19 ELR 10351 | Environmental Law Reporter | copyright © 1989 | All rights reserved

Striking a Balance: A Proposal for Interpreting the Pollution Exclusion Clause in Comprehensive General Liability Insurance Policies

E. David Hoskins

Editors' Summary: One of today's hottest legal battles is the ongoing dispute between corporations and their insurance companies over who will pay for hazardous waste cleanup. When Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act in 1980, it decided that the private sector, not government, would be liable for most of the cleanup costs. But within the private sector, Congress left open to what extent the standard insurance policies would cover this liability. Literally tens of billions of dollars in cleanup costs ride on the outcome, and well-financed corporate waste generators and corporate insurers have challenged one another with mixed success in courts all over the country.

In this Article, the author analyzes the case law interpreting the pollution exclusion clause, one of the standard form insurance clauses that are at the root of the controversy. He points out the subtle changes in the underlying facts that have led judges to shift their interpretations from favoring insureds to favoring insurers. He suggests that these factual distinctions, turning on whether the insured was active in causing the pollution, can provide a workable rule for determining when insurance covers the damage.

Mr. Hoskins is an associate with the law firm of Goodell, DeVries, Leech & Gray in Baltimore, Maryland. He has formerly served as an Assistant to the General Counsel in the Office of the General Counsel, Department of the Army.

[19 ELR 10351]

One of the growing battles in environmental law is between insurance companies and their insureds, over whether standard insurance contracts cover pollution liability. In many ways, this battle represents the second wave of the American legal system's response to pollution. In the first wave, some of which is still being played out, government and the victims of pollution have sought to shift pollution's costs from the victims of pollution to those who caused the pollution. In the more recent, second wave, those who caused pollution seek to shift its cost onto their insurance companies.

The battle is still escalating, but already its outcome promises to shape society's response to a number of environmental issues and has implications for the long-term stability of several industries, especially the insurance industry. For example, in one case involving Shell Oil Company and its insurance coverage for hazardous waste in Rocky Mountain Arsenal, Colorado, and Fullerton, California, up to $ 1 billion in liability could be shifted to insurance companies.1

At issue in virtually all of these disputes is the interpretation of the coverage provided by comprehensive general liability (CGL) insurance policies. A CGL policy is an "all-risk" contract between the insurance company and the insured, under which insurance coverage is provided for practically any event causing bodily injury or property damage unless specifically excluded from coverage by the policy.2

CGL policies are essentially standard form policies made up of standardized clauses that have been developed for nationwide consistency by insurance industry organizations.3 Under the standard CGL coverage clause the insurer agrees to indemnify the insured for "all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence."4 The term "occurrence" is defined to mean "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."5 Thus, under the standard CGL policy, coverage is provided for damages even if caused by an event that occurs over a long period of time, unless a policy exclusion applies. Additionally, under the definition of "occurrence," an intentional activity is covered if the resulting damage was neither expected nor intended.6

With the advent of federal and state legislation addressing the cleanup of hazardous wastes and the growth of toxic tort litigation, liable parties began looking to their CGL policies for relief. Faced with the prospect of astronomical liability, the insurance industry reacted with a concerted effort to disclaim coverage under CGL policies whenever the damage claim involved pollution.

In the ensuing insurance coverage disputes between the insurers and insureds, several legal theories for denying coverage emerged. For example, in lawsuits involving response costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),7 insurance companies argue that CERCLA cleanup costs [19 ELR 10352] do not constitute "damages" under the policy coverage clause because cleanup costs are claims in equity rather than damages.8 Similarly, in situations where the cleanup occurs on the insured's property, insurers argue that the cleanup costs are excluded by the CGL policy's exclusion of damages to the insured's own property.9

One over-arching issue, in cases relating to damages caused by pollution is the standard "pollution exclusion" clause contained in the CGL policy. This clause provides that coverage will not apply

to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, 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.10

The clause's very structure invites confusion. The "occurrence" definition in the standard CGL policy first seems to make coverage apply to pollution damage. Then the pollution exclusion clause seems to completely remove coverage for all pollution damage. Then the last phrase in the clause seems to restore coverage if the pollution was "sudden and accidental."

his Article traces the evolution of the court decisions that have interpreted the pollution exclusion clause. The first section examines the early decisions, holding that the pollution exclusion clause is merely a restatement of the occurrence definition and therefore bars coverage only if the pollution damage was intended or expected by the insured. Next, the Article focuses on a line of decisions appearing after 1984, generally interpreting the exclusion to bar coverage for all pollution-related damage unless the polluting activity was both unexpected and occurred instantaneously. The apparent conflict created by these two lines of authority is examined in the third section of the Article. Central to the two diverging lines of cases is the meaning of "sudden and accidental," the last three words of the pollution exclusion clause. Finally, this Article analyzes these different interpretations and concludes that the current trend goes too far in limiting coverage for pollution damages. The Article suggests that these two lines of authority do not actually conflict because they were decided in different factual contexts. If each is applied only to the appropriate facts, both lines of cases provide a workable interpretation to the pollution exclusion clause under which coverage will be barred for only intentional pollution activities.

The Jackson Township Line of Cases: The Pollution Exclusion Clause Does Not Bar Coverage for Unexpected and Unintended Pollution Damage

The early cases on CGL insurance coverage developed principally in New York and New Jersey.

New York Cases

One of the earliest decisions interpreting the pollution exclusion clause was a New York state court opinion in Farm Family Mutual Insurance Company v. Bagley.11 At issue was whether the pollution exclusion clause relieve the insurance company's duty to defend Bagley in a lawsuit brought by a neighbor alleging that crop spraying on Bagley's property damaged the neighbor's vineyard.12 Bagley's insurer disclaimed coverage on the ground that the crop spraying was an intentional act, but the court ruled that the key issue was not Bagley's intent with respect to the crop spraying, but whether the damage caused by the dispersal onto the neighbor's property was expected and intentional.13

The next significant New York case to construe the pollution exclusion clause was Allstate Insurance Company v. Klock Oil.14 That case involved an insurance coverage dispute over whether Allstate Insurance owed Klock Oil a duty to defend and indemnify for any injuries from a leaky gasoline storage tank that Klock Oil installed for a customer.15 The key issue in Klock Oil was whether the escape of gasoline from the negligently installed storage tank fell within the "sudden and accidental" exception to the pollution exclusion clause. The Klock Oil court construed "accidental" as meaning "unexpected, unusual, and unforeseen,"16 and concluded that, in the absence of an intent to cause harm, injury resulting from ordinary negligence is accidental.17 The court then ruled that the [19 ELR 10353] term "sudden" did not mean that the pollution discharge had to occur instantaneously.18 Instead, the court ruled that the inquiry whether the "sudden and accidental exception applies is to be focused on whether the resulting damage was unexpected and unintended" by the insured.19 Under this analysis the court ruled that coverage existed because Klock Oil neither intended or expected that the gasoline tank it installed would leak and cause damage.

In Niagara County v. Utica Mutual Insurance Company,20 a New York state court ruled that the pollution exclusion clause was intended to apply only to "actual polluters" who by their actions could be said to have expected or intended that the damage would occur.21 Niagara County was one of several named defendants in the litigation that arose out of the "Love Canal" contamination. Niagara County owned Love Canal, and all other defendants in the underlying litigation dumped wastes at the Love Canal. In Niagara County, the Fourth Department ruled that the insurer owed the County a duty to defend because, unlike the other named defendants in the underlying litigation, the county did not actually participate in dumping contaminants into the Love Canal.22

New Jersey Cases

The leading New Jersey case interpreting the pollution exclusion clause is Jackson Township Municipal Utilities Authority v. Hartford Accident and Indemnity Company,23 and the decision is perhaps the most prominent in this line of cases. In that case, the underlying dispute arose when the Authority was sued after seepage from a landfill used by the Jackson Township Municipal Utilities Authority contaminated the Cohansy Aquifer.24 At the outset of its opinion, the court explained that in resolving problems of policy interpretation, any ambiguities must be resolved in favor of the policy holder. After noting that the trend in other jurisdictions was to allow coverage under CGL policies containing the same pollution exclusion clause for the unintended results of intentional discharges of pollution,25 the court explained that the courts of other jurisdictions were nearly unanimous in finding that the standard pollution exclusion clause was ambiguous. This ambiguity, in turn, had led the courts to focus on the resulting damage, rather than the discharge, and to rule that coverage existed if the damage or injury was unintended.26

