Pollution, Certificates of Insurance, and Duty to Defend

Let’s look at some different points of view on three perennial liability insurance problems: Pollution, Certificates of Insurance, and Duty to Defend.

Pollution May Not Mean Pollution

“A rose is a rose is a rose,” but pollution is not always pollution. In the early 1970s, faced with enormous pollution liability claims arising from newly enacted environmental legislation, the insurance industry introduced the first of a series of pollution exclusions. The first iteration eliminated coverage for pollution claims unless the pollution was “sudden and accidental.” That seemed like a reasonable solution. Insurers were facing claims for pollution that had been going on for 50 or even 100 years and could generate hundreds of millions of dollars in claims. They felt they couldn’t assume that liability. On the other hand, they were willing to cover claims arising from “sudden and accidental” occurrences, for example a malfunctioning heating plant that resulted in carbonmonoxide poisoning.

Unfortunately, but probably not surprisingly, insureds and their attorneys successfully argued that “sudden and accidental” was ambiguous. Courts across the country accepted the argument that “sudden and accidental” could reasonably be interpreted to mean “unexpected or unintended.” Insurers responded by introducing what’s referred to as “absolute” pollution exclusions. (I’ve placed quotation marks around “absolute” because most pollution exclusions do provide some coverage for pollution claims by means of exceptions to the exclusion.)

The basic absolute exclusion wording has been modified a number of times. In its current form, it excludes bodily injury or property damage arising out of the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.”

Pollutants are defined as: “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”1 There are certain exceptions to the exclusion, but for the most part, it appears to be all encompassing.2 That’s not how courts read the exclusion. Many courts have ruled that not all pollution is excluded despite the seemingly clear language. They hold that a reasonable interpretation of the pollution exclusion is that it applies only to traditional environmental harms. Typifying this approach, the judge in the US 6th Circuit Court of Appeals wrote: “Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results. To take but two simple examples, reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the spilled contents of a bottle of Drano, and for bodily injury caused by an allergic reaction to chlorine in a public pool. Although Drano and chlorine are both irritants or contaminants…one would not ordinarily characterize these events as pollution.”3

The decision cited other examples of events involving pollutants that were held not to trigger the pollution exclusion. These included injuries arising from an individual’s ingestion of malathion during a municipal pesticide-spraying operation, paint damage to vehicles due to the spray painting of a bridge, an apartmentdweller’s ingestion of lead paint, and a release of asbestos particles during installation, handling and removal of insulation.4 Courts in other states agree with insurers that all pollution is excluded. These include courts in Florida, Maryland, Mississippi, Pennsylvania, Texas, and others. 5 Courts in one state, Indiana, will not enforce the standard pollution endorsement at all. Indiana courts hold that the exclusion is ambiguous and require that the specific pollutant be named to make the endorsement enforceable.6 New York courts lean towards the traditional- environmental-harm approach. A recent example is a case involving the Upper West Side New York City delicatessen. Barney Greengrass (also know as the “The Sturgeon King”). A residential tenant in the same building sued the Sturgeon King for bodily injuries allegedly caused by the odors emanating from the store. Two courts applying New York law (the Federal District Court and the U.S. Court of Appeals for the Second Circuit) ruled that the claim was not excluded by the pollution exclusion because the odors were not environmental-type harms.7 There are two learning points in this for us:

(1) Don’t accept every pollution liability declination. The absolute pollution exclusion is far from absolute, and

(2) Present quotations for pollution liability coverage to your insureds. An insured may be successful in gaining coverage in its CGL policy for a pollution-type claim, but it’s an expensive proposition and many times the insured will lose.

Certificate of Insurance Issued by Agent

Suppose that a certificate of insurance shows the certificate holder as an additional insured, but the policy has not been endorsed to provide that coverage and does not contain an effective automatic additional insured endorsement. If the certificate was issued by an agent of the insurance company, is the insurance company barred by the doctrine of estoppel8 from denying coverage because the certificate was issued by its agent?

That was one of the problems discussed at the May 9, 2012 Westchester CPCU Coverage Conundrums seminar in Stamford, CT. The consensus of the group and the four insurance attorney panelists was that coverage cannot be created by estoppel. New York courts, however, sometimes go the other way on the issue.

In Sevenson Environmental Services, Inc. et al v Sirius Am. Ins. Co.9 the court held that Sirius was not obligated to defend Stevenson because there was no proof that the insurer or its agent had notice of Stevenson’s status as an additional insured. (The additional insured endorsement required that the additional insured’s name be on file with the insurance company.) However, the court did say: “For estoppel based upon the issuance of a certificate of insurance to apply… the certificate must have been issued by the insurer itself or by an agent of the insurer.” (Emphasis added).

