Pollution Exclusion Clauses and Their Applicability to Construction Site Environmental Risks

Environmental risk management is a major concern for contractors. This article discusses the liability of contractors for environmental clean-up costs under CERCLA. In addition, the existence of pollution exclusion clauses in comprehensive or commercial general liability insurance policies is also analyzed.

Key Words: CERCLA, environmental, insurance

Introduction

Assume that Less Care Construction (LCC) is hired by Owner to construct a project on a site. As part of the contract LCC is to remove the existing buildings, equipment, and machinery. LCC is entitled to the salvage value of any machinery and equipment on the site. The site was formerly used by Ban Rupt Shipbuilding Corporation, a corporation that no longer exists.  

Unknown to LCC and Owner, soil at the site contains hazardous chemical compounds, including paint thinner, lead, asbestos, and petroleum hydrocarbons apparently deposited on the site in the 1940s when the site was used as a shipbuilding plant by Ban Rupt. In addition, buildings on the site contain asbestos. Old drums, later found to contain the above hazardous chemicals, are also stored on the site. 

During the construction of the project LCC moves contaminated soil from one location on the site to another location. In addition, during the salvage operations LCC scrapes asbestos insulation from equipment and machinery allowing the scrapings to come into contact with the soil. In addition, LCC moves the drums from their existing location to a remote location on the site. During the transportation one of the drums was broken and its contents spilled on the ground. Environmental damage has occurred on Owner’s property, neighboring landowners’ property, and to the Grand River, adjacent to the construction site. 

The Environmental Protection Agency sends both Owner and LCC a “potentially responsible party” or ‘prp’ letter and informs them they must promptly devise a plan and commence clean up of the contaminated soil, asbestos, and drums. Clean-up costs may run as high as $3,000,000 and failure to comply may subject LCC and Owner to fines of $25,000 per day per violation. To compound its problems, comprehensive/commercial general liability insurers of both Owner and LLC are denying coverage for any environmental clean-up costs. 

The agreed to and underlying basis of property insurance is that the insurance company is obligated to pay “all sums” the insured becomes “legally obligated to pay as damages” because of an “occurrence” from which “property damage” results. CGL (comprehensive or commercial general liability insurance policies) insurance coverage for such environmental risks, however, is limited by “pollution exclusion” clauses and “owned property” exclusion clauses. Therefore, businesses need to purchase special environmental impairment liability insurance – often with high deductibles, caps, and limiting features of its own -- to off-set some risks and expenses. If the business has only a CGL policy at the time the environmental risk is discovered or government-ordered clean up is initiated this can present a major problem in shifting the risk of the expenses.  

This article discusses in general terms the potential liability of contractors and owners for environmental risks and the applicability of CGL exclusion clauses related to environmental hazards. It is intended only as an overview of a complex area of law that is undergoing constant change and evolution. This article is not intended to serve as legal advice and the authors strongly encourage readers to obtain independent legal advice based on the application of the most current law to a specific factual situation. 

Liability of Contractors under CERCLA

CERCLA

Environmental risk management is a major concern for contractors and owners, particularly since Congress adopted CERCLA, Comprehensive Environmental Response, Compensation, and Liability Act in 1980. In general terms CERCLA requires entities responsible for environmental damage to bear the cost of clean-up or remedying the damage. A natural tension exists because contractors and owners want insurance coverage for burdensome environmental clean up costs, while insurers want to limit the scope of coverage and avoid catastrophic losses not covered by underwriting.  

Passed during a heightened awareness of environmental problems, CERCLA is intended to provide  

“the tools necessary for a prompt and effective responses to hazardous waste disposal problems of national magnitude . . . [and to require] those responsible for causing the problems . . . [to] bear the costs and responsibility for remedying the harmful conditions they created.”  

United States v. Cannons Engg. Corp. The statute is to be liberally construed in light of its broad remedial purpose of preserving public health. (S. Rep. 844).  