Recognizing this trend, the Jackson Township court concluded that the pollution exclusion clause should be interpreted as a restatement of the "occurrence" definition so that the CGL policy as a whole will cover claims, including those resulting from pollution, when the injury or property damage is unexpected or unintended.27 Under this analysis, the pollution exclusion clause will act to bar coverage for injuries caused when the person who discharged the pollution possessed knowledge that the discharge would result [19 ELR 10354] in the damage.28 If, however, the pollution damage was neither expected nor intended, as in the case of damage caused by leachate of materials disposed at a landfill, the pollution exclusion will not apply.29

New Jersey's Jackson Township decision was reaffirmed in Broadwell Realty Services v. Fidelity and Casualty Company of New York.30 In Broadwell, the Appellate Division of the New Jersey Superior Court ruled that the pollution exclusion clause did not bar coverage for damages resulting from the unexpected discharge of gasoline through cracks and fissures in an underground storage tank.31 The Broadwell court supported its conclusion with a discussion of the history of the pollution exclusion clause. Prior to 1966, coverage under a CGL policy was not based on the "occurrence" definition. Rather, coverage was determined by focusing on whether the property damage and personal injury was "caused by accident."32 Unfortunately, these policies did not define the term "accident," and when the courts took on this task they defined the term broadly as "an unexpected happening without intention or design."33 This interpretation led to judicial decisions requiring coverage for intentional or willful acts of the insured in those instances where the insured had no intent to cause the resulting harm or was not substantially certain that the harm would occur.34

In 1966, the insurance industry changed from accident-based coverage to occurrence-based coverage to better respond to consumer demands to include protection for damages resulting from long-term or repeated exposure to conditions,35 and to acknowledge the judicial trend to read the term "accident" broadly.36 In 1973, the pollution exclusion clause was added to the standard CGL policy to provide an incentive to policy holders to take steps to reduce pollution by excluding coverage for knowing or intentional pollution of the environment.37

In rejecting the insurance company's interpretation of the pollution exclusion clause, the Broadwell court pointed to statements by the drafters of the clause in support of the proposition that the exclusion was "intended to be coextensive with the scope of the definition of 'occurrence.'"38 The court concluded that the pollution exclusion clause bars coverage for damages caused by intentional pollution, but does not bar coverage when the conduct of the policy holder, not intended or expected to result in pollution, caused damages.39

The Trend Spreads to Other States

During the early to mid-1980s, several jurisdictions adopted the rationale developed in Jackson Township. In United Pacific Insurance Company v. Van's Westlake Union, Inc.,40 the Washington Court of Appeals ruled that the pollution exclusion clause was intended to deprive active polluters from coverage, but does not apply where the damage caused was neither expected nor intended.41 That case involved damages caused by a leak of 80,000 gallons of gasoline from a service station over a period of several months. The Court of Appeals found the policy to be ambiguous because it defined "occurrence" to include continuous conditions while also appearing to exclude coverage for all but sudden pollution discharges.42 Resolving this ambiguity in the insured's favor, the court ruled that the exclusion did not apply because the discharge and resulting damage were not expected or intended.43

Massachusetts has also interpreted the pollution exclusion clause in favor of the insureds. In Shapiro v. Public Service Mutual Insurance Company,44 the issue was [19 ELR 10355] whether Shapiro's CGL policy provided coverage for damage caused by a leak from a corroded underground fuel storage tank. In finding that the standard pollution exclusion clause did not bar coverage, the Appeals Court of Massachusetts ruled that the term "sudden" means "happening without previous notice … coming or occurring unexpectedly, unforeseen, or unprepared for;" and the term "accidental" means "an unexpected, undersigned, and unintended happening or a mishap."45

In City of Northglenn v. Chevron U.S.A., Inc.,46 the U.S. District Court for colorado addressed the pollution exclusion clause. The case involved an insurance coverage dispute arising out of a slow leak from a Chevron gas station's underground storage tank that lead to 171 personal injury claims and the need to evacuate and eventually purchase 42 nearby homes.47 Applying Colorado law, the court concluded that the gradual seepage of gasoline through the son and groundwater and into the sewer system was the cause of the injuries and property damage sustained, and that the damage was an "occurrence" under the excess insurance policy.48 In construing the pollution exclusion clause, the court concluded that an ambiguity existed between the policy's "occurrence" definition, which included coverage for continuing conditions, and the policy's pollution exclusion clause, which limited coverage for the escape of pollution to those instances where the escape was "sudden and accidental."49 Under Colorado law, ambiguities in insurance policies are construed in favor of the insured and against the insurer, unless the intent of the parties, as established by extrinsic evidence, makes clear that any ambiguities in policy language had been clarified.50

In New Castle County v. Hartford Accident and Indemnity Company,51 the U.S. District Court for Delaware ruled that the term "sudden" in the pollution exclusion clause means "unexpected."52 New Castle County arose out of a motion seeking a declaratory judgment that insurance companies must defend and indemnify the County for claims that resulted when leachate from landfills used by the County contaminated nearby wells.53 Several insurance companies filed a motion for summary judgment on several issues, including the effect and meaning of the pollution exclusion clause contained in each of the CGL policies.54 The court noted that under Delaware law, insurance policies are contracts of adhesion.55 As such, any terms contained in the policies that are ambiguous because they permit two or more reasonable interpretations are "construed in favor of the insured and strictly against the insurer."56 The court concluded that the term "sudden" in the pollution exclusion clause was ambiguous and should therefore be interpreted in favor of the insured to mean "unexpected."57

Summary of Early Decisions

In general, the early court decisions narrowly construed the pollution exclusion clause by relying on the common law maxim that ambiguities in insurance policy clauses are to be construed in favor of the insured, especially if the ambiguous clause is an exclusion clause. The insurers argued that the term "sudden" in the exception to the pollution exclusion clause barred coverage for damage caused by pollution unless the polluting discharge was instantaneous. The courts rejected this argument, ruling that an ambiguity existed between the "occurrence" definition, which provided coverage for damage caused by continuous conditions, and the term "sudden" in the pollution exclusion clause, which could mean either cinstantaneous" (proinsurer) or "unexpected" (pro-insured). In light of this ambiguity, the courts interpreted the pollution exclusion clause to be a restatement of the "occurrence" definition, often drawing support from extrinsic evidence such as representations made by the insurance trade organizations that drafted the standard clause. As such, coverage extended to the willful or intentional acts of the insured if the insured had no intent to cause the resulting harm or was not substantially certain that the harm would occur.

Under this interpretation, coverage is provided for pollution activities if the insured establishes that the resulting damage was unintentional and unexpected. Although this interpretation, if carried to its logical conclusion, would also provide coverage for the unexpected damage caused by intentional polluting, these early decisions did not involve intentional polluters. Rather, they involved either the accidental, unexpected rupture or cracking of a storage tank, or a situation where the insured was being required to share in the cleanup costs related to seepage from a landfill. In each of these fact situations the insured neither expected nor intended that the activity involved would lead to pollution damage. In the storage tank cases, the insured expected the tanks to remain sound and not leak or rupture. Similarly, in the landfill cases, the insured had no expectation that disposal at a landfill would lead to pollution, because using a landfill represented the appropriate, non-polluting method to dispose of waste.

The Pendulum Swings Too Far in the Techalloy Line of Cases: Interpreting the Pollution Exclusion to Bar Coverage Unless the Discharge is Instantaneous

Beginning in 1984, a string of victories for insurance companies began to emerge. At their heart, these decisions usually find that the term "sudden and accidental" in the pollution exclusion clause only restores coverage for pollution that is virtually instantaneous.

In the earliest pro-insurer decision, Techalloy Company, Inc, v. Reliance Insurance Company,58 the Superior Court [19 ELR 10356] of Pennsylvania ruled that the pollution exclusion clause was unambiguous and barred coverage for a personal injury action arising out of Techalloy's dumping and storage of trichloroethylene. The complaint in the underlying toxic tort action alleged that Techalloy disposed of trichloroethylene onto its property for over 25 years. While agreeing that the discharge could be considered "accidental," the court ruled that the pollution exclusion clause barred coverage because the discharge took place over time as a part of Techalloy's manufacturing process and was not "sudden."59 Thus, in Techalloy, the court ruled that the underlying complaint alleged an "occurrence," but that insurance coverage was barred because the discharge was not instantaneous.60

Similarly, in 1985, in Transamerica Insurance Co. v. Sunnes,61 the Oregon Court of Appeals ruled that an intentional discharge of waste materials regularly over a period of many years was not "sudden or accidental" and thus fell within the pollution exclusion clause.62 The case involved damages to city sewer lines caused by the discharge of acid and caustic wastes into the system by the Culligan Water Conditioning Company. Culligan argued that the pollution exclusion clause did not apply because the damage to the sewer line was unintentional.63 The court rejected this argument and ruled that the pollution exclusion clause applied notwithstanding the fact that the damage was unintentional because the discharge of the acid and caustic waste was intentional.64

