Environmental Coverage Under Comprehensive General Liability Policies

Comprehensive General Liability ("CGL") insurance policies issued after the early 1970s contain some form of a pollution exclusion clause. Although businesses that are subject to environmental liability may purchase separate policies to address environmental hazards, most businesses have not yet obtained such coverage.

This newsletter explores whether the pollution exclusion in a CGL policy precludes coverage based on the law in New York State. CGL policies issued prior to the early 1970s did not contain a pollution exclusion. However, from the early 1970s through approximately 1986, standard CGL policies contained a "sudden and accidental" pollution exclusion. From approximately 1986 to the present, the standard CGL policy contains a so-called absolute exclusion that was intended to eliminate coverage associated with pollution related events.

General Principles of Insurance Coverage

It is well-settled that an insurer has a duty to defend its insured in a lawsuit if the complaint alleges a covered occurrence, regardless of the merits of the action. In construing an insurance policy to determine whether coverage is warranted, a court will apply what are known as the "common speech" and the "reasonable expectation and purpose of the ordinary businessman" tests. Courts have held insurers to a high standard in this regard in order to prevent the denial of a claim because of an exclusion contained in a CGL policy which is ambiguous; any ambiguities in the policy are to be construed against the insurer, particularly when such ambiguities are found in an exclusionary clause. See, Ace Wire & Cable Co., Inc. v. Aetna Casualty & Surety Co., 60 N.Y.2d 390, 469 N.Y.S.2d 655 (1983); City of Johnstown v. Bankers Standard Ins., 877 F.2d 1146 (2d Cir. 1989).

Definition of "Pollution"

The first step in analyzing whether a pollution exclusion clause precludes coverage is to determine whether the substance involved in the action falls within the definition of pollution. In several contexts courts have addressed the issue as to what constitutes "pollution" in a CGL policy.

For example, New York's highest court, the Court of Appeals, held that the term "pollution" did not bar coverage for asbestos-related diseases because the clause was ambiguous with regard to whether asbestos fibers were discharged into the "atmosphere" as contemplated by the pollution exclusion. That court also viewed the exclusion clause as ambiguous in view of its alleged purpose, i.e., to exclude coverage for environmental pollution. Continental Casualty Co. v. Rapid-American Corp., 80 N.Y.2d 640, 593 N.Y.S.2d 966 (1993).

In similar situations, such as claims involving lead paint exposure, non-industrial environmental pollution, and carbon dioxide leaks from heating systems, courts have likewise held that the pollution exclusion clause did not bar coverage. See, Cepeda v. Varveres, 234 A.D.2d 497, 651 N.Y.S.2d 185 (2d Dep't 1996); General Accident Ins. Co. of America v. Idbar Realty Corp., 163 Misc.2d 809, 622 N.Y.S.2d 417 (Sup. Ct., Suffolk 1994); Stoney Run Company v. Prudential-LMI Commercial Insurance Co., 47 F.3d 34 (2d Cir. 1995).

Some CGL policies exclude from coverage injury or damage arising from "discharge, dispersal, seepage, migration, release or escape" of pollutants. Courts have construed this language to apply to pollutants which travel "from a contained place to the insured person's surroundings and then cause injury." In contrast, injuries caused by irritants that normally are stationary, but can be shifted or moved manually, are not excluded from coverage because they do not cause injury by one of the pre-scribed methods. Lefrak Organization, Inc. v. Chubb Custom Insurance Co., 942 F.Supp. 949 (S.D.N.Y. 1996). For example, an employee of a gas service station sued her employer alleging injuries caused by exposure to toxic substances in the gasoline sold at the station. The station's insurer refused to defend the action, relying upon the pollution exclusion clause in the policy. However, the court found that there was coverage and that the exclusion did not apply. Autotronic Systems, Inc. v. Aetna Life and Casualty, 89 A.D.2d 401, 456 N.Y.S.2d 504 (3d Dep't 1982).

The pollution exclusion clause has been viewed by many courts to be ambiguous and thus only applicable where the insured's acts were intentional. See, Technicon Electronics Corp. v. American Home Assurance Co., 141 A.D.2d 124, 533 N.Y.S.2d 91 (2d Dep't 1988).

