Law and Insurance

Court Curbs Expansive Reach of Absolute Pollution Exclusion

National Cas. Ins. Co. v. Orior Transport, Inc. No. H-09-1539 (S.D. Tex. Feb. 22, 2010), see Decision

The so-called "absolute pollution" exclusion has become a fixture in commercial liability insurance policies for the last two decades.  It is called "absolute" because it excludes damage or injury caused by all releases of pollutants, including the "sudden and accidental" variety that had been routinely covered before the 1990's.  A "pollutant" includes just about any solid, liquid, or gaseous substance more noxious than water, dirt, or pure oxygen.  And a "release" can be no more than an inch or two movement from point A to point B.  In a word, the insurance industry has successfully plied the absolute pollution exclusion to deny claims having nothing to do with environmental pollution, such as the painter who falls off a scaffold from dizziness (caused by paint fumes), and the laborer unloading bags of cement who sustained eye injuries from the dust. 

This case went in favor of the policyholder following some very close parsing by the trial judge.  A trucking company in the business of hauling away salt water refuse from oil wells hired a welding contractor to repair one of its trailers.  Unfortunately, the tank had not been completely emptied from its last job, and some "potentially explosive residue" remained in the trailer.  During the repair, the potential became actual, and an explosion killed the welder.  The decedent's family sued the trucking company who sought coverage under a commercial auto policy with an absolute pollution exclusion.  The insurer refused coverage arguing that the explosion resulted from a release of the gaseous residue.

Before looking at the court's resolution, we need to look at the language of the exclusion itself, which has a few wrinkles found only in some auto policies.  The policy excludes:

"Bodily injury" . . . arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants" that are, or that are are contained in any property that is: (1) being transported or towed by, handled, or handled for movement into, onto or from, the covered "auto"; . . . [or] (3) being stored, disposed of, treated or processed in or upon the covered "auto."

This exclusion is triggered only if the pollutant release occurs during one of the enumerated activities.

The judge probably could have decided the issue without considering any of the activities.  The petition simply alleges that the explosion of the residue occurred while the welding was being done -- no explicit allegation of any "discharge, dispersal, seepage, migration, release or escape."  The insurer argued that some kind of release must be inferred.  How else can the welder's spark outside the trailer ignite fumes unless the fumes had escaped from inside the trailer? 

Without conceding the insurer's argument, the judge proceeded to the enumerated activities and found that the residue was not being transported, handled, stored, disposed of, treated or processed.  The insurer again argued that that one had to infer that the residue was present in the trailer only because one of the activities had occurred.  The salt water had been transported for disposal, and the stuff that exploded was residue of those activities.  Therefore, the residue should be treated as the equivalent of the salt water.

The court was unpersuaded.  Orion's motion for summary judgment was granted. 

Although the court didn't elaborate, at work here is the principle that, when determining an insurer's duty to defend, reasonable inferences should be drawn in favor of the policyholder, not the other way.  The insurer's arguments were plausible.  But the right question is whether the court could reasonably determine that, at the moment of the explosion, the residue was not being transported, handled, stored, treated or processed. 

Judge Finds Policy Ambiguous But Rules Against Coverage. How Can That Be?

Jefferson Block 24 Oil & Gas, LLC v. Aspen Ins. UK Ltd, No. 08-cv-4792-JCZ-SS (E.D. La. Jan. 29, 2010) see Jefferson Block Decision

Every time I see a politically contentious senate confirmation hearing over the appointment of a judge to the federal bench, I am reminded of how seldom political philosophy or partisanship has anything to do with resolving actual cases and controversies, and, how hard good judges work to reach the legally correct result.  Facing the judge in this case are a host of perplexities, including out-of-state law (the policy selected New York law), a set of federal laws and regulations requiring insurance coverage for certain offshore pollution risks, and common law rules of interpretation over ambiguities, extrinsic evidence, and the policyholder's reasonable expectations.   On a very close call, the judge ended up ruling in favor of the insurers, but only after a careful and astute review of the facts.

