Barg Coffin Lewis & Trapp, LLP Articles

February 2004

The "Absolute" Pollution Exclusion Is Not Absolute in California

By Jon Enscoe

It is now clear that in California the so-called "absolute" pollution exclusion found in virtually all current commercial general liability ("CGL") policies since 1986 is not, as many insurers have argued, a bar to coverage for all claims involving toxic substances. In MacKinnon v. Truck Insurance Exchange, 31 Cal.4th 635 (2003), a unanimous California Supreme Court ruled that the pollution exclusion does not preclude coverage for injuries arising from ordinary acts of negligence involving toxic substances, but instead bars coverage only for traditional environmental pollution.

The Facts of MacKinnon

In MacKinnon, the plaintiff policyholder, John MacKinnon, was the owner of an apartment building. In response to a tenant's complaints, MacKinnon hired a pest control company to exterminate yellow jackets in the building. The complaining tenant later died, allegedly as a result of the exterminator's negligent use of the pesticides. Her parents filed a wrongful death action against MacKinnon, and MacKinnon sought a defense and indemnity from his CGL carrier, Truck Insurance. Truck denied coverage on the basis of the "absolute" pollution exclusion. The trial court granted summary judgment in favor of Truck, and the California Court of Appeal affirmed. The Supreme Court, however, ruled that the pollution exclusion did not apply and reversed.

The pollution exclusion in the Truck policy precluded coverage for any bodily injury or property damage resulting from "the actual, alleged, or threatened discharge, dispersal, release or escape of pollutants…" The term "pollutants" was defined to include "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste materials." Truck argued that the pollution exclusion applied because the pesticides were irritants and chemicals and therefore "pollutants," and the spraying of the pesticides therefore was a "discharge" or "dispersal" of the pollutants.

The Meaning of the Pollution Exclusion

The Supreme Court began its analysis by reviewing the historical background of the pollution exclusion. The Court noted that in response to increased liability resulting from new environmental statutes, the insurance industry began in 1970 to adopt what became known as the "qualified" pollution exclusion. The qualified pollution exclusion precludes coverage for property damage or bodily injury arising out of the discharge, dispersal, release or escape of pollutants, unless the discharge, dispersal, release or escape was "sudden and accidental." After years of controversy and litigation over the meaning of the term "sudden" in the qualified pollution exclusion, the insurance industry responded by drafting a new version of the exclusion, which first appeared in 1985 and is now commonly known as the "absolute pollution exclusion." The Court pointed out that the insurers' primary motivation for broadening the scope of the exclusion was to exclude traditional environmental pollution, costs that had increased dramatically as a result of the passage of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in 1980.

The Court acknowledged that a literal interpretation of the words "irritant or contaminant" in the pollution exclusion would include toxic pesticides, but it refused to look simply at the bare words of the exclusion, ignore its historical background, and apply it to situations that do not resemble traditional environmental contamination. The Court found that the CGL policy's broad coverage grant establishes a reasonable expectation that the insured will have coverage for ordinary acts of negligence resulting in bodily injury unless the exclusion "conspicuously, plainly and clearly" apprises the insured that certain acts of ordinary negligence, such as the spraying of pesticides, will not be covered. Truck argued, relying on dictionary definitions, that the pollution exclusion applies because pesticides are "pollutants" and that the spraying of the pesticides was a "discharge" or "dispersal." The Court rejected this literal reading of the exclusion, holding that a court must instead "attempt to put itself in the position of a layperson and understand how he or she might reasonably interpret the exclusionary language." The Court explained that although pesticides may be pollutants in some circumstances, it is unlikely a reasonable policyholder would think of the normal application of pesticides around an apartment building to exterminate yellow jackets as "pollution."

The Court also pointed out that adopting Truck's literal interpretation approach could lead to absurd results. As an example, the Court noted that the application of iodine onto a cut through an eyedropper may be literally characterized as a discharge or release of an irritant, and that under Truck's interpretation the pollution exclusion would bar coverage for the misapplication of iodine or for its application on someone who was hypersensitive and had an allergic reaction.

The Court concluded that an interpretation limiting the exclusion to what is generally thought of as environmental pollution is reasonable in light of the historic purpose of the pollution exclusion and the general purpose of CGL policies -- to provide the insured with the broadest spectrum of protection against liability for unintentional and unexpected personal injury or property damage.