Potentially responsible parties under CERCLA include “operators,” as well as “owners,” of property where the hazardous waste is generated or to which it is transported or stored. To be an “operator” under CERCLA, a contractor must exercise “control” over the operations. Because the duty and liability is nondelegable, a generator continues to be a prp after the waste is trucked offsite and is no longer in its control. The environmental goal is enhanced through exposure of all (but de micromous) “potentially responsible parties” (prps) to potential liability for all of the pollution cleanup costs through joint and several liability (imposed through case law). The party targeted by the EPA to bare the primary financial responsibility (directly or through a § 107 Response Cost Recovery Action) can file contribution actions (§ 113 claims) to get other prps to indemnify their “fair share.”  

Contractors can be considered “operators” if they control the cause of the contamination at the time the hazardous substances were released. Liability under § 107(a)(2) attaches to parties who had control of the cause of the contamination. The owner sued contractors who had been hired to clean up PCB contamination at the owner’s site but who allegedly had exacerbated the pollution by contaminating previously uncontaminated areas. In refusing to dismiss the CERCLA claims against the contractors the court said, “this court concludes [defendant contractors] could be liable as “operators”. See, Ganton Technologies v Quadion Corp. 

A housing developer hired an excavating contractor to excavate and grade a portion of the land for a proposed housing project. The developer claimed that the excavator mixed contaminants with soil and other fill materials, and then dispersed the resulting contaminated mixture over the land in the project. The court held that the excavating contractor had sufficient control over the contamination to qualify as an “operator”. See, Kaiser Aluminum & Chemical Corp. v Catellus Dev. Corp.  

Few defenses to CERCLA §107(a) strict liability exist. CERCLA initially allowed a defense if the toxic release was caused by an (a) act of God; (b) act of war; or (c) act or omission of a third party (who was not an agent or under contract with the defendant). [42 U.S.C. § 9607(b), CERCLA §107(b)]. Other defenses include the innocent purchaser defense, [42 U.S.C. §9601(35), CERCLA §101(35)] the security interest holders defense, [42 U.S.C. § 9601(20)(A), CERCLA §101(20)(A)], the common carrier exclusion, [42 U.S.C. § 9601(20)(B), CERCLA §101(20)(B)], the application of pesticides pursuant to the Federal Insecticide, Fungicide, and Rodenticide Act, and those releases that are federally permitted. [42 U.S.C. § 9601(10), CERCLA §101(10)]. Most recently, an exemption has been created for arrangers and recyclers of certain materials under the Superfund Recycling Equity Act of 1999. 

What is a Facility? 

All persons who own or operate a facility are liable for clean up costs of any hazardous substances disposed of at the facility. § 107(a)(2) of CERCLA, 42 U.S.C.A. § 9607(a)(2). While at first glance contractors may believe they are not liable under this definition because they do not operate the facility, the terms “facility” and “operator” are broadly defined. A facility includes "any site or area where a hazardous substance has been deposited, stored, disposed of, or placed, or otherwise come to be located" [42 U.S.C. § 9601(9)(B)] In addition, “any building, structure, installation, equipment, pipe or pipeline . . ., well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock, or aircraft” can be considered a CERCLA “facility.” [42 U.S.C. § 9601(9)(A)] Thus during a construction project, site containers or dredge ditches that may contain hazardous substances may be deemed to be “facilities,” the clean up of which may trigger CERCLA concerns. Machinery and equipment also fall within the courts’ interpretation of this definition of “facilities”. See FMC Corp. v. U.S. Dept. of Commerce. 

The term “facility” is broadly interpreted by the courts. In order to be termed a "facility," a plaintiff need only show that a hazardous substance has "otherwise come to be located" there. Thus, even if hazardous substances "come to be located" at several locations in a particular case, there does not appear to be a limit to the number of "facilities" that can be created by the migration of hazardous substances. In a case involving a contractor who constructed a water main through which pollution was funneled, not only did the court conclude that the construction site was a CERCLA "facility," but the court also held that the water main became a "facility" after hazardous substances entered the water main. Brookfield-North Riverside Water Com'n v. Martin Oil Marketing, Ltd., (CERCLA claims dismissed on other grounds). 

