First Circuit holds Total Pollution Exclusion does not apply where an endorsement may provide separate grant of coverage

 

I wrote here about Performance Transp., Inc. v. General Star Indemnity Co., 419 F.Supp. 3d 199 (D. Mass. 2019), a case in which the United States District Court for the District of Massachusetts held that a total pollution exclusion excluded coverage despite a grant of coverage in a separate endorsement.  

The United  States Court of Appeals for the First Circuit has overturned that case, holding that the endorsement was ambiguous as to whether the pollution exclusion applied to it.  983 F.3d 20 (2020). 

 

The plaintiff, PTI, transports petroleum products.  On February 19, 2019, a tanker truck owned by PTI overturned in New York.  It spilled 4,300 gallons of fuel onto the roadway and into a nearby reservoir.  PTI and the New York State Department of Environmental Conservation undertook remediation work.  The cost for the work exceeded the coverage limit on PTI's primary insurance policy. 

 

PTI sought additional coverage from its umbrella carrier, General Star Indemnity Company.  The umbrella policy included a standard total pollution exclusion.  It also contained an endorsement, Endorsement 13, labeled “special hazards and fluids limitation endorsement.”  Endorsement 13 provided:

This policy does not apply to ultimate net loss or costs from any event arising out of, contributed by or relating to any Special Hazard described in this endorsement and resulting from the ownership, maintenance or use of any auto. Special Hazards: A. Radiation Hazard[;] B. Underground Hazard[;] C. Drilling Fluids Unloading Hazard[.] However, this exclusion does not apply to an event arising out of the unloading of drilling fluids from an auto covered by this policy and covered by the controlling underlying insurance for the total limits of the underlying insurance, if the unloading of drilling fluids resulted directly from any of the following: 1. Heat, smoke or fumes from a hostile fire; 2. Upset or overturn of such auto; 3. A collision between such auto being used in your business and another object; or 4. A short term drilling fluid event, provided that coverage under this item 4: a. Will be available to bodily injury or property damage, but not damage to real property or to a body of water or to any other natural resource; and b. Will not be available unless written notice of the short term drilling fluid event is given to us or the controlling underlying insurance company as soon as practicable, but no more than thirty (30) days after the shipment of the drilling fluids was entrusted to your care. If any other limit, such as a sublimit, is specified in the underlying insurance, then paragraphs 1. and 2. above will not apply unless that limit is specified in the SCHEDULE OF UNDERLYING INSURANCE.

 (Bold added.)

 

General Star disclaimed coverage on the basis of the total pollution exclusion. PTI argued that even if the pollution exclusion applied there was coverage under the Special Hazards Endorsement which was not excluded by the pollution exclusion.  The United States Court of Appeals for the First Circuit agreed, on the ground that the Special Hazards endorsement was ambiguous as to whether the pollution exclusion applied to it.

 

The court noted, first, that the endorsement provides that “coverage under this item 4: . . . will be available to bodily injury or property damage, but not damage to real property or to a body of water or to any other natural resources.”  PTI argued that the clause qualifies as a coverage guarantee if the circumstances apply.  General Star argued that the endorsement does not provide coverage if an exclusion elsewhere in the policy excludes coverage.  The court noted that an in-between interpretation is that the language creates a limited coverage guarantee applicable only to item 4. (That seems to be an adoption of PTI's argument, not an in-between interpretation.) 

 

Second, the endorsement is titled a “limitation” but later refers to itself as an exclusion. 

 

Third, unlike other exclusions in the policy, the endorsement itself did not provide that it did not create coverage for injury or damage otherwise excluded.

 

Fourth, there was substantial overlap between the total pollution exclusion and other policy terms.  The total pollution exclusion had standard language disclaiming coverage for any request, demand, or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants.  It defines pollution as including any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalies, chemicals and waste.  But the policy contained specific exclusions for cleanup costs that appear to come within that definition.  Therefore, the court held, it could not rely on the total pollution exclusion to resolve the ambiguity in the text of the special hazards endorsement. 

 

The court concluded that since the policy was ambiguous, the endorsement must be construed in favor on the insured as a separate grant of coverage to which the pollution exclusion did not apply.   

The main takeaway from this case is that insurance policies have to be read as a whole.  The basic procedure in determining whether a loss is covered is to look at the grant of coverage in the policy, then any exclusions to the coverage, then exceptions to the exclusions.  But, as in this case, it is often not clear whether a policy clause is a grant of coverage, an exclusion, or an exception.  Here, the court held that at least arguably the Special Hazards and Fluids Endorsement was a separate grant of coverage for the drilling fluids unloading hazard.  That matters because then (again, arguably) exclusions that apply to the main grant of coverage do not apply to the endorsement. 

The court may have overstated the maxim that ambiguous clauses in an insurance policy are interpreted against the insurer.  There is an exception to that rule if the policy was negotiated on a more equal footing between the insurer and a business (as opposed to a consumer).  Here, the court referenced negotiations of the policy terms. 

This umbrella policy is a little unusual because most umbrella policies are “follow form” policies:  if there is coverage under the primary policy there is coverage under the umbrella policy.  This policy clearly stated that it would include additional terms not in the primary policy – such as the absolute pollution exclusion.  That is something that a policyholder purchasing an umbrella policy should watch out for.

 Massachusetts Lawyers Weekly quotes me in an article about the case.  

 

 

US District Court for District of Massachusetts holds that exception to exclusion does not create coverage barred by a different exclusion

On February 19, 2019, an employee of Performance Trans, Inc. ("PTI") drove a tanker truck off the road in New York.  The truck overturned and spilled 4,300 gallons of gasoline and diesel fuel.