The policyholder, Jefferson Block ("JB"), specialized in acquiring and reworking abandoned offshore oil and gas leases.  A federal law known as the Oil Pollution Act ("OPA") requires "responsible parties" to purchase clean-up insurance for any lease or "facility" (which includes pipelines) with a worst-case spill risk of more than 1,000 barrels.  JB acquired a $10 million OPA policy covering two leases and "facilities" in the Gulf of Mexico.  One of the pipelines leading from a covered lease leaked costing $3 million for the cleanup.

The insurers refused to reimburse JB arguing that the pipeline itself was not within the lease and was not otherwise scheduled in the policy.  Here is where it gets complicated.

The schedule refers to certain forms prescribed by an agency of the Interior Department that JB fills out and submits to the agency and the insurer.  One part of one of the forms allows JB to choose either a "General" or "Schedule" Option.  The General Option would cover all areas and facilities for which the insured could be held liable for cleanup under the Act.  Alas, JB chose the Schedule Option and failed to list the leaky pipeline.  But that doesn't end the inquiry because nothing in the form or the Act requires listing out-of-lease pipelines.  Being a federal regulation under a federal law, the matter appears hopelessly garbled.  The court, therefore, decided that the policy application and schedule were ambiguous.

At this point JB probably celebrated because usually ambiguities are resolved in favor of the insured.  That, however, is not exactly how the principle works.  When the contract is susceptible to two or more reasonable interpretations, the court must try to determine the parties' intent.  If extrinsic evidence (evidence outside the contract itself) establishes the parties' intent, then the court may consider that evidence even if it favors a decision in favor of the insurer.

It seems that JB hired a consulting firm to assist in the regulatory side of the insurance coverage.  Communications between JB and the consuting firm indicated that JB understood that the off-lease portions of the pipelines needed to be listed separately on the schedule.  The correspondence also tended to show that JB understood that the OPA didn't require coverage for the off-lease pipelines and that JB's intent was to obtain only as much coverage as required.

But here's the kicker in the court's view.  An email from a consultant helping prepare the agency form advised that he had shortened the application to show only two lines for the express reason that each additional line (required to list each pipeline) would generate more premium.  From all of the evidence, therefore, the court concluded that JB intentionally applied for more restricted coverage that did not cover the pipeline in question.  Since JB was the drafter of the application form that was ambiguous, the judge, in effect, reversed the usual rule that ambiguous provisions favor coverage.

The decision is worth a read to appreciate the court's careful, unbiased evaluation.  I have not mentioned some of the rabbit trails the insurer tried to run, dodges that the court examined and rejected.  In the end, this case presents a close call.  Some of the extrinsic evidence tilts against the insurer.  But the court deserves a round of applause for its effort, which upholds the best traditions of the American judiciary.

Texas Court Wrestles With Number-of-Occurrences Puzzle in Pollution Cases

Pennzoil-Quaker State Co. v. American Int'l Specialty Lines Ins. Co., # H-08-2025 (S.D. Tex. September 4, 2009)

Certain issues of insurance law have become hopelessly fubar.  "Number of occurrences" under Texas law is one of those issues.  Most general liability policies provides "per occurrence" limits, say up to $1 million for each occurrence.  If a particular loss involved 2 occurrences rather than just 1, then claimants could recover up to double what they could get if only 1 occurrence was involved.  This was the fight after the twin towers fell on 9/11.  The insurers argued that 1 coordinated plot meant only 1 occurrence.  The policyholder urged that 2 towers brought down by 2 airplanes must involve 2 occurrences.  Insurers won.

But why is the issue hopelessly screwed up?  Because half the time, policyholders want as many occurrences as possible (to maximize per-occurrence limits), and half the time insurers want multiple occurrences.  If the issue is, as in this case, how many per-occurrence deductibles must be paid, the shoe is on the other foot, and the parties switch sides of the argument; insurers argue for multiple deductibles.  I believe that most of the inconsistencies in the case law on number-of-occurrences is due to courts unconsciously pulling for policyholders.  Ironically, in this case, the confusion worked against the insured.