Basically, CERCLA liability will attach to persons who cause or control the contamination at the time the contamination occurs – this includes contractors who are only temporarily on the site and do not own it – because they are potential prp “operators” under CERCLA. An excavating contractor who exacerbates the extent of contamination by extracting contaminated soil from the site and spreading it over uncontaminated areas of the property can be held liable as well. Kaiser Aluminum & Chemical Corp. v Catellus Dev. Corp. 

Pollution Exclusion Clauses

The Development of Absolute Pollution Exclusion Clauses

If the general liability policy does not contain a pollution exclusion provision, the insurance company may be required to pay damages. Most CGL insurance polices contain a provision which reads, "The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence." Some courts have determined that coverage for environmental damage is covered by this clause. See, Crocca, (2003) for such cases. It is the existence of such cases that have lead to the pollution exclusion clauses.  

Pollution exclusion clauses in CGL policies were rare prior to 1970. “Qualified” pollution policies that became typical from 1971-1983 barred recovery if the contamination resulted from “intentional” or “expected” releases, but permitted recovery if the release was “sudden” and “accidental.” Under such exclusions, coverage was generally denied for “discharge, dispersal, release or escape of . . . contaminants or pollutants” that were intentional discharges (even if the damage was unintentional) and for continuous releases. A typical qualified pollution exclusion clause from this era read: 

This insurance does not apply to “bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water, but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental. 

Such clauses have met with a myriad of interpretations, with some courts precluding coverage in most circumstances, while other courts stretch the definitions of “sudden” and “accidental” to accommodate coverage when the judges believe it is warranted. The federal 8th Circuit Court of Appeals (in interpreting Missouri law) held that the “sudden and accidental” language was ambiguous, refusing to enforce the exclusion. Aetna Cas. & Sur. Co. v. General Dynamics Corp. Therefore, it is important to keep the old policies (that may have been occurrence / event-based rather than “claims-based” policies) if claimants can place the triggering event in a time frame where a policy with that language applied.  

 “Absolute” pollution exclusions became the norm by 1986 in CGL policies. This was largely in response to the expanded scope of liability faced by businesses under federal environmental legislation, especially CERCLA the Resource Conservation and Recovery Act (RCRA). Some other statutes under which contractors and owners face environmental liability include the Safe Drinking Water Act, Clean Water Act, and Surface Mining Control and Reclamation Act. Through the adoption of “absolute” pollution exclusion clauses, the insurance industry hoped to save the insurance industry from facing unpredictable and catastrophic losses by precluding insurability of such environmental risks in CGL policies.  

What is a Pollutant? 

What is a “pollutant” and what are “damages” caused by the pollutant have not been universally defined by all environmental laws nor universally interpreted by courts construing pollution exclusion clauses. The EPA has authority to create regulations “designating as hazardous substances, in addition to those referred to in section 101(14) of this title [42 U.S.C.§ 9601 (14)], such elements, compounds, mixtures, solutions, and substances which, when released into the environment may present substantial danger to the public health or welfare or the environment.” [42 U.S.C. § 9602.] CERCLA liability applies to things that are “hazardous wastes” or “hazardous substances” under other key environmental laws, such as RCRA (Resource Conservation and Recovery Act), TSCA (Toxic Substances Control Act) and the Clean Water Act. Under RCRA, for example, “hazardous wastes” involve characteristics of ignitability, corrosivity, reactivity or toxicity. 40 C.F.R. § 261.21 – 24. The EPA can initiate a response to the “release” or “threatened release” of “any pollutant or contaminant” under CERCLA.  

In litigation involving pollution exclusion clauses several substances commonly found on construction have been determined to be “pollutants.” Xylene, a solvent contained in sealants used on construction sites, is a pollutant. Cincinnati Ins. Co. v. Becker Warehouse, Inc. Where vapor degreasers (TCE and TCA) used to clean equipment were released into storm drain and sewer lines, the company responsible for the release was required by the EPA to perform remedial action. U.S. v. Dravo Corp. et al. Dry cleaning solvent (tetracholoroethylene) is a hazardous substance for CERCLA purposes. Bedgord Affiliates v. Sills. Polychlorinated biphenyls (PCBs) are pollutants. In re Texas Eastern Transmission Corp. PCB Contamination Ins. Coverage Litigation (applying Texas law). Asbestos is a pollutant. Selm v. American States Ins. Co. (an unpublished opinion to which citation is limited). MC-30 prime oil sprayed on a parking lot by a paving subcontractor is pollution. Tri County Service Co., Inc. v. Nationwide Mut. Ins. Co.  

