8.5.5 The Owned Property Exclusion

• Jurisdiction: Arizona

Standard general liability policies contain what is commonly referred to as an "owned property exclusion." Most CGL policies exclude coverage for property damage to "property owned or occupied by or rented to the insured." This exclusion was intended to prevent general liability policies from serving as first-party insurance. Insurance companies have routinely relied on this exclusion, arguing that it voids coverage for the discharge or spill of pollutants because abatement measures are often necessary on the insured's own property in order to forestall further discharges or spills. However, many courts have been unwilling to exclude coverage on that basis, and have found various rationales for allowing coverage. Typically, these courts have determined that the exclusion does not apply because either the clean-up was performed to prevent damage to third parties (a horizonal analysis), or the damage or contaminated water did not belong to the insured (a vertical analysis).

The court in Broadwell Realty Services, Inc. v. Fidelity & Casualty Co. of New York,^[342] for example, adopted a horizontal analysis, holding that environmental clean-up costs on the insured's property were covered because the costs were incurred to prevent pollution from spreading to adjacent property. The court in Broadwell Realty Services determined that the cost of clean-up, which was undertaken by the insured on its own property in response to governmental directives designed to abate threatened imminent third-party property damage in the form of groundwater contamination, was not excluded by the owned property exclusion.^[343]

Courts adopting a vertical analysis have held that the owned property exclusion does not apply to contamination that percolates down into subsurface water, reasoning that a private citizen's property interest in groundwater is limited to a "reasonable use."^[344]

For example, in Intel Corp. v. Hartford Accident & Indemnity Co.,^[345] the court held that under California law all groundwater within the state was the property of the people of the state and, therefore, contamination of the groundwater, even under the insured's property, was damage to third parties and was not subject to the owned property exclusion.

The Arizona courts have not considered an owned property exclusion in the environmental context. However, reasonable arguments can be made that they will adopt either a horizontal analysis or vertical analysis. Supporting a horizontal analysis is...