) and “[a] reasonable homeowner would therefore understand bat guano to be a pollutant.” Id. at 780. Thus, at least in Wisconsin, an exclusion that was initially developed to address affirmative conduct that intentionally harmed the environment now potentially encompasses naturally occurring substances deemed to be “undesirable” or “offensive.”
Policyholders can take some comfort that other states have not followed Wisconsin’s “batty” insurance policy interpretation. Just two weeks after the decision by the Wisconsin Supreme Court, the Indiana Supreme Court dealt a serious blow to the insurance industry’s ever expanding view of the pollution exclusion. In a closely watched decision in State Auto. Mut. Ins. Co. v. Flexdar, Inc., 964 N.E.2d 845 (Ind. 2012), the Indiana Supreme Court held that a pollution exclusion did not bar coverage for the policyholder’s liability for cleanup costs relating to the presence of TCE in soil and groundwater at its facility. The Indiana Supreme Court had previously found an insurance policy’s definition of “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste” to be ambiguous and that the clause “cannot be read literally as it would negate virtually all coverage.” See American States Ins. Co. v. Kiger, 662 N.E.2d 945, 948 (Ind. 1996).
In Flexdar, the Indiana Supreme Court again rejected the “literal” approach to interpreting pollution exclusions as it “eliminates practically all coverage yielding, in our opinion, untenable, results.” 964 N.E.2d at 851. The Indiana Supreme Court further found that interpreting pollution exclusions with a “situational” approach (in which the exclusion is upheld only in cases of “traditional” environmental contamination) also was “problematic” as it “leaves courts in the awkward and inefficient position of making case-by-case determinations as to the application of the pollution exclusion.” Id.
Instead, the Indiana Supreme Court applied well-established policy interpretation principles that require exclusions to be clear and unambiguous before they are applied. As the Court reiterated from prior decisions, “[a]fter all, the insurance companies write the policies; we buy their forms or we do not buy insurance.” Id. at 852. The Court noted that other pollution exclusion forms, including ones issued by the same insurer, explicitly identified substances it meant to exclude by references to substances identified in USEPA lists and/or described in statutes such as CERCLA.
Making these issues even more complicated for policyholders addressing insurer attempts to apply the pollution exclusion to exclude coverage is that the vast majority of states have issued decisions that fall somewhere between Wisconsin’s pro-insurer decision in Hirschorn and the Indiana Supreme Court’s decision in Flexdar. Policyholders should consider several steps to ensure that their potential coverage is maximized including: (1) reviewing and comparing insurer policy forms during the underwriting process to see if more favorable provisions can be obtained; and (2) when a claim arises, considering all potentially available forums for litigating a coverage dispute given the inconsistent law in various jurisdictions.
The insurance industry will undoubtedly continue to seek to expand the application of the pollution exclusion to slush puppies, swimming pools, bat guano, and beyond. Policyholders should resist such efforts, particularly when it creates absurd results that eviscerate the coverage protections they purchased.
If you would like additional information on the topics addressed in this post, please contact Ty Childress at firstname.lastname@example.org.