Chapter 7

• Jurisdiction: United States

Chapter 7

Comprehensive General Liability Insurance—The Pollution Exclusions

§ 7.01 Overview

All businesses need to be familiar with the various types of pollution exclusions used and in use in the marketplace. Because businesses generally own, lease, and operate at a physical location, there may be significant environmental issues and risks regardless of what the business does. Accordingly, it behooves businesses and their legal and insurance advisors to understand how the business’s insurance policies might respond to these environmental issues.

This chapter focuses on forms of pollution exclusions historically used and currently in use in the insurance policies that most entities use, such as pollution exclusions in first-party property policies,¹ comprehensive general liability insurance policies,² and directors and officers or professional liability insurance policies.³

With regard to the forms no longer in use, those exclusions are still relevant and applicable. Indeed, many environmental claims involve latent losses that may not appear until years after the damages first commence, and many jurisdictions apply the continuous trigger theory of coverage, meaning all policies between the date the damages first commenced and date the damages are first discovered are responsible to respond to the loss.⁴

The distinction between first-party and third-party insurance policies⁵ is important to remember because, as mentioned above, the exclusions discussed in this chapter are usually included in all types of first-party and third-party insurance policies. Accordingly, one should focus on the environmental exposure, claim, or liability at issue to determine which type would be the appropriate policy under which to consider submission of a claim. For example, a governmentally initiated cleanup action might require a third-party insurance policy if the cleanup efforts are directed at the groundwater. Additionally, a cleanup action initiated by a neighboring landowner or a bodily injury claim initiated by one exposed to materials emanating from one’s property or operations would require consideration of submission to a third-party liability policy. On the other hand, a cleanup action initiated to clean up pollution confined to one’s own property might require submission to one’s first-party property insurance company.

This chapter first reviews the “qualified” pollution exclusion, including the “sudden and accidental” exception from which its “qualified” label has emanated,⁶ its regulatory and drafting history,⁷ and the case law construing it.⁸ This chapter then reviews the so-called “absolute” pollution exclusion, including the policy language,⁹ its regulatory and drafting history,¹⁰ and the case law construing it.¹¹ This chapter further reviews the so-called “total” pollution exclusion, including the policy language,¹² its regulatory and drafting history,¹³ and the case law construing it.¹⁴

§ 7.02 The “Qualified” Pollution Exclusion

Beginning in the early 1970s, most comprehensive general liability insurance policies contained a “qualified” pollution exclusion, which was limited in scope and attempted to exclude coverage for “releases” and “discharges” of “pollutants.”¹⁵ One such exclusionary provision that has been used provides:

“This insurance does not apply to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soots, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, 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.”¹⁶

[1]—“Sudden and Accidental” Exception

The “qualified” pollution exclusion is denoted as “qualified” because it is limited in scope. To wit, it contains an express exception for discharges or releases that are “sudden and accidental.”¹⁷ This “sudden and accidental” exception is the central litigated issue under the “qualified” pollution exclusion.

As a result of stringent enforcement of state and federal environmental statutes,¹⁸ the insurance industry often took the position that the “qualified” pollution exclusion relieved its members of any coverage obligations for such liabilities.¹⁹

The principal disputes between policyholders and insurance companies over the exclusion are: (1) the meaning of “sudden” in the “sudden and accidental” exception;²⁰ and (2) whether “sudden and accidental” refers to the initial dumping of hazardous material or to the release into the environment.²¹

[2]—The Construction of “Sudden”

The first issue concerns the meaning of “sudden” within the “sudden and accidental” exception. The dispute over the meaning of “sudden” is whether the word connotes a temporal or time-related element requiring something “abrupt, immediate, or of short duration” or whether it merely rehashes the “occurrence” or fortuity requirement of “unexpected” and “unintended.” If a court reads a temporal component into the exception, then damage occurring over an extended period of time, which would be typical of a government-mandated cleanup under the various state and federal environmental statutes, would not be covered even if the pollution is unexpected and unintended. However, if no temporal limitation is imputed to the word “sudden,” then as long as the damage was unexpected and unintended, the “qualified” pollution exclusion should not apply to bar coverage.²²

Case law is split as to the meaning of “sudden” in the “qualified” pollution exclusion. Some courts hold the insurance company to their regulatory representations that the “qualified” pollution was meant to clarify pre-existing insurance coverage and did not restrict coverage for gradual pollution damage and apply the “sudden and accidental” exception to all unintended and unexpected pollution losses irrespective of the abruptness of the release.²³

In its seminal case, using principles of regulatory estoppel, the New Jersey Supreme Court determined that the insurance industry misrepresented that the “sudden and accidental” pollution exclusion merely clarified pre-existing insurance coverage.²⁴ The court found that the insurance industry had failed to disclose its intent to restrict coverage for gradual pollution damage and determined that “[h]aving profited from that nondisclosure by maintaining pre-existing rates for substantially-reduced coverage, the industry justly should be required to bear the burden of its omission by providing coverage at a level consistent with its representations to regulatory authorities.”²⁵

In so holding, the court defined “sudden” as “connoting an event that begins abruptly or without prior notice or warning, but the duration of the event—whether it lasts an instant, a week, or a month—is not necessarily relevant to whether the inception of the event is sudden.”²⁶

Several courts have concurred with this position.²⁷ A number of courts, however, have found the “qualified” pollution exclusion requires that pollutant releases be temporally quick, typically holding that excluding the temporal aspect of “sudden” renders the term “mere surplusage.”²⁸

[3]—What Does “Sudden and Accidental” Modify?

The other main area of contention between policyholders and insurance companies with regard to the “sudden and accidental” pollution exclusion is whether it is the initial dumping of the pollutant or the subsequent release of that contaminant into the environment that must be “sudden and accidental.” Some courts hold that “the relevant polluting event for purposes of the pollution exclusion clause is the release of pollutants from a containment area and not the initial placement of waste in that containment area.”²⁹ This distinction is significant because if the relevant “release” of the pollutant is the initial deposit of material into the area of containment, no coverage would ever be afforded when a policyholder intentionally places wastes into a containment area, even if that party neither expected nor intended for the pollutants to escape from that containment area.³⁰ Other courts have found the exception ambiguous.³¹ In contrast, a number of courts look to the initial “release” of the pollutant as the relevant point to test whether it was “sudden and accidental.”³²

§ 7.03 The “Absolute” Pollution Exclusion

[1]—Language

As litigation surrounding the scope of the “qualified” pollution exclusion continued, the insurance industry, through the Insurance Services Office (“ISO”), an insurance industry trade organization that drafts and revises standard-form liability insurance policies and endorsements (the successor to the Insurance Rating Bureau (“IRB”) and the Mutual Insurance Rating Bureau (“MIRB”)), drafted another pollution exclusion: the so-called “absolute” pollution exclusion. ISO specifically crafted this exclusion to exclude liability for government-directed cleanup of damage to the natural environment. The language of the standard-form exclusion provides as follows:

“This insurance does not apply to:

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f. (1) ‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured;

(b) At or from any premises, site or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste;

(c) Which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for any insured or any person or organization for whom you may be legally responsible; or

(d) At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing

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