In 1987, in Claussen v. Aetna Casualty and Surety Company,65 the U.S. District Court for the Southern District of Georgia ruled that long-term, gradual releases of hazardous wastes from a landfill owned and operated by the insured were covered by the pollution exclusion clause, even though the damage that resulted from the gradual release was unexpected.66 Applying Georgia law, the court concluded that the word "sudden" in the pollution exclusion clause connoted abruptness and therefore would exclude damages caused by gradual leaching into the groundwater.67 The court agreed with the insurers' explanation that the pollution exclusion clause was drafted based on the assumption that the "occurrence" definition would exclude damage arising from intentional pollution activities because any resulting pollution-related damage would not be unintentional. When courts began interpreting "occurrence" to require coverage for intentional pollution when the specific damage was unintended, the industry was forced to rely on the pollution exclusion clause to remove this class of liability from coverage.68 Thus, the court reasoned, the insurance industry's past representations were not inconsistent with the industry's current legal position.69

In 1988, in International Minerals and Chemical Corporation v. Liberty Mutual Insurance Company,70 the Appellate Court of Illinois ruled that the pollution exclusion clause was unambiguous and removed a duty to defend an Environmental Protection Agency (EPA) civil enforcement action.71 At issue in the underlying EPA enforcement action was pollution caused at the plaintiff's barrel reconditioning facility. In the course of the barrel reconditioning process, used barrels were cleansed of residue and the residue was deposited onto the ground. Eventually the waste materials from the used barrels entered and contaminated the groundwater underlying the facility. At the outset the International Minerals court focused on the definition of "occurrence," and concluded that coverage under the CGL policy is triggered whenever damage occurs that was unexpected or unintended.72 Next, the court explained that the "occurrence" definition is narrowed by several clauses, including the pollution exclusion clause, that remove from coverage all damage caused by the discharge [19 ELR 10357] of pollutants into the environment.73 The exclusion focuses on the nature of the event and the nature of the damages, and applies regardless of the insured's intentions or expectations.74

The court then concluded that under the facts before it there had been an "occurrence," but that the pollution exclusion clause would apply unless the "sudden and accidental" exception to the pollution exclusion clause restored coverage.75

The court then interpreted "accidental" as being synonymous with the "occurrence" definition, and held that if the pollution activity were unexpected and unintended from the insured's standpoint, the first prong of the exception would be satisfied.76 In order to meet the "sudden" requirement, however, the pollution event must have "occurred without or on brief notice, abruptly or hastily."77 Applying this definition, the court ruled that no duty to defend existed because the pollution damage at issue was caused by disposal of barrel residue over a long period of time and the groundwater contamination was the result of a gradual, rather than sudden, process.78

In 1988, the Sixth Circuit applied Kentucky law and found the language of the pollution exclusion clause unambiguous in United States Fidelity and Guarantee Company v. Star Fire Coals, Inc.79 At issue was whether the CGL policy covered coal dust drifting from a coal tipple, causing bodily injury and property damage.80 The Sixth Circuit found the CGL policy to be unambiguous,81 explaining that under the policy's "occurrence" definition, coverage is provided for damages that result from "an accident including continuous or repeated exposure to conditions."82 The pollution exclusion clause, however, excludes from coverage all damages caused by the discharge of pollution, unless the discharge "is sudden and accidental."83 Thus, the court reasoned, the focus of the pollution exclusion clause is on whether the discharge, rather than the damage, was sudden and accidental. Next, the court interpreted the term "sudden" as placing a temporal requirement on the discharge.84 The court then went on to rule that, because the discharge of the coal dust occurred over an eight-year period as the result of normal operation of the coal tipple, the damages caused by that discharge were excluded under the policy.85

Summary of the Techalloy Line of Cases

Thus, beginning in 1984, courts reversed the earlier trend with respect to interpretation of the pollution exclusion clause. These later decisions reasoned that no ambiguity existed between the pollution exclusion clause and the CGL coverage provision. Applying the "plain meaning" rule, the courts interpreted the term "sudden" in the exception to the pollution exclusion clause as having a temporal meaning. Under this interpretation, only instantaneous, immediate, or abrupt discharges of pollution were considered to be covered by the CGL policy.

Different Facts Lead the Courts to Different Legal Theories

The factual setting in the Techalloy line of cases differs drastically from the factual settings before the courts that adopted the Jackson Township rationale. The Techalloy line of decisions involved coverage claims for damage arising from intentional pollution activities such as dumping trichloroethylene onto the ground, discharging acids into the city sewer system, depositing barrel residue and cleaning chemicals onto the ground, and discharging coal so as to release coal dust into the air. In everycase, the activity that caused the damage was one form or another of what a layman would probably consider intentional pollution, or at least reckless pollution. In contrast, the insureds in the Jackson Township line of cases did not perform an activity that would fall within a layman's understanding of intentional pollution. Instead, the Jackson Township line of cases involved pollution that occurred despite precautions to prevent it.

Thus, it appears that, beginning with Techalloy, courts believed CGL coverage should not be allowed for damages [19 ELR 10358] resulting from intentional pollution activities. Searching for a rationale through which coverage could be denied, the courts adopted the insurers' argument that the term "sudden" should be given a temporal meaning that connotes abruptness or an instantaneous event.

Unfortunately, this legal reasoning is not limited to intentional polluters, or even reckless polluters. The reasoning is so broad as to bar coverage even in instances where the pollution activity was unintentional.

The distinction is subtle, particularly where the prevailing practice was to dump hazardous waste openly, and its environmental effects were poorly understood. Though subtle, the difference seems nonetheless intuitive, and may explain why generalist judges, approaching these issues much as a layman would, find insurers' and insureds' arguments to have different persuasive values in different cases.

The Lines Blur: Coverage Denied for Unintentional Pollution

The seminal case applying the "'sudden' means 'instantaneous'" rule to unintentional polluting is Waste Management of Carolinas, Inc. v. Peerless Insurance Company, decided in 1986.86 In that case, the North Carolina Supreme Court ruled that the pollution exclusion clause exempted insurance coverage for damages caused by landfill seepage.87 Waste Management involved a claim by the landfill operators seeking indemnification or contribution from a waste hauler that had deposited waste material on a continuing basis at the landfill in the regular course of its business.88 The court first noted that the seepage from the landfill fell within the insurance policy's definition of "occurrence" and would be covered unless barred by an exclusion.89 Next, the court explained that because the focus of the pollution exclusion clause is on the nature of the damage, and not on the intention or expectation of the insured, it excludes all damage caused by pollution.90 The "sudden and accidental" exception to the pollution exclusion clause also focuses on the pollution event, and recaptures insurance coverage for unexpected pollution events that happen "instantaneously or precipitantly."91 The court concluded that the seepage damage could be considered "accidental" because it was arguably the unexpected or unintended result of the intentional dumping.92 However, because the seepage occurred over a long period of time, it was not "sudden" and hence fell outside the policy coverage.93

The Waste Management decision stands in stark contrast to the earlier Jackson Township line of cases. Both Jackson Township itself and New Castle County involved a landfill user facing liability for damages caused by the landfill's seepage. In these cases, the insured performed an activity that is not normally considered active polluting. Rather than disposing of their waste into a nearby storage pit or waterway, the insureds acted responsibly and brought their waste to a landfill for proper disposal. The Jackson Township and New Castle County decisions appeared to recognize the relative blamelessness of this class of insureds and ruled that their CGL policies provided coverage if the seepage damage was unexpected by the insureds. The Waste Management court was not swayed by the innocent circumstances of the insured, and ruled instead that no coverage existed under the CGL policy because the damage resulted from a gradual event, seepage from the landfill.