Various types of toxic fumes have been considered “pollutants.” Odors coming from a roofing materials plant were considered pollutants in Iko Monroe, Inc. v. Royal & Sun Alliance Ins. Co. of Canada, Inc. (applying Michigan law), and Zell v. Aetna Cas. & Sur. Ins. Co. See also, White v. Freedman, involving exposure to "noxious fumes and chemical gases," where the homeowner sued the painting and repair contractor for alleged injuries she suffered as a result of the fumes from the paint and glue. The court decided the paint and glue were "pollutants". American States Ins. Co. v. Nethery (applying Mississippi law). Airborne lead contamination was also held to be a pollutant. Bituminous Cas. Corp. v. Cowen Const., Inc. In this case patients sued a hospital, claiming that they were injured by steam coming into contact with lead flashing. This steam was vented into a dialysis unit. Because of the pollution exclusion clause, no insurance coverage existed. Sealant fumes qualified as “vapors,” which were “pollutants” under the policy definition. See, Cook v. Evanson  wherein the court applied the exclusion to chemicals that caused respiratory problems, refusing to limit the application of the exclusion to traditional environmental pollution.  

It is not always necessary to specifically identify the chemical in order for it to be classified as a “pollutant” to facilitate enforcement of a pollution exclusion clause. In B.U.D. Sheetmetal Inc. v. Massachusetts Bay Ins. Co. an unnamed product emitting toxic fumes was a pollutant. Strip mining liquid containing a mixture of chemicals was found to be a pollutant in Hicks v. American Resources Ins. Co., Inc. An unnamed catalyst that sprayed from a burst hose “occurrence” was a form of pollution to which the pollution exclusion policy endorsement applied. See, Amerada Hess Corp. v. Zurich Ins. Co. (applying Virgin Islands law).  

While not specifically related to the construction industry, a case involving restaurant kitchen wastes is interesting because grease and scouring pads were deemed to be “pollutants.” A construction site produces a prodigious amount of waste and so it is possible this waste could be deemed a pollutant. Pollution was defined in that policy as “any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkaline, chemicals and waste. Waste includes material to be recycled, reconditioned or reclaimed.” Boulevard Investment Co. v. Capitol Indemnity Corp. Since insurance coverage is determined by interpretation of the language of individual policies, the particular substance in question must be analyzed in conjunction with the breadth of the definition of a “pollutant” in the policy. 

In contrast, some courts limit the application of the definition of “pollution” to situations involving “traditional environmental pollution.” When the coolant, ethylene glycol, leaked from a centrifuge and contaminated blood plasma, this chemical was not construed by the court to be a “pollutant” under the insurance pollution exclusion clause. The court refused to apply the exclusion to “nonenvironmental pollution contamination.” Vigilant Ins. Co. v. V.I. Technologies, Inc. Adopting a “common sense approach,” other courts refuse to view all chemical exposures as “pollutants,” reasoning that when someone slips on the contents of a spilled bottle of drano or has a reaction to the chlorine in a swimming pool, that these events ought not be considered as involving “pollutants,” even if the substances are irritants or contaminants that cause bodily harm. Pipefitters Welfare Educ. Fund v. Westchester Fire Ins. Co. For an extensive list of court interpretation in different jurisdictions, see Meridian Mutual Ins. Co. v. Kellman, citing decisions limiting the application of pollution exclusion clauses to “traditional environmental pollution” (1^st Circuit applying Maine law, 2d Circuit applying New York law, 9^th Circuit applying Montana law, 10^th Circuit applying Colorado law, 11^th Circuit applying Georgia law, as well as cases in Arkansas, Illinois, Maryland, Massachusetts, Michigan, Ohio, Pennsylvania and North Carolina). 