Learning Point

While in the best of all possible worlds, the additional insured will review the pertinent insurance policy, for us mere mortals, the most we can realistically do is review the actual endorsement that grants additional insured status. If the endorsement shows the name of the additional insured, that’s great. If it says “on file with the insurer,” the additional insured needs confirmation from the insurer or its authorized agent that its name is actually on file. If it says “agreed in writing in a contract or agreement,” then the additional insured must be sure that there is, in fact, such a contract.

Duty to Defend is Broader than Duty to Indemnify

It’s accepted law in New York and most other states that the duty to defend is broader than the duty to indemnify10.  Under that doctrine, if one cause of action, say negligence, is alleged in the lawsuit, the insurer must defend all the causes of action alleged by the plaintiff even if some of them, such as intentional acts, are clearly not insured. All that is required is that the insured is potentially covered under the policy for one of the counts.

In his May 19, 2012 Binding Authority email newsletter11, Randy Maniloff, a leading insurance coverage attorney, discussed an unusual duty to defend situation. The convoluted facts of the case do not concern us; the important points for our purpose are that two companies provided coverage for the insured and that one of the policies contained an unusual provision.

Chicago Title’s policy was primary and Philadelphia Insurance’s was excess. Chicago Title’s policy contained the unusual provision. It read: “[Chicago Title] will not pay any fees, costs or expenses incurred by the insured in the defense of those causes of action which allege matters not insured under the policy.”12

The question Maniloff proposes is: “Did Chicago Title’s policy language, which limits the duty to defend to solely potentially covered claims, trump Illinois’s long-standing rule that if an insurer has a duty to defend one count of a complaint, it has a duty to defend all counts of the complaint?” The court held that the broad duty to defend is not based on policy wording; it arises as a matter of law. It concluded that “Chicago Title may not contract around this duty.” There is also an Ohio case based on the same wording that held the same way13.

These are lower court cases, but Maniloff feels they’re important because they demonstrates how deeply duty-todefend is embedded in the law. I agree. Some insurers offer non-duty to defend policies; generally the cost of defense is a covered expense usually in excess of a retention or deductible, but the insured selects counsel. That makes sense for large corporations that want to control the management of the claim and have the sophistication to do so. Small firms and most mid-size firms don’t have those skills. What’s more, non-duty to defend forms don’t cover the costs to defend the portions of the claim that aren’t covered by the insurance.

Learning Point: Getting a defense for your insured can be an enormous benefit even if coverage for indemnity is doubtful. Defense can be extremely expensive. In addition, faced with an expensive defense obligation, the insurer may elect to settle the case to cut its losses.

 

1 CG 00 01 12 07 © ISO Properties, Inc., 2006

2 Among other occurrences that are now excepted from the exclusion is carbon-monoxide poisoning resulting from smoke, fumes, vapor or soot produced by or originating from equipment that is used to heat, cool or dehumidify the building,

3 Meridian Mutual Insurance Company v. Kellman. 197 F.3d 1178 (6th Cir. 1999).

4 Ibid.

5 Ibid (The Meridian decision cited above lists a number of such cases.

6 Elsie D. Allen “Indiana Solidifies Its Treatment Of Pollution Exclusions As Generally Ambiguous” CM Report, Clausen Miller, May 2012 http://www.clausen.com/index.cfm/fa/firm_pub.article/article/4f9baf8b- 63744251ad9688a81478fb7b/Indiana_Solidifies_Its_Treatment_Of_Pollution_Exclusions_As_Generally_Ambiguous.cfm

7 Barney Greengrass, Inc. v. Lumbermans Mut. Cas. Co., 2010 U.S. Dist. LEXIS 76781 (S.D.N.Y. July 27, 2010)

8 Estoppel is a legal principle that bars a party from denying or alleging a certain fact owing to that party’s previous conduct, allegation, or denial.

9 Supreme Court Of The State Of New York Appellate Division, Fourth Judicial Department 09-02516 June 11, 2010.

10 One New York case setting out the breadth of the duty to defend is BP Air Conditioning Corp. v. One Beacon Ins. Group, 8 N.Y.3d 708, 840 N.Y.S.2d 302 (2007). 11 http://www.whiteandwilliams.com/binding.html

12 Philadelphia Indemnity Insurance Company v. Chicago Title Insurance Company U.S. District Court, Northern District of Illinois Case No. 09 C 7063 May 11, 2012.

13 Little Italy Dev., LLC v. Chi. Title Ins. Co., No. 1:11 CV 212, 2011 WL 2532663 (N.D. Ohio June 24, 2011).