Similarly, in 1987, in Continental Insurance Company v. Lumberman's Mutual Casualty Company,94 the U.S. District Court for the Eastern District of Pennsylvania applied Pennsylvania law to an insured who contracted with a waste hauler who illegally dumped the waste. The court found that the dumping of waste at the Wade site was an occurrence under the policy because the insured waste generator neither expected nor intended the harmful dumping of its chemical waste.95 The court also ruled that an occurrence arose at each separate release. Nevertheless, the court ruled that because the chemical waste was released on numerous occasions over a 13-month period, the release was not "sudden" and thus was outside the policy coverage.96

In 1988, in United States Fidelity and Guarantee Company v. Murray Ohio Manufacturing Company,97 the U.S. District Court for the Middle District of Tennessee applied Tennessee law and adopted the reasoning of Waste Management to bar insurance coverage for a landfill contributor. The court explained that, under the pollution exclusion clause, no coverage exists for damage caused by a "gradual release, escape, discharge, or dispersal of irritants, contaminants, or pollutants."98 In reaching this conclusion, the court held that the clause was unambiguous and that "the term 'sudden' combines both the idea of 'unexpected,' and the idea of 'quick.'"99

Thus, since the Waste Management decision, some [19 ELR 10359] courts have interpreted the pollution exclusion clause to preclude coverage under CGL policies for all pollution-related damage, irrespective of whether the insured expected or intended the discharge to occur, unless the pollution discharge at issue was instantaneous. Under this rule, it is hard to imagine a case where the "sudden and accidental" exception would preserve coverage other than a spontaneous rupture of a chemical or fuel storage tank. Even in that situation, coverage may be lost if the ultimate damage results from gradual seepage of the chemicals or fuel released from the storage tank.100

Confusion Spreads: Some Jurisdictions Adopt Both Lines of Cases

Beginning in 1987, several jurisdictions developed split authority on the interpretation of the pollution exclusion clause. Such a split currently exists, for example, between the U.S. District Court for the Southern District and the U.S. District Court for the Northern District of Florida. The Southern District ruled in Pepper's Steel and Alloys Inc. v. United States Fidelity and Guarantee Company101 that the pollution exclusion clause retains insurance coverage for disposal of transformer oil later learned to contain polychlorinated biphenyls (PCBs), where ultimately the PCBs contaminated an aquifer.102 In ruling that the insurance companies owed a duty to defend to the insured, the court interpreted the pollution exclusion clause to exclude only those activities that were expected or intended from the insured's point of view. Under this approach, the court ruled that, notwithstanding the fact that the insured intentionally disposed the contaminated oil, the release of the PCBs was "sudden and accidental" because it was "neither expected nor intended from the [insured's] point of view."103

The Northern District of Florida reached the opposite conclusion in Hayes v. Maryland Casualty Company.104 In Hayes, the court ruled that whether the groundwater pollution was intended by the insured is relevant only for the purposes of determining whether the pollution was accidental. The court applied a temporal meaning to the term "sudden" and ruled that the pollution exclusion clause applied because the waste disposal, and the resulting leaching into the groundwater, occurred over a long period of time.105

Michigan is another jurisdiction in which different courts have come to different conclusions with respect to the interpretation of the pollution exclusion clause. In a brief opinion in Jonesville Products, Inc. v. Transamerica Insurance Group,106 the Michigan Court of Appeals interpreted "sudden" to mean unexpected and "accidental" to mean unintended.107 But in the federal courts in Michigan, while the Western District adopted the jonesville Products rationale in United States Fidelity and Guarantee Company v. Thomas Solvent,108 the Eastern District in Fireman's Fund Insurance Company v. Ex-Cell-O Corporation109 rejected the reasoning of Jonesville Products and ruled that the term "sudden" in the "sudden and accidental" exception to the pollution exclusion clause must be read temporally to mean "brief, momentary, or lasting only a short time."110 The court concluded that only when the discharge or release of pollution is brief, momentary, or lasting only a short time can it be said to be "sudden," and thereby exempt from the pollution exclusion clause.111

In each of these jurisdictions, splits in authority have developed when a court has misapplied the rationale from the two lines of authority established in the earlier decisions involving the pollution exclusion clause. In Florida, for example, the Southern District's decision in Pepper's Steel applies the Jackson Township rationale to the inappropriate factual situation of intentional discharge of waste oil onto the ground. The Northern District rejected this approach in Hayes, choosing instead to follow the Techalloy reasoning, which bars coverage for intentional polluters. Michigan's conflict can also be traced back to the misapplication of the Jackson Township rationale to a case involving intentional pollution. In Jonesville Products, the Court of Appeals applied the rationale developed in Jackson Township to a fact pattern involving intentional pollution. The Ex-Cell-O court declined to follow Jonesville Products in a case with similar facts, but adopted instead the Techalloy rationale.

Ohio is another jurisdiction with apparently conflicting decisions. However, in contrast to the other jurisdictions with split authority, Ohio's split has resulted from applying the rationales established in both Jackson Township and Techalloy to the appropriate factual settings. In Buckeye Union Insurance Company v. Liberty Solvents and Chemicals Company, Inc.,112 a state intermediate appellate [19 ELR 10360] court ruled that the pollution exclusion clause did not remove the insurance company's duty to defend against a CERCLA enforcement action at the Chem-Dyne hazardous waste facility.113 Liberty Solvents contracted with Chem-Dyne to receive and properly dispose of Liberty Solvents' waste. The Chem-Dyne site became contaminated through Chem-Dyne's negligent handling of the wastes. The Buckeye Union court adopted the reasoning of Jackson Township and ruled that the pollution exclusion clause barred coverage only for pollution damages that were intended or expected by the insured.114

In Borden, Inc. v. Affiliated FM Insurance,115 the United States District Court for the Southern District of Ohio refused to follow Buckeye Union because it believed that the Ohio Supreme Court would not adopt that court's construction of the pollution exclusion clause.116 The underlying dispute involved an allegation that Borden regularly deposited radioactive wastes on its property as part of its production of phosphoric acid. The Borden court declined to follow Buckeye Union because it believed that the Ohio Supreme Court would adopt the reasoning of Waste Management v. Peerless117 to these facts.118

Thus, in Ohio, the courts seem to have recognized the importance of the underlying facts in interpreting the pollution exclusion clause. In the factual setting of intentional pollution, the Borden court denied coverage. Conversely, Buckeye Union held that the pollution exclusion clause would not bar coverage for unexpected damage in a case that did not involve intentional pollution by the insured. Rather than rely exclusively on one of the two lines of authority interpeting the pollution exclusion clause, the Ohio courts apply both lines of authority to the factual contexts in which they were decided.

Striking a Balance

Judicial interpretations of the pollution exclusion clause have evolved significantly since the clause was first added to the standard form CGL policy. Throughout the last decade, the exclusion has been held ambiguous by some courts and unambiguous by others. In the early decisions, arising out of catastrophic or unforeseeable events that did not involve intentional pollution, the exclusion was considered nothing more than a restatement of the "occurrence" definition. Starting with Techalloy, courts recognized that intentional pollution activity should not be covered under CGL policies. To reach this result, the courts ruled that the pollution exclusion clause was unambiguous and that a temporal meaning attached to the exclusion's "sudden and accidental" exception. Under this approach, pollution damage caused by an ongoing activity was excluded.

Unfortunately, beginning with Waste Management, courts extended the Techalloy rationale to facts more akin to those decided by the earlier, pro-insured decisions such as Jackson Township. In a similar vein, the Jackson Township rationale has been misapplied by several jurisdictions. It appears that many jurisdictions have attempted to find one interpretation of the pollution exclusion clause that will fit all factual settings.

In striving for a uniform interpretation, the courts have ignored the facts of the underlying disputes, choosing to focus instead on which particular interpretation of the pollution exclusion clause is currently in vogue and favored by other jurisdictions. Unfortunately, these courts have overlookedan obvious solution that provides for a consistent interpretation of the pollution exclusion clause. Rather than try to fit every factual setting into a single interpretation of the exclusion, courts should recognize the important distinction between actual or active pollution and accidental or unintentional pollution.

In those cases involving active pollution by the insured, the pollution exclusion clause should be interpreted to bar coverage regardless of the insured's expectation of the ensuing damage. On the other hand, coverage should always be provided for pollution damage, without regard to whether the release was gradual or spontaneous, if the insured was not engaged in a pollution discharge activity and the damage was unexpected or unintentional.