The Controversy Over Absolute Pollution Exclusion Clauses 

“Absolute” pollution exclusion clauses have been strictly construed by some courts, while others have limited their application. While some courts give literal enforcement to the total ban, other courts have limited the exclusions to “traditional environmental pollution,” refused to enforce such “absolute” exclusions as contrary to public policy, or looked for ambiguities in terminology in order to limit the breadth of such exclusions. (Knight, 2001 and Leiter, 2001). 

The checkered experience in Louisiana alone illustrated the difficulty that courts have had in wrestling with the application of clauses. Coverage was denied for personal injuries resulting when a mowing tractor overturned and ruptured an ammonia pipeline. The clause was given the full breadth advocated by the insurance industry, applying the exclusion “regardless of whether the release was intentional or accidental, a one-time event or part of an on-going pattern of pollution.” Ducote v. Mobil Oil Corp. A previous Louisiana case, however, refused to adopt a literal interpretation of the clause, concluding that such a broad interpretation would “basically eviscerate” all coverage otherwise provided for in the CGL policy. That court distinguished “environmental damage” from other types of resulting damages, holding that the exclusion applied only to incidents resulting in “environmental damage,” but not to damage to underground phone cables resulting from the gasoline leak. South Central Bell Telephone Co. v. Ka-Jon Food Stores of La., Inc.  (In accord see Gainsco Ins. Co. v. Amoco Production Co.). 

More recently the Louisiana Supreme Court concluded that the Ducote decision was not supported by public policy and should not be followed. Instead, the Doerr tri-part test was developed for determining the enforceability of the pollution exclusion clause: 1) whether the insured was a “polluter,” 2) whether the release involved “pollutants,” and 3) whether a “discharge, dispersal, seepage, migration, release, or escape” occurred. Doerr v. Mobil Oil Corp. Pursuant to this Doerr test, the analysis focuses on the actor (the role of the insured), the occurrence (whether it involved release of a pollutant) and the nature of resulting damage (whether damage to the environment occurred).  

Whether costs incurred under EPA ordered environmental clean up actions or costs expended to discourage such actions are “damages” has also been subject to various interpretations. See discussion in Farmland Industries, Inc. v. Republic Ins. Co., concluding that CERCLA response costs are “damages.” It is the aim of pollution exclusion clauses under CGL policies to preclude insurability of the release of all such pollutants and the damages caused thereby. 

Preclusion of Coverage under Pollution Exclusion Clauses 

Where courts find the “absolute” pollution exclusion to be unambiguous no insurance coverage exists for the claim. Charter Oil hired Bliss Oil (a St. Louis based waste hauler) to dispose of waste oil. Instead Bliss mixed the oil with other chemicals and used it as a dust suppressant on roads and tracks in eastern Missouri. This practice in the 1970s gave rise to claims by over 1600 plaintiffs, the State of Missouri and the federal government, and was instrumental as a catalyst for the passage of CERCLA. In the case of Charter Oil Co. v. American Employers' Ins. Co. (applying Missouri law), the contractor sprayed dioxin-contaminated oil to suppress dust on a regular basis for at least two months. The discharge was not "sudden and accidental" and therefore the pollution exclusion clause barred coverage. Similarly, liquid asphalt applied to roads dispersed into a creek, contaminating property and injuring wildlife. Because of the absolute nature of the exclusion, the insurance policy did not cover the loss. Cannon Const. Co., Inc. v. Liberty Mut. Ins. Co.  

No coverage existed to protect a grading and paving contractor when sediment dislodged by the construction contaminated downstream water. The policy precluded coverage for “solid contaminant” and the soil was a solid contaminant. Pennsylvania Nat. Mut. Cas. Ins. Co. v. Triangle Paving, Inc. (applying North Carolina law). Similarly, a contractor was hired to lay a clay lined bioreclamation berm and fill it with oil soaked soil. However, the contractor also deposited tree stumps, fencing, wood, metal, construction materials, other debris, toxic chemicals stored in oil drums, and a large tank. The injured party sued the contractor who presented the suit to his insurer. Because the suit was within the pollution exclusion provision the insurance company did not have to defend nor pay any damages. American Contracting & Management Corp. v. Liberty Mutual Ins. Co. (unpublished opinion to which citation is limited). 

