In Este Oils Co. v. Federated Ins. Co., No. C-980048, Slip Op. (Ohio Ct. App. Feb. 9, 1999), the Ohio Court of Appeals reaffirmed a fundamental principle of insurance policy analysis that insureds sometimes forget: coverage is not created by the fact that an exclusion does not apply. The insured in Este Oils, an oil delivery company, delivered heating oil to a house. The insured did not know that the oil tank had been removed. Consequently, as the insured pumped the oil through the delivery pipe, the oil poured into the basement, causing property damage. The homeowner sued the insured. The insured sought a defense and indemnification under its business auto policy.
The insuring agreement provided, in pertinent part:
We will pay all sums an "insured" legally must pay as damages because of "bodily injury" or "property damage" to which this insurance applies, caused by an "accident" and resulting from the ownership, maintenance or use of a covered "auto."
We have the right and duty to defend any "suit" asking for these damages.
The policy excluded coverage for "pollutants":
This coverage is subject to the following exclusion:
B. 11. Pollution
a. "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:
(1) That are, or that are contained in any property that is:
(1) Being transported or towed by, or handled for movement into, onto or from, the covered "auto"
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.
The Court had no trouble holding that this pollution exclusion precluded coverage. The policy's definition of "pollutant" included any liquid contaminant, and heating oil is clearly a liquid contaminant, the Court found. Slip op. at 7. The Court ruled that the heating oil was "dispersed" into the homeowner's basement. Therefore, there was a dispersal of a pollutant, and the pollution exclusion barred coverage. Id.
The Court then turned its attention to the insured's argument that the completed operations exclusion created coverage. That clause provided:
This insurance does not apply to:
"Bodily injury" or "property damage" resulting from the delivery of any liquid into the wrong receptacle or to the wrong address, or from the delivery of one liquid for another, if the "bodily injury" or "property damage" occurs after delivery has been completed.
Delivery is considered completed even if further service or maintenance work, or correction, repair or replacement is required because of a wrong delivery.
Although not entirely clear from the Court's opinion, it appears that the insured argued that coverage existed because this exclusion did not apply. The insured also argued that this exclusion somehow conflicted with the pollution exclusion.
The Court rejected the insured's position. After ruling that the completed operations clause does not conflict with the pollution exclusion, the Court stated that it "adds no coverage applicable to this case." Id. at 8. Although the Court may not have articulated its reasoning with great clarity, it was applying the well-established principle that the non-applicability of an exclusion does not create coverage.
It is fundamental that the only part of a policy that creates coverage is the insuring agreement. An exclusion only removes coverage that would otherwise apply. Therefore, the non-applicability of an exclusion does not create coverage that otherwise does not exist. Numerous decisions have recognized this basic tenet. See, e.g., Edwards v. Motor Vehicle Accident Indem. Corp., 25 A.D.2d 420 (N.Y. 1st Dept. 1966)("An exclusion, in insurance parlance, serves the purpose of taking out persons or events otherwise included within the defined scope of coverage"); Kay v. United Pac. Ins. Co., 902 F. Supp. 656, 659 (D. Md. 1995)("long established Maryland rule that exceptions to exclusions do not extend coverage beyond that which is otherwise provided"); Reliance Ins. Co. v. Mogavero, 640 F. Supp. 84, 87 n.3 (D. Md. 1986)(an exception to the contractual liability exclusion "cannot itself create coverage").