In addition to Ohio, several jurisdictions appear to be ready to adopt this approach to interpreting the pollution exclusion clause. For example, in Technicon Electronics Corporation v. America Home Assurance Company,119 New York's Appellate Division, Second Department, applied the pollution exclusion clause to an underlying dispute involving personal injury and CERCLA enforcement actions arising out of Technicon's long-term, intentional discharge of industrial wastes into a nearby creek.120 In ruling in favor of the insurers, the court found that the pollution exclusion clause barred coverage, giving "sudden" a temporal meaning.121 The court then distinguished the New York Fourth Department's earlier decision in Klock Oil122 on the grounds that Klock Oil involved an unintentional, "accidental" discharge.123 The Technicon court treated as dicta the more general discussion in Klock Oil that unintended damage falls within the "sudden and accidental" exception to the pollution exclusion clause, and ruled instead that if the pollution discharge was intentional, no coverage exists under the pollution exclusion clause regardless of whether the damage that resulted was unintentional.124 The court also rejected the New York Fourth Department's analysis in Farm Family125 that unintentional [19 ELR 10361] dispersal of pollution intentionally discharged could be viewed as accidental.126

Thus in Technicon, a New York appellate court applied the Techalloy rationale to a fact pattern involving intentional pollution. Unfortunately, a different panel of the New York Second Department misapplied the Techalloy rationale five weeks later in Powers Chemco, Inc. v. Federal Insurance Company.127 The plaintiff in Powers Chemco was a manufacturer of photographic supplies who purchased a parcel of land from a typewriter ribbon manufacturer. Several years later, while digging in a drainage basin, the plaintiff discovered hazardous material that had been disposed on the property by the previous owner. The plaintiff cleaned up the land under a consent decree with the New York Department of Environmental Conservation and then sought indemnification for the cleanup costs from his insurance company.128 At issue on appeal was whether the pollution exclusion clause defeated coverage for the cleanup. Notwithstanding the fact that Powers Chemco was not involved in any way with the discharge of the pollution, the court ruled that the pollution exclusion clause barred coverage.129

Nonetheless, it appears that the New York courts are beginning to focus on the nature of the underlying pollution activity when determining whether the pollution exclusion clause should bar coverage. In factual settings involving intentional pollution, such as directly discharging waste into a nearby creek, the pollution exclusion clause has been interpreted to bar coverage. However, in those situations where the discharge is not a form of intentional pollution, the exclusion may not apply.130

The Minnesota Court of Appeals has adopted a similar approach in Grinnell Mutual Reinsurance Company v. Wasmuth.131 This case pitted Grinnell Mutual, the insurer, against Eddie's Insulation in a coverage dispute over property damage and personal injury alleged when improperly installed insulation deteriorated and unexpectedly emitted formaldehyde.132 The court concluded that the intent of the pollution exclusion clause was to deny coverage for "those who know or should have known their actions would cause harm."133 The court distinguished the decisions of the appellate courts from other jurisdictions that had applied the pollution exclusion clause to preclude coverage,134 and went on to rule that under the doctrine of protecting the insured's reasonable expectation,135 the exclusion did not apply.136

Id.

See also United States Fidelity and Guaranty Co. v. Speciality Coatings Co., No. 87-3852 (Ill. App. 1989). In that case, the Appellate Court of Illinois, First District, declined to apply the reasoning of its earlier decision in International Minerals, supra notes 70-78 and accompanying text, to a factual setting involving unintentional pollution. In Specialty Coatings, the defendant contracted for the disposal of its drums and pails with a recycling company. The recycling company took delivery of the drums and pails at Specialty Coatings' loading dock and proceeded to dispose of the waste illegally. Specialty Coatings sought coverage for the cleanup action that ensued. In ruling that the pollution exclusion did not bar coverage, the court explained:

It is not clear from the circumstances of this case, and from the underwriting history of the exclusionary clause to which we will later refer, that the parties intended the exclusionary clause to apply whether the insured was active polluter or not. Certainly, those engaged in manufacturing processes would be expected to have sought other or additional insurance had they known that the mere act of engaging an independent agency such as a waste disposer in the ordinary course of having industrial wastes removed from their property would result in the denial of insurance coverage. There is nothing in the record to show whether such additional insurance was even available when defendants purchased their USF & G policy. This ambiguity must be resolved against USF & G in consonance with the authorities previously cited.

Id. at 4.

[19 ELR 10362]

These decisions provide a workable solution to CGL coverage disputes involving the pollution exclusion clause. Rather than focus solely on whether the damage is expected or on whether the discharge occurred quickly as opposed to gradually, these decisions were based on the insureds' intent concerning the discharge. Under this approach, occurrences that can be classified as acts of intentional or active pollution would not be covered by insurance. However, for those occurrences where the insured was not involved in active polluting, insurance coverage would remain.

Conclusion

The standard form pollution exclusion clause in CGL policies has been, and will continue to be, the subject of contentious litigation. Early decisions interpreting the pollution exclusion clause adopted a pro-insured approach, but were based on fact patterns that did not involve intentional pollution activity. In later decisions, this trend was reversed by courts in cases involving active polluting by the insured. These later decisions held that the pollution exclusion clause barred coverage. Some recent court decisions have recognized that the two lines of authority are based on different factual settings and can be read together to provide a workable interpretation of the pollution exclusion clause. In coverage disputes requiring interpretation of the pollution exclusion clause, courts should focus on the factual setting presented, and deny coverage only in those circumstances where the insured's activities represent intentional pollution.

1. Adler, Shell Has No Coverage for Cleanup, Jury Says, BUSINESS INSURANCE, Dec. 26, 1988, at 1.

2. Gordon and Westendorf, Liability Coverage for Toxic Tort, Hazardous Waste Disposal and Other Pollution Exposures, at 4, in INSURANCE CLAIMS FOR POLLUTION AND CONTAMINATION LOSSES (Defense Research Institute, 1988).

3. Price, Evidence Supporting Policyholders in Insurance Coverage Disputes, NATURAL RESOURCES AND ENVIRONMENT, Vol. 3, No. 2, at 17 (American Bar Association Section of Natural Resources Law, 1988).

4. Gordon and Westendorf, supra note 2, at 6.

5. Id. at 14.

6. Id. (citing International Minerals and Chemical Corp. v. Liberty Mutual Insurance Co., 168 Ill. App. 3d 361, 522 N.E.2d 758 (Ill. App. Ct. 1988)).

7. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 44001-44081.

8. See Verlan, Ltd. v. John L. Armitage & Co., 695 F. Supp. 950 (N.D. Ill. 1988). In holding that no duty to defend existed for Superfund response actions, the court ruled that

[C]ourts generally distinguish damage claims from equitable claims. Damages are remedial, pecuniary and intended to compensate for injury suffered. In contrast, restitution restores plaintiff's property to its former state, but does not remedy the injury sustained and involves no monetary gain to the injured parties.

Id. at 953 (citation omitted). See also Maryland Casualty Co. v. Armco, Inc., 822 F.2d 1348, 17 ELR 21277 (4th Cir. 1987) (under Maryland law, holding "damages" does not cover cleanup costs); Continental Insurance Cos. v. Northeastern Pharmaceutical and Chemical Co., 842 F.2d 977, 18 ELR 20819 (8th Cir. 1988), cert. denied, 109 S. Ct. 66 (1988) (under Missouri law, the term "damages" is not ambiguous and does not include cleanup costs under CERCLA). Contra New Castle County v. Hartford Accident & Indemnity Co., 673 F. Supp. 1359, 1365-67 (D. Del. 1987) (under Delaware law, holding "damages" includes cleanup costs).

9. See CPS Chemical Co. v. Continental Insurance Co., 222 N.J. Super. 175, 536 A.2d 311 (N.J. Super. Ct. App. Div. 1987) (insured's own property exclusion is given effect at least as to damage to the insured's site or the cost of alterations designed to improve insured's property). Contra Intel Corp. v. Hartford Acc. & Ins. Co., 692 F. Supp. 1171, 19 ELR 20459 (N.D. Cal. 1988) (groundwater contamination and other damage to third parties is sufficient to eliminate "own property" exclusion) and Broadwell Realty Services, Inc. v. Fidelity Casualty Co., 218 N.J. Super. 516, 528 A.2d 76 (N.J. Super. Ct. App. Div. 1987) (coverage owed for portion of remedial activities occurring on insured's property that could reasonably be allocated to preventing damage to neighboring property). See also Bankers Trust Co. v. Hartford Accident and Indemnity Co., 518 F. Supp. 371 (S.D.N.Y. 1981), vacated, 621 F. Supp. 685 (S.D.N.Y. 1981) (corrective action taken on property owned by the insured covered under the policy because it was done to prevent eventual damage to the property of third parties).

10. Gordon and Westendorf, supra note 2, at 17.

11. 64 A.D.2d 1014, 409 N.Y.S.2d 294 (N.Y. App. Div. 4th Dep't 1978) (memorandum opinion).

12. Id. at 1014, 409 N.Y.S.2d at 295.

13. Id.

14. 73 A.D.2d 486, 426 N.Y.S.2d 603 (N.Y. App. Div. 4th Dep't 1980).

15. Id. at 487, 426 N.Y.S.2d at 604.

16. Id. at 488, 426 N.Y.S.2d at 605 (quoting Miller v. Continental Insurance Co., 40 N.Y.2d 675, 677, 389 N.Y.S.2d 565, 566, 358 N.E.2d 258, 259 (1976)).

17. 73 A.D.2d at 488, 426 N.Y.S.2d at 605.

18. Id. at 489, 426 N.Y.S.2d at 605.

19. Id. See also National Grange Mutual Insurance v. Continental Insurance Co., 650 F. Supp. 1404 (S.D.N.Y. 1986). In National Grange the court relied on Klock Oil, supra n.14, in ruling that the pollution exclusion clause did not relieve an insurance company from its duty to defend a state enforcement action for CERCLA response costs. 650 F. Supp. at 1406.