A pollution exclusion clause worked to bar coverage in American States Ins. Co. v. Zippro Const. Co. In this case the homeowners hired a construction company to do kitchen remodeling and repair. Apparently the old flooring contained asbestos and the fibers became airborne. The court held that the contractor’s insurance did not cover this event because the pollution exclusion clause prevented coverage for "any loss, cost, or expense arising out of any request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effect of pollutants." Asbestos was a pollutant and remodeling was a removal of it; therefore the insurance did not cover any damages caused by the process. 

In Tech. Coating Applicators, Inc. v. U.S. Fid. and Guar. Co., (applying Florida law), there was no coverage for a roofing contractor who applied polyurethane foam and several layers of elastomeric protective coatings to the roof of a school, after which students and employees suffered respiratory problems. The court determined that the foam and coatings were “irritants” and the policy precluded coverage for “irritants”. 

In recent years, there has been a heightened awareness of the neurological health effects associated with children’s exposure to lead. A painting contractor allowed lead paint chips to contaminate soil surrounding buildings which he was stripping and repainting. The policy barred coverage for actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants "into or upon land" whether or not the discharge "is sudden, accidental or gradual in nature". The exclusion prevailed and the insured could not recover for soil contamination. U.S. Liability Ins. Co. v. Bourbeau,(applying Massachusetts law). Contractors doing lead abatement should become familiar with training and licensing requirements. 

Coverage Allowed Despite Pollution Exclusion Clause 

Cases in which courts have not upheld the pollution exclusion clause tend to be grounded in public policy considerations. They often limit the application of the clause to “traditional environmental pollution.” In addition, these courts strictly construe the exclusion, refusing to give it any greater breadth than necessary, using an expressio unius est exclusio alterius approach that assumes that there is coverage for anything not expressly excluded in the pollution exclusion clause.  

In the case of Roofers' Joint Training, Apprentice and Educational Committee of Western New York v. General Acc. Ins. Co. of America, the court refused to dismiss the lawsuit because it said a total pollution exclusion endorsement did not clearly and unambiguously apply to the claim. In that case fumes were released during a classroom demonstration of roofing material and allegedly injured a trainee. The court held that it was reasonable for the insured to believe that the exclusion applied only to traditional environmental pollution and not to bodily injuries from the normal use of products. See discussion supra, concerning limitation of the pollution to “traditional environmental pollution.” 

Under this narrow interpretation of pollution exclusion clauses, coverage will not be barred for unlisted substances or unanticipated methods of releasing the polluting substance. In the case of Superior Equip. Co., Inc. v. Maryland Cas. Co.  gasoline was not specifically listed as a pollutant in Hocker Oil Company’s insurance policy. Where the release of gasoline caused damage to an adjacent landowner, gasoline was deemed to be the “product” of the gas company rather than a “pollutant,” and, as such, the insurer had the duty to defend the gas company against claims in this Missouri case. Hocker Oil Co., Inc. v. Barker-Phillips-Jackson, Inc. Similarly, the case of Cincinnati Ins. Co. v. German St. Vincent Orphan Ass’n construed the policy so as to require coverage for release of asbestos caused by a floor scraper. 

Where state law mandates a particular coverage (such as minimum financial responsibility coverage), public policy may make the enforcement of pollution exclusion clauses less likely. In the Bentz case, the particular insurance was required by law and the insurer knew that the insurance was being purchased to cover the activities of the business – that is, pesticide application – so this should not be treated as a GCL policy. The parties had intended, at the time the insurance was purchased, that the insurance cover the contractor’s normal operations and meet state insurance requirements, and the court gave effect to that contractual intent by construing coverage to exist. Despite the fact that the contractor "openly" sprayed the chemicals upon the home's interior environmental surfaces and "openly" applied them to exterior portions of the premises, the Court of Special Appeals in Maryland concluded that coverage should exist under the “sudden and accidental” exception. The discharge was not “sudden” or “accidental” in the traditional sense, but rather was negligent or reckless. Nevertheless, the Court concluded that the harm was unintended and therefore “accidental” and that it was “sudden” because the contact resulting in harm was nearly instantaneous. Bentz v. Mutual Fire, Marine & Inland Ins. Co. 

