§17.10 - Policy Exclusions

• Jurisdiction: Washington

§17.10 Policy Exclusions

Policy exclusions, including exclusions for pollution and owned property, are discussed below.

(1) The pollution exclusion with the sudden and accidental exception

Since the early 1970s, most CGL policies contained pollution exclusions with an exception for sudden and accidental discharges. This 1970 form ISO pollution exclusion provides that coverage shall not apply:

To bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, or contaminants or pollutants into or upon land, the atmosphere or any water course or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

See Mitchell L. Lathrop, Insurance Coverage for Environmental Claims §3.07[2] (1994) (emphasis added).

Insurers in Washington have historically taken the position that the sudden and accidental language in this exclusion is clear and unambiguous. Moreover, it is the insurers position that the sudden and accidental exception has a temporal component and is only intended to provide coverage for abrupt, temporally sudden, boom type events. Finally, insurers take the position that this pollution exclusion focuses upon the discharge of the contaminants rather than on the resulting damages.

(a) Admissibility of extrinsic evidence of drafting or regulatory history

The Washington Supreme Court has held that the term sudden in the sudden and accidental exception is ambiguous. Queen City Farms, Inc. v. Cent. Natl Ins. Co. of Omaha, 126 Wn.2d 50, 82, 882 P.2d 703 (1994), amended, 891 P.2d 718 (1995); Key Tronic Corp. v. Aetna (CIGNA) Fire Underwriters Ins. Co., 124 Wn.2d 618, 629, 881 P.2d 201 (1994). In both cases, the insured deliberately dumped waste materials into containment pits over many years in the regular course of its business. The court in each case held that the exclusion focused on the damage-causing event, which was the discharge, dispersal, release, or escape of pollutants from the containment pit rather than the original practice of placing the pollutant in the pit. Queen City Farms, 126 Wn.2d at 95; Key Tronic, 124 Wn.2d at 627-28.

The courts in both cases held that they would allow policyholders to present to the court a reasonable construction of the policy language that is favorable to policyholders and that is based on regulatory history as reported in decisions from other jurisdictions. Queen City Farms, 126 Wn.2d at 85; Key Tronic, 124 Wn.2d at 630. A vigorous dissent argued that consideration of such extrinsic evidence creates a dangerous precedent. Queen City Farms, 126 Wn.2d at 136 (Madsen, J., dissenting); see also Cook v. Evanson, 83 Wn.App. 149, 920 P.2d 1223 (1996), review denied, 131 Wn.2d 1016 (1997) (court rejects use of drafting history to find ambiguity in absolute pollution exclusion context).

(b) Meaning of sudden and accidental in Washington

The Queen City Farms court summarized its pollution exclusion holding by stating that sudden means unexpected and therefore sudden and accidental means unexpected and unintended. 126 Wn.2d at 90. Reading the occurrence clause and the pollution exclusion together, the court held as follows:

[P]ollution damage resulting from an accident, including continuous or repeated exposure to conditions, which is neither intended nor expected is covered under the occurrence clause. The exclusionary language of the qualified pollution exclusion precludes coverage for damage resulting from the listed polluting events. The polluting event may be the discharge, dispersal, release, or escape of materials from a place of containment into the environment where they cause damage. Coverage is re-triggered, however, under the exception to the exclusion, where the discharge, dispersal, release, or escape is sudden and accidental, i.e., unexpected and unintended. Therefore, if the damage results from the dispersal of materials into the groundwater from a place of containment where the insured believed they would remain or from which they would be safely filtered, and that dispersal was unexpected and unintended, then coverage is provided under the policies.

Queen City Farms, 126 Wn.2d at 90-91. In this passage, the court has adopted what is known as a secondary discharge theory, shifting the focus from the initial deposit of pollutants to a second escape or migration of pollutants from a place of containment. Thus, under Washington law, the sudden and accidental pollution exclusion would bar coverage for a claim if the insured subjectively expected the releases of pollutants. This has also been referred to as the landfill exception. As the court went on to say:

Finally, we point out that the intentional polluter, or the polluter which dumps materials into landfills or waste disposal sites while knowing or expecting that materials will migrate or disperse into the environment, will not find coverage under the standard CGL policies containing the qualified pollution exclusion. The pollution exclusion with its exception thus serves the obvious policy purpose of precluding coverage for damage resulting from expected and intended pollution.

Queen City Farms, 126 Wn.2d at 93; see also Am. Natl Fire Ins. Co. v. B & L Trucking & Constr. Co., Inc., 82 Wn.App. 646, 660-65, 920 P.2d 192 (1996), affd, 134 Wn.2d 413, 951 P.2d 250 (1998).

The Queen City Farms courts analysis of the...