PTI undertook an emergency response action to clean up the spill.  It sought coverage for its costs in doing so from its insurer, General Star Indemnity Company.  General Star disclaimed coverage on the basis of a total pollution exclusion.

Utica Mutual Insurance Company provided malpractice insurance to PTI's insurance broker.  It agreed to reimburse PTI for the cleanup costs in exchange for an assignment of PTI's rights against General Star.  The case proceeded to a declaratory judgment action.

The General Star policy included a Special Hazards and Fluids Limitation endorsement, which excluded coverage for "the unloading of drilling fluids from any auto, mobile equipment, machinery or equipment, whether unloading is the result of movement of property by a mechanical device, an accident, a spill or otherwise."  The exclusion contained an exception for unloading of the fluids caused by the upset or overturn of an auto.

Utica and PTI argued that the exception to the exclusion indicated that General Star agreed to provide coverage for unloading caused by the upset or overturn of an auto.

In Performance Trans., Inc. v. General Star Indemnity Co., __ F.Supp. 3d __, 2019 WL 6307227 (D. Mass.), the United States District Court for the District of Massachusetts disagreed.  "An exception to an exclusion does not affirmatively create coverage."  Rather, an exception merely prevents the exclusion itself from applying in specified circumstances.  (In a footnote the court noted that by their plain meaning the total pollution exclusion of the policy and the Special Hazards and Fuel Limitation endorsement can coexist, so that the exception to the latter exclusion is not superfluous or illusory.)

Appeals Court holds pollution exclusion in auto policy of oil delivery service applies to overfilled oil tank

United Energy Oil Company, an oil delivery service, delivered oil from a truck to an oil tank in  a building owned by National Equity Properties.  It overfilled the tank and caused oil to seep into the ground. 


The truck was covered by a business auto insurance policy issued by Hanover Insurance.  Hanover determined that damages over $5000 came within the policy's pollution exclusion. 


A declaratory judgment action over the meaning of the pollution exclusion followed.  It was undisputed in that action that heating oil is a pollutant within the meaning of the pollution exclusion.


The first policy clause at issue in Izdebski v. Hanover Ins. Group, Inc., 86 Mass App. Ct. 1102, 2014 WL 2973681 (unpublished) was one that made the pollution exclusion applicable to property damage arising out of the actual discharge, release, or escape of pollutants:

a.  That are, or that 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.'

The Massachusetts Appeals Court held that the clause excluded coverage because the spill happened as the polluting oil was being delivered by the pump from the tank to its intended destination.    The plaintiffs argued that the oil had reached its final destination before it seeped into the ground, or that the oil that seeped into the ground was already in the tank before United began to fill it.  The court held that those interpretations ignored the meaning of "arising out of" in the exclusion. 


The second policy clause at issue was an exception.  The exclusion was for  damage arising out of the actual discharge, release, or escape of pollutants once they have been finally delivered. The exception applied to accidents with respect to pollutants not in a covered auto if

(1)  The pollutants or any property in which the pollutants are contained are upset, overturned or damaged as a result of the maintenance or use of a covered auto; and

(2)  The discharge, dispersal, seepage, migration, release or escape of the pollutants is caused directly by such upset, overturn or damage.

The phrase "upset, overturned or damages" was not defined.  The court held that a fair reading of the exception is that it applies to an accidental oil spill only  if United's truck is upset, overturned or damaged.  That doesn't make a lot of sense to me, as the exception plainly says that it is the pollutants "or any property in which they are contained" that must be upset, overturned, or damaged.  If it was only the covered auto that could be upset, overturned or damaged, the policy would have said so.  On the other hand, it does not seem that an overflow or seepage of oil comes within the definition either. 

Appeals Court holds that exception to pollution exclusion allows coverage for common law liability, even when such liability overlaps 21E liability

In Clean Harbors Envtl. Servs., Inc. v. Boston Basement Techs., Inc., 75 Mass. App. Ct. 709 (2009), Basement Technologies, while installing a waterproofing system in the home of Silva, broke a heating oil line and caused 150 gallons of oil to leak into Silva's basement. The oil collected in a sump pump, which then pumped the oil into Silva's yard.

Basement Technologies hired Clean Harbors to clean up the oil spill. Clean Harbors billed Basement Technologies $12,638.40 for its services.

The Massachusetts Department of Environmental Protection issued a notice of responsibility to Basement Technologies pursuant to G.L. c. 21E, which identified Basement Technologies as a potentially responsible party, and therefore strictly liable, for the costs of remedial actions at the property.

Basement Technologies sought payment of Clean Harbors' invoice under its commercial general liability policy with Admiral. Admiral denied the claim on the basis of a pollution exclusion.

The pollution exclusion excluded coverage for "(a) Request, demand, order or statutory or regulatory requirement that any insured or others . . . in any way respond to, or assess the effects of, 'pollutants'; or (b) Claim or 'suit' by or on behalf of a governmental authority for damages . . . in any way responding to the effects of 'pollutants.'"

The pollution exclusion had an exception for "damages because of 'property damage' that the insured would have in the absence of such request, demand, order or statutory or regulatory requirement, or such claim or 'suit' by or on behalf of a governmental authority."

The Massachusetts Appeals Court noted that absent the action by the DEP, Basement Technologies would still be liable in negligence to the property owner for damages caused by the oil spill.

Admiral argued that the Clean Harbors expenses were not covered, because those costs were part of the response actions required by the DEP. Basement Technologies argued that damages recoverable against it at common law, including clean up costs, were covered.

The court noted that liability under 21E often exceeds common law liability. It concluded that the exception to the pollution exclusion extends coverage to common law liability which would exist if there was no liability under 21E, even if liability under common law and 21E overlap.