Insurance Services Office's (ISO's) unendorsed commercial general liability policy contains what is historically referred to as the absolute pollution exclusion (APE). Although called an "absolute" exclusion, it is far from absolutely excluding all pollution-related injury or damage. In fact, the exclusion contains seven explicit or implied exceptions that extend coverage under certain conditions.

Never let it be said that an insurance carrier would grasp at any possible means to deny a claim; but the absolute pollution exclusion is likely the most misapplied exclusion within the commercial general liability (CGL) policy. Reasons for improper denials by application of the pollution exclusion are varied, ranging from the claim adjuster's misunderstanding of the injury's or damage's true proximate cause to a complete lack of understanding regarding the exclusion itself. Courts, too, contribute to misapplication because of inconsistent rulings among jurisdictions.

Exceptions to the Exclusion

Seven express and implied exceptions to the pollution exclusion are found in the CGL policy; but only six are truly relevant to the named insured (the seventh relates to coverage extended to an additional insured rather than the named insured). Of the six remaining exceptions, four are explicit in the form, one is understood from the policy wording and the last is strictly implied by the lack of any exclusionary wording within the endorsement.

Briefly, the four express exceptions to the pollution exclusion are:

• Bodily injury sustained in a building owned by, occupied by, rented to or loaned to an insured if caused by smoke, fumes, vapor or soot produced by or originating from equipment that is used to heat, cool or dehumidify the building, or equipment that is used to heat water for personal use, by the building's occupants or their guests;
• Bodily injury or property damage in a building owned by, occupied by, rented to or loaned to an insured, or at a premises on which an insured contractor is working if arising out of heat smoke or fumes from a hostile fire (the hostile fire exception is found in two separate subsections);
• "Bodily injury" or "property damage" arising out of the UNINTENTIONAL escape of fuels, lubricants or other operating fluids which are needed to perform the normal electrical, hydraulic or mechanical functions necessary for the operation of mobile equipment or its parts, if such fuels, lubricants or other operating fluids escape from a vehicle part designed to hold, store or receive them. The loss must occur at an off-premises site at which the inured is performing operations; and
• Bodily injury or property damage sustained within a building and caused by the release of gases, fumes or vapors from materials brought into that building in connection with operations being performed by the insured or its subcontractor.

One exception is implied from the express wording in the CGL form. Exclusion "f.1.(d)" specifically excludes pollution injury or damage "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 operations if the 'pollutants' are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor." This means that if the pollutant was not brought to the site by the insured or its subcontractor, injury or damage arising out of pollution and caused by the insured's (or its subcontractor's) operations is covered by the policy.

The last exception is implied and created by the conspicuous absence of any exclusionary wording. Products/completed operations injury or damage is not excluded by the pollution exclusion. Since there is no exclusion, coverage exists for pollution losses falling under the products completed operations definition.

These six exceptions point to the historical creation and purpose of pollution exclusions. Birthed in response to federal environmental laws (i.e. the clean water act (CWA), the resource conservation and recovery act (RCRA) and the Superfund Act (aka the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA))); the original intent of most standardized pollution exclusions was to exclude environmental pollution injury or damage falling under the jurisdiction of these laws. In fact, the New York Supreme Court noted that the exclusion's terminology is taken from environmental laws.

Current use of this exclusion seems to stray from its original intent and purpose.

Missing from the Exclusion

Pollution is not excluded! Only bodily injury or property damage caused by a pollutant and not extended coverage by an exclusionary exception are excluded. Literally, this means that the mere presence of a pollutant (a defined term) is not sufficient to trigger the pollution exclusion. The pollutant must be the proximate cause of the injury or damage.

For pollution to qualify as the proximate cause means that the injury or damage would not have occurred apart from the actions of a pollutant. The pollutant must be the factual cause of the injury or damage, not just a byproduct of the negligent event or simply present at the time or place of the loss. Any other interpretation of this exclusionary wording makes the absolute pollution exclusion unconscionably broad.