Implications of MacKinnon for Policyholders

The MacKinnon decision is unquestionably a positive development for California policyholders. In recent years, insurers in California routinely have relied on the pollution exclusion to deny coverage for virtually any claim involving toxic substances. After MacKinnon, insurers will have difficulty relying on the pollution exclusion to deny claims that do not fit neatly within the category of traditional environmental claims. The MacKinnon court cited with approval decisions from courts in other states that have adopted a similar narrow interpretation of the pollution exclusion and allowed coverage for claims such as those involving injuries from carbon monoxide leaks, death caused by hydrogen sulfide fumes, property losses sustained from toxic smoke, and injuries sustained from the ingestion of lead paint chips. The MacKinnon decision also may have a significant impact in cases involving toxic mold or "sick building syndrome." In the past, some insurers have denied coverage for such claims based on the pollution exclusion, but neither of these types of claims should be considered traditional environmental pollution. Policyholders who have had non-traditional environmental claims denied by insurers on the basis of the pollution exclusion should re-evaluate potential coverage for those claims in light of MacKinnon.

"Personal Injury" Coverage

Brucia v. Hartford Accident and Indemnity, United States District Court., N.D. Cal, Case Number C02-05331 SBA; 2003 WL 23320570 or 2003 U.S. Dist. LEXIS 24704 (N.D. Cal. Jan. 22, 2003) (granting plaintiffs' motion for summary judgment) and 2003 WL 23310258, or 2003 U.S. Dist. LEXIS 24705 (March 11, 2003) (denying defendants' motion for reconsideration)¹ is another recent case in which a court applying California law rejected an insurer's attempt to use the pollution exclusion to avoid its coverage obligations in a case involving toxic substances. In the underlying action, Joseph Brucia, the prior owner of a commercial building in San Francisco, was sued by his prior tenant, Randolph & Hein, Inc. ("R&H"). While R&H was a tenant, the San Francisco Department of Health discovered hazardous substances under the building associated with a former battery manufacturer that had owned the building decades earlier. The discovery of the hazardous waste resulted in a governmental enforcement and removal action, forcing R&H to vacate the premises. R&H sued Brucia for nuisance, negligence and breach of the implied covenant of quiet enjoyment, alleging, in part, that Brucia's failure to discover and warn of the existence of hazardous substances forced R&H to vacate the property during the cleanup, thereby disrupting its business and causing it damage.

Brucia asked its insurer, Hartford, to defend and indemnify it against R&H's claims. Hartford denied all coverage obligations on the basis of the absolute pollution exclusion contained in Brucia's CGL policy. The pollution exclusion precluded coverage for property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants. "Property damage" was defined, in relevant part, as "loss of use of tangible property." Hartford took the position that R&H was seeking damages for loss of the use of the premises due to the pollution, that this was a claim for property damage arising out of pollution, and that coverage was therefore barred by the pollution exclusion.

Brucia filed an insurance coverage action against Hartford in San Francisco Superior Court, and Hartford removed the case to federal court. In a decision soon to be published in Mealey's Litigation Report: Insurance, the District Court granted Brucia's motion for summary judgment that Hartford had a duty to defend Brucia. The court held that although R&H had alleged a claim against Brucia for property damage caused by pollution, it also alleged a claim for "personal injury" to which the pollution exclusion did not apply, thereby entitling Brucia to a defense.

"Personal injury" is covered by a separate section of CGL policies and is distinct from "bodily injury." Personal injury provisions vary from policy to policy, but typically provide coverage for claims such as slander, malicious prosecution and false arrest. The Hartford policy definition of "personal injury" included injury arising out of "the wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room dwelling or premises that a person occupies . . . ." The court found that R&H's claim for breach of the implied covenant of quiet enjoyment fell within the personal injury coverage for an "invasion of the right of private occupancy." The court pointed out that the claim against Brucia was based not merely on the existence of the contamination at the property, but also upon Brucia's failure to discover and disclose the existence of contamination. The court reasoned that an insured would reasonably expect the pollution exclusion to apply only to property damage and bodily injury, and not to claims within the personal injury coverage that appeared in a separate section of the CGL policy without its own pollution exclusion.

Conclusion

Insurers routinely have denied coverage for any claim that involves substances that could be characterized as pollutants. Policyholders should carefully examine the validity of such denials. First, if the injury or damage commenced before 1985, even if not discovered until recently, there may be coverage under earlier policies that pre-date the absolute pollution exclusion. Second, under MacKinnon, if a complaint seeks damages for anything other than traditional environmental pollution, the pollution exclusion may be inapplicable. Finally, as in the Brucia case, a claim involving contamination may include allegations bringing it within the "personal injury" coverage of a CGL policy.

ENDNOTE

1. Barg Coffin Lewis & Trapp, LLP, represented plaintiff Joseph Brucia in this action.

These materials are provided for information purposes only and are not intended as and cannot be considered legal advice. Before taking action based upon this information, you should consult your legal counsel.

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