Pennzoil has a refinery in one Louisiana city. In a 4 month period in 2001, Pennzoil was hit with 5 separate lawsuits brought by numerous residents near the refinery complaining of physical ailments and property damage caused by the release of various pollutants into groundwater and air.  All 5 cases were consolidated.  The insurer agreed the suits were covered and agreed to defend, but only after Pennzoil first paid deductibles totaling $10 million (5 deductibles of $2 million each).  Not surprisingly, Pennzoil argued that 1 deductible was due because all the alleged releases were part of "the same, related or continuous Pollution Condition," as defined in the deductible clause.

The court decided the issue in favor of the insurer after an exhaustive analysis of the rules and guidelines other courts have contributed over the years, which I submit are hopelessly inconsistent.  The insurer argued for 5 separate "Pollution Conditions" (really no different than "occurrences") because the 5 lawsuits alleged: (1) releases from a fire on January 18, 2000; (2) exposures from a release on November 4, 2001; (3) continuous releases into the groundwater; (4) continuous releases into the air; and (5) releases of various substances that differ from one suit to the next.

I plead guilty to over-simplifying the issues somewhat, and I do not in any way impugn the court's painstaking attempt to correctly apply existing law.  But I am not sure that some of the distinctions between one type of release from another are persuasive.  For example, the White lawsuit alleged release of benzene, but the Daughtry suit alleged releases of "benzanthracene, benopyrene, bis(2-Ethylhexly)phthalate, benzo(b)floanthene, benzo(k)floranthene, and chrysene, but not benzene."  Not being a chemist, I couldn't say if the substances listed in Daughtry could not accurately be called "benzene," but I suspect the differing allegations are more a function of the plaintiff attorneys' attention to detail than a matter of differing releases from the refinery.  The question is, do the distinctions stand up to scrutiny, or, as Pennzoil, argues, do they all more or less allege a continuous hodge-podge of related releases.

I also suspect this one is going up  on appeal.

Insurer Failed To Say What It Meant in Pollution Buyback Endorsement

Solvent Underwriters v. Furmanite America, Inc., No. 14-07-00889-CV (Tex. App.-- Houston [14th Dist.] February 5, 2009) see Furmanite Opinion

Insurance companies are usually the ones that write the insurance policies, and this case gives a striking illustration of just how treacherous that activity can be -- I meaning using words.  The case has many twists.  The part that interests us is a Pollution Buyback Endorsement that partially reinstates coverage for certain pollution liability risks otherwise excluded by the pollution exclusion.  The Endorsement provides:

Nothwithstanding the [Pollution Exclusion] . . . coverage . . . will apply to . . . personal property or bodily injury or loss of, damage to or loss to use of property . . . caused by seepage and pollution ... or contamination of air . . .

Provided that . . . the following conditions are met:

(a)    . . . the loss is accidental . . .

(b)    the loss became known to the Assured within 7 days after its commencement . . .

(c)    the loss was reported in writing to these Underwriters within 14 days after having become known to the Assured.

Furmanite contracts with refineries and chemical plants to fix leaks and prevent the escape of hazardous liquids or gas from plant pipes or equipment while (and this is the tricky part) the plant remains on-line and operating.  Nobody is perfect, and in 2003, Furmanite was sued along with the refinery by a former engineer with the plant who alleged continual exposure to toxic airborne chemicals between 1992 and 1999.  Furmanite sought coverage, and Solvent Underwriters denied the claim, in part based on the conditions of the Buyback Endorsement.

Furmanite admitted that the alleged injury was not discovered within 7 days or reported within 14 days of discovery.  The Endorsement should apply anyway, argued Furmanite, and the trial and the appellate courts agreed.  On what basis, you ask.

Furmanite asserted that the conditions following "provided that" apply only to instances of property damage, not personal or bodily injury.  The Endorsement uses the word "loss" only in reference to property, and, in general, "loss" is typically linked to property damage, not bodily injury.  Although recognizing that "loss" is not always used exclusively to mean property damage, the Court held that the parties' intent as expressed in the language of the policy [Court's emphasis], was to limit the conditions only to property damage.

