“Pollution” Exclusion Interpretation Highlights Need for Appropriate Coverage

“Pollution” Exclusion Interpretation Highlights Need for Appropriate Coverage

By David A. Gauntlett*

Introduction

In St. Paul Fire & Marine Ins. Co. v. Getty Properties Corp., 213 N.Y.S.3d 185 (2024), the New York Appellate Division determined that insurers had no duty to defend or indemnify a policyholder due to the “Pollution” exclusions in the policies. The case illustrates the perils of businesses that fail to obtain insurance coverage suited to their needs.

Compliance with Legal Requirements Does Not Avoid “Pollution” Exclusion

In 2007, the New Jersey Department of Environmental Protection commenced an action in a New Jersey state court against multiple defendants to recover damages related to the contamination of New Jersey surface and ground waters with methyl tertiary butyl ether (“MTBE”), a fuel additive that was incorporated into gasoline beginning in the late 1970s. Environmental agencies from Pennsylvania and Maryland followed suit, and the ensuing litigation encompassed 27 different lawsuits sprawling across multiple jurisdictions. After reaching a settlement to resolve its liability in 2010, Getty Properties Corp. (“Getty”) sought coverage from several insurers under policies dating back to 1971.

The parties agreed that the lawsuits fell within the initial grant of coverage, but the insurers argued for the applicability of a standard “Pollution” exclusion. It excludes coverage for:

“Bodily injury” or “property damage” which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.[1]

Getty argued that MTBE could not qualify as a “pollutant” for two reasons: (1) Getty did not know MTBE was harmful during the relevant time period and (2) the Environmental Protection Agency (“EPA”) required Getty to use MTBE as a fuel additive.[2] The court rejected both arguments.

Lacking any scienter language, the “Pollution” exclusion’s applicability did not depend on whether Getty subjectively understood that MTBE was an environmental contaminant. For the second argument, the court cited precedent from the New York Court of Appeals determining that an insured’s compliance with the law could not prevent an insurer from enforcing a “Pollution” exclusion.

Similarly unpersuasive is Technicon's claim that as long as the discharge was legal, . . . the pollution exclusion provision is displaced from its policy. The plain language of the exclusion clause . . . makes no mention of the legality of the discharge. Notably, when the statute mandating the inclusion of the pollution exclusion provision in all general liability insurance contracts was added to the Insurance Law in 1971—Technicon's policy was acquired during that period—opponents of the legislation stressed that even those who “observe the laws and rules scrupulously and discharge materials from his facility only in strict conformity with the concentrations, quantities or conditions set forth in the laws, regulations and permits * * * [are] stripped * * * of [the] ability to insure against this event” [citations].[3]

The court also noted that Getty’s argument fails because it focused on whether MTBE is a pollutant when used in gasoline, but the relevant liability stemmed from MTBE seeping into groundwater. In the latter context, the court determined MTBE was undeniably a pollutant.[4]

“Pollution” Exclusion’s “Sudden and Accidental” Exception Inapplicable

The standard “Pollution” exclusion found in the relevant CGL policies was accompanied by an exception for any discharge or release of pollutants that is “sudden and accidental.”[5] “Sudden” and “accidental” have been interpreted as distinct requirements an insured must satisfy to invoke the exception.[6] The Getty court limited its analysis to the “sudden” component, which is “only met where the discharge occurs ‘abruptly or within a short timespan, of a significant quantity of the pollutant sufficient to have some potentially damaging environmental effect.’”[7] Because the seeping of MTBE into the groundwater occurred undetected over the course of many years, the court concluded the exception to the exclusion could not be applied.

