June 14, 2023

New Mexico Eviscerates the Absolute Pollution Exclusion

Posted on June 14, 2023 by Thomas M. Hnasko

In my last blog, I discussed the seminal ruling in Chisholm’s-Village Plaza, LLC v. Travelers Insurance Co., et al.; No. 2:20-cv-00920-JB-KRS, in which the United States District Court for the District of New Mexico analyzed the so-called “absolute pollution exclusion” in a comprehensive general liability policy and held that the exclusion does not apply to Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) cost recovery actions in which the plaintiff seeks the recovery of response costs under Section 107 for contamination, when most of that contamination was caused by unrelated third parties.  Subsequently, the court issued a lengthy memorandum opinion, significantly expanding its earlier order, and held that all insurers in the case had breached the duty to defend because the pollution exclusion was inherently ambiguous and could not be enforced to foreclose coverage, even for releases emanating from property owned or occupied by the insured.  See Civ.-20-920-JB-JHR, filed August 16, 2022, 621 F. Supp. 3d 1195, 2022 WL 3369202.[1]

In its initial order, the court explained that a typical CERCLA Section 107 joint and several liability claim not only seeks to impose liability for releases from the insured’s property – the triggering language of the absolute pollution exclusion – it also seeks to impose liability for contamination emanating from other properties and thus triggers a duty to defend the entire complaint based on the long-standing principle that a potential for coverage for one claim invokes a duty to defend all claims.  The court concluded that the insurers had no basis to assert the exclusion for releases of pollutants from locations other than the premises owned and occupied by the insured.

In its subsequent 120-page memorandum opinion, the court thoroughly analyzed the exclusion under New Mexico law and concluded that it was inherently ambiguous.  The court explained that the exclusion, if applied literally, could lead to absurd results and, if applied on a case-by-case basis, would destroy the reasonable expectations of the insured. The court cited as an example the situation in which a patron who slipped on solvent could not maintain an action for personal injuries because of the broad interpretation of the pollution exclusion advanced by the insurers. According to the court, the pollution exclusion could not be applied to foreclose coverage for environmental property damage unless the exclusion itself identified the particular type of contaminant excluded from coverage.

The Chisholm’s decision has wide ramifications for the entire insurance industry and will cause it to reevaluate the exclusionary language, and likely, to re-draft it for future policies. As currently interpreted, in New Mexico it is unknown whether the pollution exclusion will be ineffective as a matter of law unless the insurer includes a comprehensive endorsement identifying every type of pollutant potentially used or released at the insured’s property, or whether the insurer may simply incorporate various regulatory lists, e.g., the listing of hazardous substances in 40 C.F.R §302.4. Without further definitional language in the policy, however, coverage in New Mexico will be provided for releases of all contaminants, even if the release occurred from premises owned or occupied by the insured.

[1] https://www.westlaw.com/Document/Ib75b5d301df311ed9c93e423e673f367/View/FullText.html?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0