The Court attempted to explain why such a limitation would make sense by reasoning that damage to property is immediately apparent, and an insurer would need to quickly inspect the property.  "Bodily injury, however, is frequently not as apparent as property damage, and . . . often manifests itself much later."  Not.  There are about as many latent property damage cases as bodily injury cases.  Let's be honest.  Solvent Underwriters did not intend to leave itself wide open for long-tail bodily injury risks.  They just screwed up in drafting the Endorsement.

They as much as said so by arguing that the Court should read "loss" to mean"occurrence," which typically refers to both bodily injury and property damage in general liability polices.  The obvious rejoinder to this is the old saw that insurance companies hate, "Well, if you meant to write 'occurrence' why didn't you do so?"  There it is.  Even though the exposure to the toxic stuff occurred a decade before the claim came to light, the Court held that the insurer had to prove that the delay in reporting the claim prejudiced the insurer's rights, which an insurer can almost never do early in the lawsuit.  Case closed.

Words.

 

 

Court's Refusal To Analyze Plain Meaning of "Hostile-Fire" Exception In Pollution Exclusion Burns Insured

Noble Energy, Inc. v. Bituminous Casualty Co., #07-20354 (5th Cir. June 2, 2008) see Noble Energy Decision.

In interpreting insurance policies, courts are supposed to give effect to the plain meaning of the contract language without inquiring into broader considerations of the design or purpose of the provision.  In this case, the court whip-sawed the insured by first refusing to consider the insured's "reasonable expectations" of the scope of an absolute pollution exclusion (because courts just give effect to the language as written), but then artificially limiting  the "hostile-fire" exception by what it was designed to cover, not what it actually said.

Noble Energy was an additional insured under the policy of a contractor hired to dispose of "Basic Sediment & Water" (let's call it gunk) from Noble's storage tanks.  The contractor trucked the gunk to waste facilities, where one day a truck caught fire and exploded when fumes from the gunk seeped into the idling engine.  Death and destruction resulted, and ensuing litigation eventually narrowed to the insurer's refusal to cover Noble's damages due to the absolute pollution exclusion in the policy. 

Pollution exclusions currently enjoy very broad application under Texas law eliminating coverage for all sorts of non-pollution accidents such as tipsy falls from scaffolding due to paint fumes and carbon monoxide deaths caused by careless roofers that covered the chimney with their tool box.  Noble argued that the pollution exclusion was not intended to exclude this type of mishap, but the court, following the Texas Supreme Court's lead, stuck to the plain meaning of the policy.  The fumes from the gunk were a "pollutant," out of which arose the event.

But the pollution exclusion had a hostile-fire exception which states:

[The pollution exclusion clause] does not apply to bodily injury or property damage caused by heat, smoke or fumes from a hostile fire.  As used in the exclusion, a hostile fire means one which becomes uncontrollable, or breaks out from where it was intended to be.

Noble argued that the deaths and injuries were caused by the heat of a hostile fire.  Rather than consider this argument (I can certainly see a counter argument that "heat" and "fire" are not the same thing, and the deaths were cause by explosion, not heat -- but that wasn't raised).  Instead, the court looked to a California federal court decision to infer that the hostile-fire exception applies only if a pre-existing fire causes the pollution.  [Emphasis in original]

But that is not what the policy says.  The court's interpretation is a reasonable inference from the language, but so is Noble's.  I admit, I find the insurer's interpretation more reasonable than Noble's.  But the rules of policy interpretation require a court to give effect to the insured's reasonable interpretation of an exclusion, even if the insurer's interpretation is more reasonable. 

The court should have analyzed Noble's interpretation to determine if it could fit the plain meaning of the exception.  If so, the exception should have applied. Instead, the court jumped to a conclusion, relying on a non-controlling case, that hostile-fire exceptions only apply when the fire causes the pollution.  That is probably what the drafters (insurers) had in mind, but they didn't necessarily draft it that narrowly. 