20. 80 A.D.2d 415, 439 N.Y.S.2d 538 (N.Y. App. Div. 4th Dep't 1981), appeal dismissed, 54 N.Y.2d 608, 443 N.Y.S.2d 1030, 427 N.E.2d 1191 (N.Y. 1981).

21. Id. at 418, 439 N.Y.S.2d at 540.

22. 80 A.D.2d at 418 n.2, 439 N.Y.S.2d at 540 n.2. In Autotronic Systems v. Aetna Life and Casualty, 89 A.D.2d 401, 456 N.Y.S.2d 504 (N.Y. App. Div. 3d Dep't 1982), the court adopted the reasoning of Niagara County in a case involving injury to an employee caused by exposure to leaded gasoline sold at Autotronic's service station. 89 A.D.2d at 402, 456 N.Y.S.2d at 505. In holding that the pollution exclusion did not relieve the insurance company of its duty to defend, the court stated that

The clear purpose of the statutorily required exclusion is to strenghten New York's environmental protection standards by imposing the full risk of loss due to personal injury or property damage from pollution upon the commercial or industrial enterprise that does the polluting and by eliminating the enterprise's option of spreading the risk through insurance coverage. This purpose would not be served by applying the exclusion to insureds who are not engaged in the industrial or commercial activity that produce the pollution, although their acts of commission or omission may have resulted in bodily injury or property damage arising out of pollution.

89 A.D.2d at 403, 456 N.Y.S.2d at 506 (citation omitted).

23. 186 N.J. Super. 156, 451 A.2d 990 (N.J. Super. Ct. Law Div. 1982).

24. Id. The fact that the Authority's motion for summary judgment was limited to the issue of whether Hartford owed a duty to defend, and did not address the broader issue of whether a duty to indemnify existed, does not limit the precedential value of the case. Many jurisdictions require a lesser showing to establish a duty to defend. See, e.g., Verlan, Ltd. v. John L. Armitage & Co., 695 F. Supp. 950, 953 (N.D. Ill. 1988) (under Illinois law duty to defend extends to any claim that might possibly fall within the scope of the policy coverage); International Paper Co. v. Continental Casualty Co., 35 N.Y.2d 322, 361 N.Y.S.2d 873, 320 N.E.2d 619 (N.Y. 1974) (the right to a defense exists even if debatable theories are alleged against an insured, some of which may be within and others without the insured risk); Willoughby Hills v. Cincinnati Insurance Co., 9 Ohio St. 3d 177, 459 N.E.2d 555 (Ohio 1984) (duty to defend exists if the allegations state a claim that is potentially or arguably within the coverage, or if there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded). New Jersey applies the same standard to both issues. See, e.g., Danek v. Hommer, 28 N.J. Super. 68, 100 A.2d 198 (N.J. Super. Ct. App. Div. 1953), aff'd, 15 N.J. 573, 105 A.2d 677 (1954) (a duty to defend exists if the allegation in the complaint, if sustained, would result in a judgment for which the insurer would be required to pay).

25. 186 N.J. Super. at 162-63, 451 A.2d at 993. The Jackson Township court pointed to Farm Family Mutual Insurance Co. v. Bagley, 60 A.D.2d 1014, 409 N.Y.S.2d 294 (N.Y. App. Div. 4th Dep't 1978) (duty to defend exists for damage caused by unexpected and unintended disposal of spray onto neighbor's property notwithstanding the fact that the insured intentionally sprayed the chemical on the insured's own property); and Niagra County v. Utica Mutual Insurance Co., 103 Misc. 2d 814, 427 N.Y.S.2d 171 (N.Y. Sup. Ct., Niagara Cty. 1980), affirmed 80 A.D.2d 415, 439 N.Y.S.2d 538 (N.Y. App. Div. 4th Dep't 1981), appeal dismissed, 54 N.Y.2d 608, 443 N.Y.S.2d 1030, 427 N.E.2d 1191 (N.Y. 1981) (pollution exclusion clause is ambiguous and must be construed so as to afford coverage); and Molton, Allen and Williams, Inc. v. St. Paul Fire and Marine Insurance, 347 So. 2d 95 (Ala. 1977) (pollution exclusion is ambiguous and intended to cover only industrial pollution, not damages caused by negligently causing sand and dirt to pass onto neighboring property). The Jackson Township court's reliance on Molton, Allen was misplaced. That case involved the very narrow issue of whether damage caused to adjacent landowners when eroding sand and dirt was naturally deposited on their property was "pollution." 347 So. 2d at 97. In reversing the trial court's decision in favor of the insurance company, the Alabama Supreme Court ruled that the standard pollution exclusion clause was ambiguous and construed the clause as intended to cover only industrial pollution and contamination. Id. The interpretation of the terms "sudden and accidental" was not decided. Id. at 100.

26. 186 N.J. Super. at 164, 451 A.2d at 994.

27. Id. The court likened its interpretation to the "principle that coverage will not be provided for intended results of intentional acts but will be provided for the unintentional results of an intentional act." Id. (citing Lyons v. Hartford Insurance Group, 125 N.J. Super. 239, 310 A.2d 485 (N.J. Super. Ct. App. Div. 1973) cert. denied, 64 N.J. 322, 315 A.2d 411 (N.J. 1974)).

28. 186 N.J. Super. at 164, 451 A.2d at 994.

29. Id. The court also noted that the fact that the damage was caused by gradual seepage into the aquifer was irrelevant. Id. (quoting Allstate Insurance Co. v. Klock Oil Co., supra n.14 (the word "sudden" need not be limited to an instantaneous happening)).

30. 218 N.J. Super. 516, 528 A.2d 76 (N.J. Super. Ct. App. Div. 1987).

31. Id. at 519, 528 A.2d at 77. Defendant insurance companies also argued that the "own property" exclusion applied because the remedial activities for which coverage was sought took place on the insured's property. Id. at 521, 528 A.2d at 79. The court rejected this argument and ruled that the policy must provide coverage for that portion of the remedial activities that could be reasonably allocated to preventing damage to the neighboring property. Id. at 529-30, 528 A.2d at 83. The court nonetheless reversed and remanded the lower court's decision because the factual question of how the remedial costs should be allocated was not addressed by the lower court. Id.

32. Id. at 532, 528 A.2d at 84 (citing Hourihan, Insurance Coverage for Environmental Damage Claims, 15 FORUM 551, 552 (1980)).

33. 218 N.J. Super. at 532, 528 A.2d at 84 (citing Beacon Textiles Corp. v. Employers Mutual Liability Insurance Co., 355 Mass. 643, 645, 246 N.E.2d 671, 673 (1969)).

34. 218 N.J. Super. at 532, 528 A.2d at 84 (citing Quincy Mutual Fire Insurance Co. v. Abernathy, 393 Mass. 81, 84, 469 N.E.2d 797, 799 1984)).

35. 218 N.J. Super. at 532, 528 A.2d at 84.

36. Id. (quoting Tyler and Wilcox, Pollution Exclusion Clauses: Problems in Interpretation and Application Under the Comprehensive General Liability Policy, 17 IDAHO L. REV. 497, 399 (1981)).

37. 218 N.J. Super. at 532, 528 A.2d at 85 (citing Soderstrom, The Role of Insurance in Environmental Litigation, 11 FORUM 762, 767-68 (1976)). The Broadwell court explained that

The insured could not "seek protection from his liability insurer if he knowingly pollute[d]" the environment. Although it has been argued that the sole object of the clause was to limit coverage to accidents distinct in time and place, the more reasonable conclusion is that the exclusion was designed to "eliminate coverage for damages arising out of pollution or contamination, where such damages appear to be expected or intended on the part of the insured and hence are excluded by definition of 'occurrence.'"

218 N.J. Super. at 533, 528 A.2d at 85 (citations omitted).

38. 218 N.J. Super. at 534 n.1, 528 A.2d at 85 n.1. The court was persuaded by the statement by the Insurance Service Office that

Coverage for pollution or contamination is not provided in most cases under present policies because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence. The [pollution] exclusion clarifies this situation so as to avoid any questions of intent. Coverage is continued for pollution or contamination caused injuries where the pollution or contamination results from an accident.

Id. (emphasis in original).

39. Id. (citing Hurwitz and Kohane, The Love Canal — Insurance Coverage for Environmental Accidents, 50 INS. COUNS. J. 378, 378 (1983)). See also C.P.S. Chemical Co. v. Continental Insurance Co., 199 N.J. Super. 558, 489 A.2d 1265 (N.J. Super. Ct. Law Div. 1984), rev'd and remanded on other grounds, 203 N.J. Super. 15, 495 A.2d 886 (N.J. Super. Ct. App. Div. 1985) (pollution exclusion does not bar coverage for allegedly illegal disposal of waste by a company hired by the insured to properly dispose of waste).