Pollution Claim Example

A utility contractor specializing in heavy civil construction was removing and installing new water and sewage piping for a water treatment facility. One of the pipes being removed ran through a control room. During removal, a large amount of effluent-tainted water gushed from the pipe damaging some of the computers in the control room.

The CGL carrier denied the claim citing the pollution exclusion because of the effluent in the water. We, of course, contested the denial based on two facts:

1. The effluent was not brought to the job site by the contractor (see the exception above); and
2. The pollutant was not the proximate cause of the damage. Negligently-released water that just happen to contain effluent was the factual cause of the damage.

Faced with these facts, the carrier reopened and paid the claim.

Pollution Exclusions and the Courts

Courts are charged with reviewing and comparing the facts of the loss with policy language to determine the availability of coverage. The problem is there are distinct differences among the jurisdictions. Some courts narrowly define the pollution exclusion in favor of the insured; while others tend to take a broader view of the wording and policy terms to the benefit of the insurance carrier.

For example, some states specifically define "pollutant" to universally include solvents and cleaners. Conversely, other states have ruled that solvents and cleaners are NOT pollutants based on the facts of particular cases.

Such a broad spectrum of jurisdictional rulings makes generalizing the application of the pollution exclusion, at best, extremely difficult and impossible at worst. Local rulings must be studied to properly apply the policy language.

Regardless of the jurisdiction and its application of the pollution exclusion, all courts try to answer two questions:

1. Is the substance a pollutant; and
2. Was there a release, discharge, etc. as that jurisdiction defines it?

Courts may not always define a particular substance as a pollutant. Whether a substance is, in fact, a pollutant hinges on the jurisdiction and the facts of the case. Six fact-based "tests" are applied to decipher a particular substance's classification as a pollutant in a particular situation:

1. What is the nature of the injury-causing substance?
2. What is the typical usage of the substance?
3. Quantity of the discharge.
4. Was the substance being used as it was intended to be used?
5. Is the substance one that is generally viewed as a "pollutant?"
6. Are there any other factors relevant to the case at hand?

From these six questions the court decides whether a particular substance is a pollutant or not. Coverage remains intact (subject to any other exclusions or condition) if the substance is not classed as a "pollutant." But being classed as a "pollutant" does not automatically negate coverage; the "pollutant" must still be the proximate cause of the injury for the exclusion to apply.

Defining escape, release, etc. is, once again, jurisdictionally-based. Some define this to mean escape or release from a location and others narrowly define these terms to mean from a particular system. In the example above, jurisdictions defining release to mean from a location would not classify the water gushing into the control room a release as it remained on premises (this hearkens back to the original intent of the pollution exclusion). A jurisdiction applying the "from a system" test would consider this a release (a much broader interpretation of the wording).

If there is no escape, release, etc., the pollution exclusion does not apply. Understanding local case law regarding these definitions is required. But again, the pollution must be the proximate cause of the injury or damage to be excluded.

In short, court decisions from external jurisdictions do little to guide agents through the pollution exclusion. Seemingly the only cases that help are those from the jurisdiction in question.

The Total Pollution Exclusion (CG 21 49)

Although outside the intended scope of this article, the total pollution exclusion requires a brief mention.

Some underwriters don't want any perceived exposure to a pollution claim thus they attach a total pollution exclusion (CG 21 49 or a proprietary form). The intent of this exclusionary endorsement is obviously to remove any coverage for injury or damage caused by a pollutant. Essentially every pollution event is excluded by this form as there are no exceptions to the exclusion.

But even this broad exclusion holds true to the idea that the proximate cause of the injury or damage must be the pollution for the exclusion to apply. The form reads, in part, "…which would not have occurred in whole or part but for…." "But for" is the proximate cause requirement. In the example above, water released due to the negligent actions of the insured was the proximate cause of the damage, not the presence of a pollutant. The damage would have occurred even if it was pure, clean water that was released.

Conclusion

Remember the "absolute pollution exclusion" is not absolute as there are exceptions; become familiar with them. And anytime a carrier asserts the pollution exclusion, always look for the true proximate cause of the loss. The mere presence of a "pollutant" is not (or should not be) sufficient to trigger the exclusion.