Pollution Exclusion in D&O Insurance Policy Should Not Completely Bar Shareholder Securities Claim, Says Canadian Court

Boliden Ltd. vs Liberty Mutual Ins. Co., 85 O.R. (3d) 492 (Ontario Superior Court of Justice, April 1, 2008) see Boliden Decision

Several years ago, a federal appeals court sent shivers through many American boardrooms by ruling that a securities lawsuit, brought derivatively by shareholders over alleged misrepresentations in SEC filings, was not covered due to a pollution exclusion in a Directors & Officers (D&O) insurance policy.  It seems that the alleged misrepresentations concerned management's failure to report certain fines and costs for a subsidiary's mishandling of waste (the company was in the waste-hauling business), and the exclusion applied to any claims "arising out of pollution [including waste])."  See National Union Fire Ins.Co. v. U.S. Liquids, Inc., 88 Fed. Appx. 725 (5th Cir. 2004).

U.S. Liquids never expected its D&O insurer to cover pollution lawsuits or clean up costs, but it was shocked to learn that it had no coverage for shareholder securities actions simply because the remote subject of alleged SEC misstatements related to operations that related to pollutants.  Foul!

In a case of first impression in Canada, the Boliden court reached the opposite conclusion, at least in part.  The facts are substantially similar to those in U.S. Liquids.  A Spanish subsidiary owned a mine which flooded large tracts of land with contaminated tailings after a dam failed.  Boliden's shares plummeted, and shareholders sued the company alleging misrepresentations in a Prospectus issued a year before the disaster in an initial public offering.  The D&O insurer refused to cover the claims relying on the pollution exclusion ("[Insurer] shall not be liable under this policy to make any payment for loss respecting a claim . . . for or in respect of pollution loss.")

Boliden argued that the loss in question was the drop in value of its shares, not the damage to land and rivers in Spain.  Insurer said the loss in value of shares was caused by the discharge of pollutants and so fell within the exclusion.  Liberty also pointed to U.S. Liquids and other American cases.  However, the Canadian court noted that the American cases applied very broad "but for" causation, which Canadian courts do not accept.

Finding little helpful guidance from Canadian cases discussing causal language (such as "arising out of," "attributable to," and resulting from"), the Court made its own analysis and determined that some of the allegations did not sufficiently involve pollution, though some did.  For reasons not fully explained, the court held that allegations regarding construction defects and poor maintenance of the dam were not excluded, but other allegations were excluded.  The policy contained an allocation clause requiring Liberty to pay 80% of the defense costs where claims involved both covered and uncovered claims.  Accordingly, the court required Liberty to cover 80% of the loss.

Although the result is a victory for the policyholder, the holding may offer little useful guidance if the issue arises again in Canadian jurisprudence.  The court's analysis is very fact-specific.  The best advice to policyholders is to get enhancements to the pollution exclusion before experiencing a loss.  Most D&O insurers are willing to carve out from the exclusion shareholder derivative actions or claims against individual insureds.  The D&O market is still soft, and underwriters are generally in an accommodating frame of mind.  The best way to fix questionable policy language is before a claim is asserted.

Another Global-Warming Lawsuit Brought Against Private Companies

The New York Times reports today that an Alaskan village has filed a nuisance suit against 5 oil companies, 14 electric utilities, and the country's largest coal company, seeking to hold these defendants liable for the impact of global warming forcing the village to relocate because of flooding.  See Flooded Village Files Suit, Citing Corporate Link to Climate Change. 

This is the latest in the ever-growing number of lawsuits brought against private industries under the rubric of "global warming litigation" (perhaps better known to some lawyers as the Klondike).  So far, courts have been shy about entertaining legal theories allowing recovery in these types of actions (e.g., in Connecticut v. American Electric Power, California v. General Motors Corp., and Comer v. Murphy Oil U.S.A., the plaintiffs' cases are being dismissed either as political questions or based on tenuous causation evidence  see Global Warming Litigation Heating Up for discussion of these cases).

I believe, however, that it is too early to tell whether the courts will eventually recognize a workable (or even unworkable) legal basis for allocating liability for damage that can be tied to climate change.  For example, asbestos plaintiffs watched throughout the 1960's while their cases were dismissed before the Fifth Circuit held in Borel v. Fi breboard Paper Prods. Corp., 493 F.2d 1076 (5th Cir. 1973) that asbestos manufacturers could be held more or less strictly liable despite intermediate sellers or product warnings. 

