Absolute Pollution Exclusion on Review By The California Supreme Court
January, 2002
Whether the “absolute pollution exclusion” now found in most CGL policies is clear and unambiguous and whether a particular substance falls within the scope of the absolute pollution exclusion have been the subject of extensive litigation with conflicting results nationwide. Recently, two California appellate court decisions ruled that the absolute pollution exclusion is clear and unambiguous and not limited to injuries arising only from “environmental” contamination, MacKinnon v. Truck Ins. Exchange (2002) 115 Cal.Rptr.2d 369 and Bechtel Petroleum Operations, Inc. v. Continental Ins. Co. (2002) 96 Cal.App.4th 571. These decisions addressed the doctrine of the insured’s “reasonable expectations” but refused to look past the policy when the language is clear on its face. Both MacKinnon and Bechtel have recently been granted review by the California Supreme Court.
MacKinnon v. Truck Ins. Exchange
Truck Insurance Exchange issued a comprehensive general liability insurance policy to MacKinnon that provided coverage for liability incurred as a result of personal injuries arising out the ownership and operation of an apartment building. Under the business liability section, the policy contained the following exclusion:
We do not cover Bodily Injury or Property Damage . . . resulting from the actual, alleged or threatened discharge, dispersal, release or escape of pollutants.
The policy further defined pollutants as:
Any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapors, soot, fumes, acids, alkalis, chemicals and waste materials. . . .
One of MacKinnon’s tenants died in the apartment building as a result of pesticide treatment for yellow jackets. The parents of the tenant filed a wrongful death suit against MacKinnon, who then tendered defense of the litigation to Truck Insurance Exchange.
Truck ultimately denied coverage under the policy and withdrew its defense pursuant to the pollution exclusion. In turn, MacKinnon filed a coverage action against Truck, claiming that Truck owed a duty to defend. The trial court granted Truck’s motion for summary judgment, finding that the pollution exclusion was clear and unambiguous and, thus, precluded coverage for the allegations in the plaintiffs’ complaint.
On appeal, MacKinnon argued that the pollution exclusion was inapplicable as it applied only to environmental pollution such as groundwater and soil contamination. MacKinnon further argued that the exclusion was ambiguous as applied to pesticide spray.
The California Court of Appeals held that the absolute pollution exclusion was clear on its face and applicable to non-environmental pollution such as pesticide exposure. The court stated that “the plain language of the exclusion applies to an assortment of substances [as defined by the policy], including chemicals, contaminants, and irritants.” It found that pesticide spray clearly fell within the meaning of an “irritant, contaminant or pollutant.” The court noted that there was no language in the policy limiting the exclusion to environmental pollution only.
Because the court found the exclusion to be clear on its face, it refused to go further and consider the “reasonable expectations” doctrine. For the same reason, the court likewise refused to examine the historical context of the exclusion.
Bechtel Petroleum Operations, Inc. v. Continental Ins. Co.
Sometime prior to 1995, Bechtel hired several subcontractors to perform soil moving, drilling, and excavation at the Naval Petroleum Reserve in Kern County, California. In 1995 and 1996, numerous employees of the subcontractors that worked at the Reserve filed lawsuits against Bechtel, alleging bodily injury as a result of years of exposure to toxic substances while working at the Reserve. The plaintiffs asserted causes of action for negligence, fraud, and violation of Health and Safety Code Section 25249.6.
Bechtel tendered its defense to its subcontractors’ insurance carriers, whose policies named Bechtel as an additional insured. The insurers rejected the tender, denying any duty to defend because of the policies’ absolute pollution exclusion. Bechtel then brought a coverage action, seeking damages for reimbursement of defense costs, breach of contract, and breach of the covenant of good faith and fair dealing.
The insurers moved for summary judgment, arguing that the absolute pollution exclusion in the policies barred coverage for the underlying claims. The exclusion effectively precluded from coverage all liability for bodily injury arising out of the “discharge, dispersal, release or escape of ‘pollutants’ from any premises occupied by the insured.” The term “pollutants” was defined as any “solid, liquid, gaseous or thermal irritant or contaminant.” The trial court concluded that all of the theories of liability in the underlying complaints arose out of exposure to toxic chemicals and pollutants and, thus, were barred by the pollution exclusion.
On appeal, Bechtel argued that the absolute pollution exclusions under the policies exclude from coverage only those injuries caused by traditional “environmental” pollution or contamination, not workplace or industrial injuries. The court, however, affirmed the trial court and held that the insurers had no duty to defend Bechtel because the absolute pollution exclusion operated to exclude coverage for bodily injuries allegedly caused by substances that were defined as pollutants in the policies. The court found that the injuries alleged arose out of the “emission, discharge, dispersal, seepage, migration, release or escape” of toxic substances.
In its holding, the court rejected the idea of looking to the historical purpose of the pollution exclusion. Where the policy language is clear, the court stated, “California courts are not at liberty to rewrite the plain terms of an insurance contract based on our view of a provision’s historical purpose.” Moreover, the court noted that the language of the pollution exclusion has changed significantly throughout its history and, therefore, consideration of its historical context was inappropriate.
Interestingly, the court also concluded that the injuries alleged were not the result of a routine commercial hazard. Rather, the court recognized that the injuries complained of arose from exposure to toxic substances at outdoor worksites over extended periods of time, which, it said, is akin to “traditional environmental contamination.” Thus, Bechtel apparently leaves open the issue of whether the exclusion would, in fact, apply to true “routine commercial hazards.”
On May 1, 2002, the California Supreme Court granted review of MacKinnon, and on May 15, 2002, the Court also granted review of Bechtel. Clearly, the Court’s decisions in these two cases could have a significant impact on the insurance industry.
NOTE: The majority trend is consistent with the MacKinnon and Bechtel decisions, although New York courts have for some time been reluctant to apply the absolute pollution exclusion to “non-environmental” injuries. In a case remarkably similar to MacKinnon, a New York court of appeals recently held that an insurer was obligated to defend and indemnify its insured painting contractor for injuries sustained by an individual who inhaled paint solvent fumes produced by the insured’s workers at a job site. Notwithstanding the presence of an “absolute pollution exclusion” in the policy, the court rejected a “literal construction” that would apply the exclusion to all substances that can be classified as “pollutants.” Belt Painting Corp. v. TIG Ins. Co., 2002 WL 985534 (N.Y.A.D. 2 Dept.), May 13, 2002.
Thanks to Michael Goodin, who also contributed to this article.
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