Notably, this exception is less relevant in the modern context. Some courts interpreted the “sudden and accidental” exception as merely requiring the pollution to be “unexpected and unintended.” The Insurance Services Office (“ISO”), which drafts the standard policy language used by major insurers in their CGL policies, revised the pollution exclusion to remove this exception in 1986.[8]

Businesses Must Obtain Policies Suited to Their Needs

In the above case, Getty found itself in the unfortunate situation of lacking coverage despite (and, in fact, arguably because of) compliance with the law. Unfortunately, the standard insurance policy language did not make legal compliance into a safe harbor. It is important for businesses to protect themselves from the risks inherent in their industry with policies that actually cover those risks. There are also niche policies that can cover risks not included in a typical Commercial General Liability (“CGL”) policy. For example, contractors and other construction businesses may consider acquiring a Contractor Pollution Liability (“CPL”) policy. Their coverage can be limited to the “sudden and accidental” form of pollution available under the old CGL forms or expanded to include coverage even for gradual pollution as occurred in Getty.[9]

While deviating from standard policy language inevitably requires higher premiums, experienced insurance brokers and coverage attorneys can aid in acquiring bespoke policies suited to a business’s needs. This often occurs in the form of removing or modifying policy exclusions. In the case of Getty, an additional exception to the “Pollution” exclusion for liability occurring despite compliance with applicable environmental safety laws could have produced a different outcome. Exclusionary language is especially important given the tendency for courts to mistakenly apply a broad construction[10] despite the principle of coverage law dictating they be construed strictly against the insurer.[11]

Conclusion

The Getty case highlights the need for businesses to obtain appropriate policies that do not include exclusions to remove the aspects of coverage most critical to the relevant risks. While obtaining such policies can be a lengthy and costly endeavor, the required investment pales in comparison to the potential duration and expense of uncovered litigation. It is also not a quest to undertake alone. Qualified insurance brokers and coverage counsel can aid in acquiring appropriate and affordable policies to suit the needs of a particular business.

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] “Pollutants” are defined as “any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste.”

[2] Getty Properties Corp., 213 N.Y.S.3d at 189.

[3] Technicon Elecs. Corp. v. Am. Home Assur. Co., 74 N.Y.2d 66, 76 (1989). Though the exclusion is no longer required by to be included in policies, the court concluded its statutory origins were still relevant to interpretation.

[4] Getty Properties Corp., 213 N.Y.S.3d at 189.

[5] Id.

[6] Northville Indus. Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 89 N.Y.2d 621, 632 (1997) (“[The terms ‘sudden’ and ‘accidental’] have separate meanings, [both] of which must be established for the exception to nullify the pollution coverage exclusion.”)

[7] Getty Properties Corp., 213 N.Y.S.3d at 189 (quoting Northville Indus. Corp., 89 N.Y.2d at 684).

[8] Craig Stanovich, The CGL Pollution Exclusion, https://www.irmi.com/articles/expert-commentary/the-cgl-pollution-exclusion (May 7, 2021) (discussing the history of the “Pollution” exclusion and the differences between the original and modern iterations).

[9] For a discussion of the coverage provided by such policies and how it differs from that offered by CGL policies, see Insurica, Contractors Pollution Liability Insurance, https://insurica.com/blog/contractors-pollution-liability-insurance/#:~:text=CGL%20Pollution%20Exclusions&text=CGL%20policies%20with%20an%20absolute,during%20an%20insured's%20business%20operations.

[10] Paraco Gas Corp. v. Ironshore Indem., Inc., No. 23-1069-CV, 2024 WL 3024658, at *2 (2d Cir. (N.Y.) June 17, 2024) (broadly construing a contract liability exclusion to only require a “but for” causation rather than a narrower “proximate” causation due to inclusion of “arising out of” in the exclusionary provision).

[11] Schlather, Stumbar, Parks & Salk, LLP v. OneBeacon Ins. Co., 2011 U.S. Dist. LEXIS 147931, at *19–20 (N.D.N.Y. Dec. 22, 2011) (“[T]his term [‘arising our of’] ‘should be interpreted as narrowly as possible in an insurance exclusion, because any ambiguities in insurance contracts should be resolved in favor of the insured.’”) (quoting Gluck v. Executive Risk Indem., Inc., 680 F. Supp. 2d 406, 419 (E.D.N.Y. 2010)) (emphasis added).