There were a lot of raised eyebrows in Texas and around the country in 2008 when a major insurer argued, temporarily, that it should not have to pay claims in the deaths of three people killed in a Houston fire.
The policy in question was an excess liability policy, and the carrier initially argued that its pollution liability exclusion barred coverage for the loss. The smoke and soot that overcame the victims were explicitly excluded causes of loss, and the exclusion in question had no exception for “hostile fire.”
But, whatever a policy says, there is a strong expectation that property/casualty policies will cover losses arising from fire. The carrier withdrew its argument, but not before the Texas Department of Insurance (TDI) resolved to undertake a thorough review of pollution liability exclusions.
Not long after the case was settled, the TDI issued a bulletin stating that its concerns about the application of pollution liability exclusions “in the absence of a pollution incident.”
In light of that concern, the bulletin announced that it was reviewing previously approved pollution exclusions and would require any that were not “consistent with public policy” to be withdrawn.
AAIS was in contact with the TDI within days of the bulletin, and did not expect to find any need to modify its pollution liability exclusions, which contain a “hostile fire” exception that would have avoided the concerns raised by the fatal fire.
AAIS staff members soon learned, however, that the TDI’s concerns go well beyond the issue of fire.
In the course of discussions, TDI staff members indicated that they believe pollution liability exclusions should only be triggered by injury or damage arising from a “pollution incident” that causes “environmental damage.”
For example, the presence of gasoline stored in a garage or shed would generally not be referred to as “pollution;” gasoline spilled on the ground or into a waterway would.
However, gasoline fits the standard definition of a “pollutant” under pollution liability exclusion. It is a “solid, liquid, gaseous, or thermal irritant or contaminant” that, if it was the cause of an injury, could trigger the pollution exclusion.
Thanks to that and other provisions, “pollution” liability exclusions have increasingly been applied to situations where there is no spill or accidental discharge at all, but where a noxious substance causes an injury, even if the substance was utilized, applied, and stored as intended.
“When did the product become a pollutant?,” asks insurance policy analyst Don Malecki in a January 2009 column in Rough Notes Magazine. The TDI is, in effect, asking the same question.
To those familiar with the development of pollution exclusions, Texas seems to be picking up where Louisiana left off a decade earlier.
In a 1997 advisory letter, Louisiana Commissioner Jim Brown castigated insurers for inappropriately applying “absolute” pollution liability exclusions in cases where “there was no underlying pollution incident.”
“The broad definition given to the term ‘pollutant’ creates an opportunity for abuse,” he wrote. “We have found instances where it has been argued that any thing and/or matter that harms a person, whether or not it has toxic or hazardous properties, is de facto an irritant and therefore a pollutant.”
Brown directed insurers to consider several questions when evaluating “pollution” claims, including this one: “Does the claim involve an injury alleged to have been caused by the product, including exposure to fumes, which was being used in accordance with its intended purpose?”
If the answer to that question was “yes,” Brown advised insurers that they would risk administrative action against them if they invoked pollution liability exclusions to deny coverage and/or refuse to provide a defense.
A few years later, the Louisiana department banned the use of absolute pollution exclusions and negotiated the development of state-specific exclusions that explicitly preserved coverage for certain forms of “indoor” pollution.
Among other things, the pollution liability exclusion mandated in Louisiana includes exceptions (preserving coverage) for bodily injury arising from:
- Heat, smoke or fumes from a hostile fire;
- Smoke, fumes, vapor, or soot from equipment used to heat the building; and
- Gases, fumes, or vapors from materials brought into a building in connections with operations performed by the insured, or by a contractor or subcontractor.
Louisiana is not the only state to restrict use of an absolute pollution exclusion. Other states require pollution to have exceptions for pollution arising from a hostile fire and/or pollution whose discharge is “sudden and accidental” (a provision that was commonly used in the earliest standardized pollution exclusions).
Until now, however, none have elected to follow Louisiana’s lead in addressing the questions of “indoor” pollution, or “pollution” arising from the intended use of a substance.
In the meantime, federal courts have been generally upholding the application of pollution liability exclusions based on their broad definition of what constitutes a “pollutant.” This is a representative sampling of U.S. rulings over the first decade of the 21st century:
September 2003: A U.S. district court in Fort Worth, Tex. ruled that a pollution liability exclusion barred coverage for injury to office workers who had been overcome by fumes from chemicals applied in a bathroom.
January 2006: A U.S. district court in Houston, Tex. ruled that a pollution liability exclusion barred coverage for injury to two refinery workers who were overcome by fumes and passed out into toxic sludge while cleaning a fuel-mixing tank. The opinion was subsequently upheld on appeal.
May 2006: A U.S. district court in Minnesota ruled that a pollution liability exclusion barred coverage for a floor installer who fell and was injured after being overcome by carbon monoxide released as a by-product of grinders he was using.
February 2007: A U.S. district court in Richmond, Va. ruled that a pollution liability exclusion barred coverage for an office worker who developed respiratory problems from inhaling fumes from an epoxy applied to a warehouse floor below her office.
In these and similar cases, standard pollution liability exclusions were found to be triggered by the role of any inhalable or ingestible “contaminant or irritant,” including those applied as intended or enclosed in containers designed for them.
When petitioners have challenged the application of “pollution” exclusions to contained substances with little or no impact on the natural environment, courts have ruled repeatedly in recent years that the plain language of the exclusions stands on its own and the question of larger environmental impact is irrelevant for the courts’ purposes.
That wasn’t always the case. In a 1992 commentary, another U.S. district court came up with what became known as a “common sense approach” to limiting the application of pollution liability exclusions. (The court nonetheless ruled that the exclusion did apply in the case under consideration.)
In its ruling, the court said the following:
“The terms ‘irritant’ and contaminant, when viewed in isolation, are virtually boundless, for there is virtually no substance or chemical in existence that would not irritate or damage some person or property. Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results.”
As an example of a potentially absurd result, the court stated that a broad reading of a standard pollution liability exclusions could bar recovery from an injured person who slipped and fell on the spilled contents of a household drain cleaner.
Clearly, the Texas Department of Insurance doesn’t want any “absurd” applications of pollution liability exclusions on its watch.
To be sure, Texas is not known as a trend-setter for insurance policy coverage; it is better known for its unique, promulgated forms. In this case, however, the eyes of P/C professionals are upon the Lone Star State to see if regulatory intervention in the nation’s second largest state will reverse the trend toward expanded application of pollution liability exclusions.
Among other things, a new approach would shift more of the burden to insurers to demonstrate that a loss is subject to an exclusion, rather than having policyholders bear almost all the entire burden of demonstrating that a loss is covered under an exception to an exclusion.
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What is “pollution?” 