Although Kivalina, the plaintiff Inupiat village may find it difficult to obtain judgment against Exxon Mobil, Corporation, American Electric Power, Conoco Phillips Company and others, it may be a matter of time before a court salutes at one or another aspect of the claims asserted.

What appears new in this case is the allegation of conspiracy, that the defendants sought to mislead the public about the science of global warming "by convincing the public at large and the victims of global warming that the process is not man-made when in fact it is." 

Whatever happens in this suit, we can expect to see more litigation of this kind.

California Court Says Settlements Are not "Damages" Without An Adjudication

Aerojet-General Corp. v. Commercial Union Ins. Co., #CO51124 (Cal. App., Sept. 13, 2007)

This case should serve as a warning to policyholders to read their policies closely (and with their legal hats on).  "Damages" was held to mean "legally obligated to pay or by final judgment be adjudged to pay," and would not include settlements reached out of court, even if the court approved the settlements.  Thus, the policyholder lost its right to recover $175 million, otherwise covered, because it settled rather than submit to actual trial.

Aerojet sought indemnification from several of its excess liability insurers for the cost of remediating groundwater contamination as a result of a number of lawsuits filed in 2000 and 2001.  If the insurers asserted coverage defenses over the merits of the claims, the case doesn't mention them.  It appears that the excess policies were in effect before 1970 and thus, before pollution exclusions.  Aerojet kept the excess carriers informed of the settlement talks but apparently did not obtain their consent to settlements reached with the claimants.

The California Supreme Court has already held in Certain Underwriters at Lloyd's of London v. Superior Court, 16 P.3d 94 (Cal. 2001) [Powerine I] that the term "damages" operated to limit the insurer's obligation to indemnify only to money ordered by a court and would not include environmental cleanup costs required by an administrative agency.  The California Supreme Court in a later opinion in the Powerine case [Powerine II], found that policy language requiring the insurer to indemnify "expenses" as part of the definition of "ultimate net loss" was enough to require an excess insurer to pay.

Unfortunately for Aerojet, its polices did not include the "ultimate net loss" definition or define "damages" in any way that would expand Powerine I's narrow interpretation.  Therefore, the excess insurers were not required to indemnify the (otherwise covered) settlement payments.

While Aerojet's policies were written more than 50 years ago and so contained standard language no longer in use, the lesson to be learned is still valid.  Policyholders should read their policies and have coverage counsel review the language in light of current legal trends.

GAO Report Faults Government Insurance Programs for Ignoring Increased Exposure From Global Warming

A report by the Government Accountability Office to the Senate Homeland Security and Governmental Affairs Committee said last week that federal insurance programs aimed at flood and crop risks are not adequately preparing for anticipated increases in losses from global warming.  For example, in 2005 the National Flood Insurance Program faced losses of approximately $875 billion, compared with $207 billion in 1980, the report said.  The Federal Crop Insurance Corporation's exposure increased to $44 billion, from $1.7 billion.  Insurance payments in these two programs could reach $919 billion this year, compared with $209 billion in 1980.  The report noted that private insurers now consider models and studies aimed at predicting increased losses from droughts, hurricanes, flooding and other factors of climate change.  The GAO recommended more research to help Congress keep a lid on "an emerging high-risk area with significant implications" for the budget.  See AP story by John Heilprin at  Senate Report for more details.

Estimates of Total US Insurance Exposure for Asbestos and Environmental Losses Remains Over $120 Billion

According to a recently released special report from A.M. Best Co., the U.S. property/casualty industry cut in half its unfunded asbestos liabilities during 2005 while continuing to whittle down the overall environmental exposures.  This estimate is on track with A.M. Best's original estimate of ultimate industry losses of $65 billion and $56 billion for asbestos and environmental, respectively.

A.M. Best's year-end 2005 estimate of unfunded asbestos and environmental liabilities for the industry is about $4 billion for asbestos and $22 billion for environmental, for a total funding deficit of $26 billion. Estimated incurred-to-date losses have reached nearly $95 billion, of which $61 billion relates to asbestos exposures. This report and the associated spreadsheet file are available at www.bestweek.com. They are free to BestWeek subscribers.

Copyright 2007 A.M. Best Company, Inc.