40. 34 Wash. App. 708, 664 P.2d 1262 (Wash. Ct. App. 1983).

41. Id. at 714, 664 P.2d at 1266.

42. Id. at 712, 664 P.2d at 1265.

43. Id. at 714, 664 P.2d at 1266. The court explained that "[t]o hold otherwise would permit the ambiguous pollution exclusion clause to unfairly devour much of the policy and relieve the insurer from liability clearly within the spirit and intendment of the policy." Id.

44. 19 Mass. App. Ct. 648, 477 N.E.2d 146 (Mass. App. Ct. 1985), appeal denied, 395 Mass. 1105, 482 N.E.2d 328 (Mass. 1985).

45. Id. at 650, 477 N.E.2d at 149 (quoting New England Gas & Electric Assoc. v. Ocean Accident & Guaranty Corp., 30 Mass. 640, 116 N.E.2d 671 (1953)).

46. 634 F. Supp. 217 (D. Colo. 1986).

47. Id. at 218.

48. Id. at 222. The insurance policy covered "all sums the insured legally must pay as damages … caused by an accident," Id. at 220, but defined the term "accident" similarly to the definition of "occurrence" contained in post-1976 CGL policies. Id. at 221.

49. Id. at 222.

50. Id. The court found that material issues of fact remained and denied motions for summary judgment. Id. at 223.

51. 673 F. Supp. 1359 (D. Del. 1987).

52. Id. at 1364.

53. Id. at 1361.

54. Id. at 1362.

55. Id. (citing Hallowell v. State Farm Mutual Automobile Insurance Co., 443 A.2d 925, 926 (Del. 1982)).

56. 673 F. Supp. at 1362.

57. Id. at 1364.

58. 338 Pa. Super. 1, 487 A.2d 820 (Pa. Super. Ct. 1984).

59. Id. at 3, 487 A.2d at 822.

60. Id. at 8, 487 A.2d at 827. The court explained that

It is immediately apparent that [the underlying personal injury complaint] did not allege a sudden event. In contrast the allegations were directly the opposite, identifying the source of the problem as contamination which occurred on ca regular or sporadic basis from time to time during the past 25 years."

Id.

61. 77 Or. App. 136, 711 P.2d 212, 16 ELR 20848 (Or. Ct. App. 1985), review denied, 301 Or. 76, 717 P.2d 631 (Or. 1986).

62. 77 Or. App. at 140-41, 711 P.2d at 214.

63. Id.

64. Id.

65. 676 F. Supp. 1571 (S.D. Ga. 1987), certified to the Georgia Supreme Court, 865 F.2d 1217 (11th Cir. 1989).

66. Id. at 1572.

67. Id. at 1580. The court explained that

The terms of the Aetna CGL's are clear and unambiguous. An insured under the policies will be covered for bodily injury or property damage resulting from an occurrence. However, the pollution exclusion provides that coverage is not afforded with respect to pollution-related damage, even where the damage is the result of an occurrence. The exception to the exclusion, on the other hand, dictates in essence that if a pollution incident (discharge, escape or dispersal of hazardous materials) is sudden and accidental, and is otherwise an occurrence within the meaning of the policy, coverage will be afforded. The relevant terms of the contracts under consideration could not reasonably be read otherwise.

Id. at 1578. (emphasis in original).

68. 676 F. Supp. at 1573-74, (citing Note, The Pollution Exclusion Clause Through the Looking Glass, 74 GEO. L.J. 1237, 1246-47 (1986)). The court explained that

In drafting the pollution exclusion clause, the insurance industry clearly intended to limit coverage for pollution-related damages to situations where such damages are caused by sudden pollution incidents involving equipment malfunction, explosions and the like. The word sudden was intended by the industry to have its usual temporal meaning, and a reasonable insured with any degree of common sense would assume the word to have that usual meaning. Only in the minds of hypercreative lawyers could the word "sudden" be stripped of its essential temporal attributes.

676 F. Supp. at 1580.

69. 676 F. Supp. at 1574. The court also appeared to find compelling the insurer's argument that the pollution exclusion clause should be interpreted to exclude coverage for risks that were not calculated into premiums under policies issued based on this assumption. Id.

70. 168 Ill. App. 3d 361, 522 N.E.2d 758 (1988), appeal denied, 122 Ill. 2d 576, 530 N.E.2d 246 (Ill. 1988).

71. Id. at 380, 522 N.E.2d at 770.

72. 168 Ill. App. 3d at 372, 522 N.E.2d at 765. The court explained that under the occurrence definition,

[A]ny unintended/unexpected damage will be covered as an "accident" without regard to the nature of the event causing it, to whether that event took place gradually or instantaneously or to the insured's intentions or expectations as to its incidence. Only damage which is intended or expected by the insured is omitted from coverage. Thus, in keeping with the designation of these insuring agreements as "comprehensive, general liability" policies, the class of events which initially qualify for coverage as an "occurrence" under this provision is potentially unlimited.

Id.

73. Id. at 374, 522 N.E.2d at 766.

74. Id. at 374, 522 N.E.2d at 766-67. The court explained that the focus of the pollution exclusion

[I]s, first and foremost, on the nature of the event[s], i.e. the discharge, dispersal, release or escape of pollutants, and, then, on the nature of the damage caused thereby, i.e. the environmental contamination. The existence of both elements triggers the exclusion clause, irrespective of the timing of the event or of the damage and — in sharp contrast to the insuring provision — without regard to the intentions or expectations of the insured as to either the happening of the event or the resulting damage.

Id.

75. Id. at 376, 522 N.E.2d at 767.

76. Id. at 376, 522 N.E.2d at 768.

77. Id. at 378, 522 N.E.2d at 769. In reaching this conclusion the court dismissed contrary precedent in other jurisdictions as "seriously flawed," explaining that

Interpreting "sudden" as "unintended and unexpected" renders it synonymous with "accidental," as that term is employed in the policy and thus the word "accidental" can be read out of the exception as nothing more than redundant surplusage. Such a reading does not comport with fundamental rules of contract construction requiring that to the extent possible, all words used in a contract be given effect.

Id. (citing Cobbins v. General Accident, Fire & Life Assurance Corp., 53 Ill. App. 2d 285, 290 N.E.2d 873 (1972)). The court also ruled that "sudden"

[I]s understood in its ordinary, most common and popular sense, to have a temporal significance. Webster's dictionary defines "sudden" as "happening without previous notice or with very brief notice"; "abrupt"; "characterized by and manifesting hastiness"; and we decline to ignore these temporal-focused definitions or hold that because the word might also have other contextual uses, it is ambiguous and thus must be interpreted to provide coverage where the policy language read as a whole clearly intends to exclude such coverage.

Id. (citations omitted).

78. Id.

79. 856 F.2d 31 (6th Cir. 1988).

80. Id. at 32. The coal dust resulted from the normal operation of the coal tipple and was generated when coal was dropped from a conveyor belt onto the stockpile of crushed coal. Id.

81. Id. The court explained that "the phrase 'sudden and accidental' is not a synonym for 'unexpected and unintended,' and … should not be defined by reference to whether the accident or damages were expected." Id.

82. Id.

83. Id.

84. Id. The court explained "[w]e do not believe it is possible to define 'sudden' without reference to a temporal element that joins together conceptually the immediate and the unexpected." Id.

85. Id.

86. 315 N.C. 688, 340 S.E.2d 374, 17 ELR 20145 (N.C. 1986) reh'g denied, 316 N.C. 386, 346 S.E.2d 134 (N.C. 1986).

87. Id. at 701, 340 S.E.2d at 383, 17 ELR at 20149.

88. Id. at 689, 340 S.E.2d at 377, 17 ELR at 20146.

89. Id. at 696, 340 S.E.2d at 380, 17 ELR at 20147-48. The court stated:

Whether events are "accidental" and constitute an "occurrence" depends on whether they were expected or intended from the point of view of the insured …. [I]t was not the routine dumping but the arguably unintended, unexpected leaching of contaminants into the groundwater that constituted the "occurrence" for the purpose of TRS's insurance coverage.

Id.

90. Id. at 697, 340 S.E.2d at 381, 17 ELR at 20148. The court explained that "[t]he focus of the exclusion is not upon the release but upon the fact that it pollutes or contaminates." Id.

91. Id. at 699, 340 S.E.2d at 382, 17 ELR at 20149.

92. Id. at 700, 340 S.E.2d at 383, 17 ELR at 20149.

93. Id.

94. 677 F. Supp. 342 (E.D. Pa. 1987).

