California Supreme Court Narrows Scope of Absolute Pollution Exclusion
September, 2003
On August 14, 2003, the California Supreme Court reversed an appellate decision on the absolute pollution exclusion to limit its application to environmental pollution events in the important case of MacKinnon v. Truck Ins. Exchange, 3 Cal. Rptr. 3d 228 (Cal. 2003), modified, 2003 Cal. LEXIS 6933. In MacKinnon, it was contended that the absolute pollution exclusion applied to the negligent spraying of pesticides resulting in bodily injury.
Facts
The coverage dispute arose under a standard form CGL policy issued by Truck Insurance Exchange to apartment building owner John MacKinnon. The Truck policy contained an absolute pollution exclusion that excluded coverage for bodily injury or property damage resulting from the discharge, dispersal, release or escape of pollutants “at or from the insured location.” “Pollution or Pollutants” were defined in the policy to mean “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste materials.”
A tenant in MacKinnon’s apartment building requested the eradication of yellow jackets, and MacKinnon hired a pest control company to exterminate them. After the apartment was sprayed with pesticides on several occasions in 1995 and 1996, the tenant died and a wrongful death action was brought against MacKinnon. MacKinnon tendered the complaint to Truck, which initially defended MacKinnon but later withdrew its defense based upon the pollution exclusion. MacKinnon retained his own counsel and settled the wrongful death action. He then filed an action against Truck claiming there was a duty to defend and indemnify him, and further alleging a breach of the implied covenant of good faith and fair dealing. On summary judgment motions, the trial court granted judgment in favor of Truck based on the absolute pollution exclusion, and the Court of Appeals affirmed.
Supreme Court Analysis
The California Supreme Court unanimously reversed, holding that the absolute pollution exclusion did not plainly and clearly exclude ordinary acts of negligence involving toxic chemicals such as pesticides. The court noted that courts nationwide were split and had generally adopted two approaches to the absolute pollution exclusion: (1) to limit its application to traditional environmental pollution into the air, water and soil, or (2) to also include all injuries involving the negligent use or handling of toxic substances that occur in the normal course of business. In this landmark case, the California Supreme Court chose the narrower interpretation.
In so doing, the court looked to the historical background of the absolute pollution exclusion. The court noted that the original pollution exclusion and its subsequent modifications were designed to avoid the liability created by the enactment of environmental laws over the last forty years regulating the discharge of hazardous substances into the environment. Applied in that manner, the court found that the absolute pollution exclusion made sense. Conversely, the court found that a literal application of the exclusion to all substances made no sense because there is virtually no substance that would not irritate or damage some person or property. The court commented that without some kind of limitation, the application of the absolute pollution exclusion could lead to an “absurd result.”
The court remarked that a general liability policy establishes a reasonable expectation in the insured that coverage exists for ordinary acts of negligence that result in bodily injury. The court found that a broad interpretation of the exclusion would ignore the familiar connotations of the words “discharge, dispersal, release or escape” as used in the exclusion. The court noted that the spraying of pesticides in and around an apartment building does not imply the common understanding of a “discharge” of a pollutant, and that the word “dispersal” used in conjunction with “pollutant” ordinarily refers to the spreading of pollution in a wide area. The court found this interpretation to be consistent with the objective of the pollution exclusion, which it described as the avoidance of liability for environmental catastrophes related to intentional industrial pollution, and not ordinary acts of negligence involving harmful substances.
The court rejected Truck’s arguments that the exclusion was meant to apply to ordinary acts of negligence involving toxic chemicals, and that policyholders were made aware that the absolute pollution exclusion limited coverage in such a manner. The court also rejected amicus curiae arguments that the elimination of the limitation that the pollution be discharged “into or upon land, the atmosphere or any water course or body of water” from the current version of the pollution exclusion, and its replacement with “at or from the insured location,” broadened its application beyond environmental pollution. In a footnote, the court commented that the purpose of eliminating “into or upon land” from the exclusion was unclear and does not unambiguously support the insurer’s position. The court found that the interpretation of the pollution exclusion as limited to conventional environmental pollution is at least as reasonable an interpretation, and thus, the exclusion must be interpreted in favor of coverage.
Further, it is interesting to note that the California Supreme Court also rejected a slightly less broad interpretation of the pollution exclusion advanced by amicus curiae London Market insurers. London argued that the exclusion applies to all injuries arising from substances that are widely understood to be dangerous. This interpretation is similar to that adopted by the Wisconsin Supreme Court, which upheld the exclusion in the context of the ingestion of lead paint chips. Here, however, the court rejected this interpretation as having no basis in the language of the exclusion; rather, limiting the exclusion to conventional environmental pollution is based on the recognition that the words “pollutant” and “pollution” have definite meanings, i.e., the creation of an impurity or something objectionable and unwanted. The court posited that the normal application of pesticides around an apartment building would not comport with the common understanding of the word “pollute.”
Learning Point:
By adopting a narrow interpretation of the absolute pollution exclusion, California now joins the ranks of those states that have arguably imposed an extra-contractual limitation on the scope of the absolute pollution exclusion to limit its application to the traditional environmental pollution context. This narrow interpretation ignores the plain language of the absolute pollution exclusion and is obviously designed to maximize insurance coverage for bodily injury claimants. It remains to be seen whether the California Supreme Court will further curtail the scope of the absolute pollution exclusion in the future in the same fashion as have the courts of Indiana and Illinois, but the door is now arguably open.
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