June 16, 2021

Just How Absolute is the Absolute Pollution Exclusion?

Posted on June 16, 2021 by Thomas M. Hnasko

Despite the myriad CERCLA cases on the books, there is little – if any – jurisprudence dissecting the so-called “absolute pollution exclusion” in a comprehensive general liability insurance policy and the insurers’ obligation to defend the insured where the complaint seeks to impose joint and several liability against the insured under Section 107 of CERCLA, as opposed to seeking contribution only for the hazardous substances which may have emanated from the insured’s property.  This question, along with whether a request for reimbursement of costs incurred by the U.S. EPA “arises out of” a “request, demand or order that any insured or others . . . respond to . . . the effect of pollutants,” has been presented within dueling cross-motions for summary judgment in Chisholm’s Village Plaza, LLC v. Travelers Commercial Insurance Co., et al., No. 2:20-cv-00920-JB-KRS, United States District Court for the District of New Mexico.

The Chisholm’s case concerns the insurers’ failure to defend Chisholm’s, their insured, in the underlying CERCLA case of City of Las Cruces, et al. v. United States of America, et al., No. 2:17-cv-00809-JCH-GBW, federal court for the District of New Mexico, where the responsible party sought contribution from Chisholm’s under Section 113 and also sought payment of all response costs under Section 107 for the entire contamination plume caused by unrelated third parties.  Chisholm’s tendered a claim for defense and indemnity benefits to its insurers in August 2019, but both refused coverage and failed to provide a defense to Chisholm’s under a reservation of rights.  Neither defendant instituted a declaratory judgment action to determine coverage or their respective duties to defend Chisholm’s.

The insurance policies at issue contain pollution exclusions clauses commonly referred to as the “absolute pollution exclusion.”  Under the first prong of the exclusion, the insurer is not obligated to cover losses from a release of pollutants “at or from any premises” owned “by the insured.” Chisholm’s asserted in its motion that the insurers had ignored the allegations of the underlying complaint, which sought to impose liability on Chisholm’s not only for the discharge of hazardous substances from its facility, but also for unidentified “hazardous substances” allegedly discharged by other co-defendants.  This Section 107 joint and several liability claim went far beyond imposing liability for a release from the insured’s property and thus triggered the duty to defend the entire complaint based on the long-standing principle that a potential for coverage for one claim invokes the duty to defend all claims.  Surprisingly, this issue has not been decided under Section 107 of CERCLA, and it appears formidable based on the principle that exclusions from coverage should be narrowly construed to effectuate a very limited purpose.

The policies contained a second prong of the so-called “absolute pollution exclusion” – upon which the insurers also relied in denying their duty to defend – which excludes from coverage “any loss . . . arising out of any demand . . . that any insured or others . . . in any way respond to . . . the effects of pollutants.”  While the defendant insurers contended that the underlying CERCLA case sought relief falling squarely within the second prong of the pollution exclusion, a careful reading of the complaint in the underlying case arguably supports a different conclusion.  True, the underlying complaint sought recovery of the “response costs” incurred by the plaintiffs for the abatement of the contamination, a claim that would likely be excluded from coverage because it “arose from” a request or demand that the insured or others respond to the effects of pollutants.  However, the complaint also sought, as a separate source of damages, the money the underlying plaintiffs had already paid directly to the U.S. EPA for the feasibility study and remedial investigation initially conducted on behalf of and paid for by the U.S. EPA.  This type of damage, according to Chisholm’s motion, is a request for reimbursement of money, and not a demand that the insured “respond to or assess the effects of pollutants,” thereby falling outside of the second prong of the exclusion.

These issues of first impression are fully briefed and awaiting decision by the District Court for the District of New Mexico.  This decision will likely clarify whether the absolute pollution exclusion is as absolute as the insurers claim.