95. Id. at 346.

96. Id. at 348. See also United States Fidelity and Guaranty Co. v. Korman Corp., 693 F. Supp. 253 (E.D. Pa. 1988) (pollution exclusion in a developer's CGL policy barred coverage for claims against the developer that alleged damages caused by discharges from a nearby landfill that was in continuous violation of state and Federal law for nearly 30 years).

97. 693 F. Supp. 617 (M.D. Tenn. 1988).

98. Id.

99. Id. at 621. The court went on to explain:

Given the term's unambiguous meaning, the exclusion clearly is not a mere restatement of the definition of "occurrence," connoting only unexpected injury as Murray Ohio argues, but, rather a contractual provision to limit the insured's coverage to accidents distinct in time and place.

Id.

100. See, e.g. Scarcia v. Maryland Casualty Co., Civ. A. No. 87-669 (E.D. Pa. 1988). In Scarcia, the Eastern District applied the pollution exclusion clause to an unexpected and unintended discharge from a leaky underground gasoline tank. The court ruled that if the discharge of gasoline occurred over a long period of time, the pollution exclusion would bar coverage, but if, as Scarcia alleged, the discharge of the 550 gallons stored in the tank took only a few days, it would be "sudden" and thus within the policy coverage. Id. The court ultimately ruled that because the complaint in the underlying action did not preclude a "sudden" discharge over several days, a duty to defend existed. Id.

101. 668 F. Supp. 1541 (S.D. Fla. 1987).

102. Id. at 1550.

103. Id. See also Payne v. United States Fidelity and Guaranty Co., 625 F. Supp. 1189, 1192. In Payne, the court drew support for the proposition that the question of whether the pollution exclusion clause applies must be viewed from the standpoint of the insured from Lansco, Inc. v. Department of Environmental Protection, 138 N.J. Super. 275, 350 A.2d 520 (1975) (pollution exclusion not applicable where pollution occurred when unknown persons opened the valves on two storage tanks at the insured's business).

104. 688 F. Supp. 1513 (N.D. Fla. 1988).

105. Id. at 1515.

106. 156 Mich. App. 508, 402 N.W.2d 46 (Mich. Ct. App. 1986).

107. Id. at 512, 402 N.W.2d at 48.

108. 683 F. Supp. 1139 (W.D. Mich. 1989).

109. 702 F. Supp. 1318 (E.D. Mich. 1988).

110. Id. at 1326.

111. 702 F. Supp. at 1325. With respect to the Michigan Court of Appeals' decision in Jonesville Products, the court stated that "[t]he decision is unsupported by reasoning or authority, is contrary to the better reasoned, more recent decisions interpreting 'sudden and accidental,' and is against the more reasonable interpretation of the word 'sudden.'" Id. The court held that Jonesville Products was not binding state law precedent because "I am of the opinion that the Michigan Supreme Court would hold that 'sudden' includes a temporal aspect." Id. Two other Eastern District cases have also adopted this interpretation. In Grant-Southern Iron & Metal Co. v. CNA Insurance Co., 609 F. Supp. 798 (E.D. Mich. 1980), the court ruled that regular and continuous pollution discharges were not "sudden." Id. at 800. In American States Insurance Co. v. Maryland Casualty Co., 587 F. Supp. 1549 (E.D. Mich. 1984), the court ruled that under the pollution exclusion no duty to defend existed because the insured's continuous dumping could not be considered "sudden and accidental." Id. at 1553.

112. 17 Ohio App. 3d 127, 477 N.E.2d 1227 (Ohio Ct. App. 1984).

113. Id. at 136, 477 N.E.2d at 1236.

114. 17 Ohio App. 3d at 134, 477 N.E.2d at 1235. See also Kipin Industry, Inc. v. American Universal Insurance Co., No. C-860658 (Ohio Ct. App. 1987) (unpublished) (an event is "sudden and accidental" and thus not excluded from coverage if the damaging result is neither expected nor intentional).

115. 682 F. Supp. 927 (S.D. Ohio 1987), aff'd, No. 87-4159 (6th Cir. 1989).

116. Id. at 929.

117. 315 N.C. 688, 340 S.E.2d 374 (N.C. 1986).

118. 682 F. Supp. at 930.

119. 141 A.D.2d 124, 533 N.Y.S.2d 91 (N.Y. App. Div. 2d Dep't 1988).

120. 533 N.Y.S.2d at 93.

121. 533 N.Y.S.2d at 97.

122. 73 A.D.2d 486, 426 N.Y.S.2d 603 (N.Y. App. Div. 4th Dep't 1980). See supra notes 14-19 and accompanying text.

123. 533 N.Y.S.2d at 99.

124. 533 N.Y.S.2d at 100. The court explained that

The pollution exclusion does not differentiate between intended or unintended consequences of intentional discharge. Instead, it excludes from coverage liability based on all intentional discharges of waste materials regardless of whether the consequential damages were intended or unintended.

Id.

125. 64 A.D.2d 1014, 409 N.Y.S.2d 294 (N.Y. App. Div. 4th Dep't 1978) (memorandum opinion). See supra notes 11-13 and accompanying text.

126. 533 N.Y.S.2d at 101. The Technicon court believed that such a rule would nullify the "sudden and accidental" requirement because

[T]here would always be potential coverage and, hence, a duty to defend even where the insured is shown to have deliberately and repeatedly polluted the land, water or air over a long period of time, merely because it cannot be known where the toxic substance will flow or what damage will ultimately result.

Id.

Recent decisions by New York's federal district courts have also refused to apply the precedents of Klock Oil and Home Farm. See EAD Metallurgical, Inc. v. Aetna Casualty & Surety Co., 701 F. Supp. 399 (W.D.N.Y. 1988) (pollution exclusion bars coverage for unintended damage caused by the intentional discharge of waste containing a radioactive isotope into city sewer system); State of New York v. Amro Realty Corp., 697 F. Supp. 99 (N.D.N.Y. 1988) (pollution exclusion barred coverage because continuous, intentional disposal of chemicals into the environment for a period of twenty years was not "sudden").

127. 533 N.Y.S.2d 1010 (N.Y. App. Div. 2d Dep't 1988).

128. Id. at 1011.

129. Id. at 1012. The court explained that

[T]he clear and unambiguous language of the pollution exclusion makes no exception for pollution caused by someone other than the insured where the pollution is not "sudden and accidental." To impose such an exception under the instant circumstances would be to "vary the contract of insurance to accomplish [this court's] notions of abstract justice or moral obligation," something which we may not do.

Id. (citations omitted).

130. See Colonie Motors, Inc. v. Hartford Accident and Indemnity Co., No. 57620 (N.Y. App. Div. 3d Dep't 1989). Colonie Motors involved damage caused when waste oil leaked out of a crack in the underground piping of a containment unit located on Colonie Motors' property. In ruling that the pollution exclusion did not bar coverage for this damage, the Third Department explained that

In contrast to the insured in the Technicon case, plaintiff herein did not intentionally discharge pollutants for several years which caused unintended and unexpected damage. Rather, plaintiff installed a containment unit for the purpose of preventing any damaging discharge of waste oil into the environment …. The fact that the discharge was not readily discoverable and, thus, continued for a period of time, through no fault of the insured, should not move an otherwise covered occurrence within the rather shadowy perimeter of the exclusion.

Id.

131. 432 N.W.2d 495 (Minn. App. 1988).

132. Id. at 497.

133. Id.

134. Id. The court explained that

[W]ithout exception, the cases which construe the pollution exclusion clause to preclude coverage involve (1) deliberate disposition of potentially hazardous waste or produced substances, (2) widespread pollution, (3) multiple claimants, (4) damaging actions over an extended period of time, usually in the regular course of business, and (5) discovery of the damage years after the polluting conduct.

Id. (citations omitted).

135. Id. at 499. Under the doctrine the insured's reasonable expectation may be given effect even if careful examination of the policy provision would negate the expectation. Id. (quoting Atwater Creamery Co. v. Western Mutual Insurance Co., 366 N.W.2d 271, 276-77 (Minn. 1985)). The doctrine recognizes the unequal bargaining power between the parties; the lay person's inability to read and understand an insurance policy; and the fact that the insured often relies on the insurance agent or company to provide the appropriate coverage. 432 N.W.2d at 499.

136. 432 N.W.2d at 499. The court explained that "[t]he ordinary reader of the exclusion would reasonably conclude that it would not limit coverage for respondent's unexpected damage due to installation of building materials in a home, but would exclude pervasive environmental pollution problems such as hazardous waste dumping."

19 ELR 10351 | Environmental Law Reporter | copyright © 1989 | All rights reserved