"Sudden and Accidental" Pollution Exclusion

Under the pollution exclusion in effect from the early 1970s until approximately 1986, pollution coverage is barred unless the release was "sudden and accidental". The term "accidental" includes not only an unintended event but also one "occurring unexpectedly or by chance." Northville Industries Corp. v. National Industries Corp., 89 N.Y.2d 621, 657 N.Y.S.2d 564 (1997). This meaning of acci-dental is well recognized and has generally been applied in construing insurance policies, and cannot be disregarded in the context of the use of the term in an exclusion clause.

In determining whether an occurrence is "sudden", the focus is on the initial release of the pollutant, not on the length of time the discharge remains undiscovered, the length of time that damage to the environment continued as a result of the discharge, or the timespan of the eventual dispersal of the discharged pollutant in the environment. Thus a release or discharge must occur abruptly or quickly to be considered "sudden". See, Northville, 675 N.Y.S.2d 564; County of Fulton v. United States Fidelity and Guaranty Co., 195 A.D.2d 972, 600 N.Y.S.2d 972 (3d Dep't 1993). It should be noted that in several other states, "sudden", as used in this exclusion, is defined to mean "accidental". As a result, in these states, soil or groundwater contamination that occurs gradually and is unexpected may well be covered under a CGL policy. In contrast, in New York the exclusion would probably apply and coverage would be precluded since sudden is defined as meaning abrupt or quick. This distinction is critical since most soil and groundwater problems occur in a gradual rather than an abrupt manner. As a result, there may be coverage in one state but not another under the exact same facts.

Absolute Pollution Exclusion

The standard CGL policies issued after approximately 1986 contain an "absolute pollution exclusion". This exclusion has been viewed to apply only to instances of environmental pollution. Thus, in one case a bulldozer operator was accidentally sprayed with sulfuric acid while working. The insurer denied coverage based on an absolute pollution exclusion clause contained in the policy, and the court granted the insured's suit for coverage, holding that the language of the clause was ambiguous and did not apply to that situation. See, Karroll v. Automergic Chemetals Corp., 194 A.D.2d 715, 600 N.Y.S.2d 101 (2d Dep't 1993).

In another action, tenants in a single-family home were exposed to asbestos when an employee of a contractor carried asbestos-containing materials through the home. The contractor's policy contained an absolute pollution exclusion endorsement. The court held that "the absolute pollution exclusion endorsement is ambiguous concerning whether the environment encompasses the air within a residential home through which asbestos fibers pass." Miano v. Hehn, 206 A.D.2d 957, 614 N.Y.S.2d 829 (4th Dep't 1994). In another example, the absolute pollution exclusion was found not to relieve the insurer from its obligation to defend against a suit by a tenant allegedly injured from fumes released from installed carpet within an apartment building. Garfield Slope Housing Corp. v. Public Mutual Insurance, 973 F.Supp. 326 (E.D.N.Y. 1997). Likewise, the absolute pollution clause has been interpreted as not barring coverage for lead paint exposure claims. Generali-U.S. Branch v. Caribe Realty Corp., 169 Misc.2d 1956, 612 N.Y.S.2d 296 (Sup. N.Y. 1994).

Asbestos Exclusion Clause

For several years, CGL policies have also contained an asbestos exclusion. Like the other types of exclusions contained within an insurance policy, an asbestos exclusion clause will be upheld if its terms are unambiguous. An insurer will be held to the strict language contained within an asbestos exclusion clause. See, Schneider v. Continental Casualty Co., 989 F.2d 728 (4th Cir. 1993)(terms in clause must be unambiguous to be enforced); Kimmins Industrial Service Corp. v. Reliance Insurance Co., 19 F.3d 78 (2d Cir. 1994)(insurer held to strict language of exclusionary clause).

Emerging Environmental Insurance Products

The insurance industry has many policies and products available to address the specific environmental hazards which may otherwise be barred from coverage under the exclusions contained in a CGL policy. There are a broad range of products that may cover, among other things, asbestos abatement, lead abatement, property transfer, and remediation costs.

Prepared by Laurie Sayevich Horz and James P. Rigano who concentrate their practice in environmental law and litigation. These reports are prepared periodically to provide general information on subjects of interest. The reports are not intended to provide legal advice for a specific matter. If you require further information on the subject of this report or would like to provide comments, please feel free to contact either Ms. Sayevich Horz or Mr. Rigano at (516) 694-8000.

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