In the case of Clarendon America Ins. Co. v. Bay, Inc., the insured was sued by claimants alleging that the manufacturer placed toxic substances in its cement mix and these substances injured the claimants. The pollution exclusion clause barred coverage related to threatened discharge of pollutants from a site owned or occupied by the insured. Interpreting the conditions listed in the exclusion, the court concluded that the exclusion did not apply to injuries suffered by plaintiffs as a result of working with the cement “for their own purposes at their own businesses.” 

Many of these cases also arise out of Michigan and show that state’s reluctance to enforce absolute pollution exclusion clauses. In 1999 the 6^th Circuit (applying Michigan law) held that the pollution exclusion clause was not applicable in a suit for liability for injuries caused by toxic substances that were still confined within the general area of their intended use. Meridian Mut. Ins. Co. v. Kellman. The pollution exclusion clause excluded from coverage substances that were discharged, dispersed, seeped, migrated, released or escaped. However, the toxic substances used to seal a floor in the room immediately above plaintiff’s classroom were confined to the general area where they were used and had not “disbursed” from the origin, so the pollution exclusion clause did not bar recovery. 

Where the acts of the insured owner were “intentional,” but were covered by another provision in the policy that gave coverage for “wrongful acts,” the pollution exclusion clause did not supercede the other clauses that would permit coverage. In Lansing Bd. of Water and Light v. Deerfield Ins. Co. (applying Michigan law), the contractor claimed that the insured had misrepresented the amount of asbestos to be removed. The insurance company maintained that the pollution exclusion clause applied and no coverage existed. However, the court held that the claim was based on the insured’s “wrongful act,” which was covered by another provision of the policy and allowed recovery.  

Liability of LCC 

Returning to the initial scenario and assuming Less Care Construction (LCC) has an absolute pollution exclusion clause in its GCL insurance policy, LCC will have no insurance coverage in this situation. It had control of the facility and the pollution at the time that contamination occurred. Consequently, LCC is a potentially responsible party under CERCLA as an “operator” of a site where the contaminates were “generated.” Whether the owner is solvent or bankrupt or out of business, the EPA could look to LCC for the costs of clean-up. The EPA could require LCC to clean up the site or could seek indemnification for clean-up costs and damages through a cost recovery action. Assuming the enforceability of the pollution exclusion clause, LCC would be responsible and would not have insurance coverage. 

Remediation of the damage to owner’s property and the publicly-owned Grand River (as damage to third-party property) may be covered by the third party coverage portion of the policy -- if the pollution exclusion clause does not limit that section of the policy. The hazardous chemical compounds, including paint thinner, lead, asbestos are likely to be considered “pollutants” and, therefore, no coverage exists for the clean-up. Petroleum was originally excluded from the definition of “hazardous substance” 42 U.S.C. § 9601(14), but CERCLA was amended by the Oil Pollution Act in 1990, 33 U.S.C. § 2701 et seq. in response to the Exxon Valdez oil spill. Regardless of the outcome, LCC faces an uphill battle in financing the clean up and in fighting its own insurer for coverage. LCC should have acquired insurance specifically aimed at insuring for environmental risks. 

Special Insurance Products 

Special insurance products have been developed to cover environmental impairment liability to fill-in the gaps caused by CGL “pollution exclusion” and “property owned exclusions.” The three primary types of environmental insurance include (1) Pollution Legal Liability Policies (PLL), (2) Clean-up Cost Cap (CCC) policies and (3) Remediation Cost Overrun coverage (where actual contamination is greater than originally estimated). Ron Robinson (Marsh & McLennan Companies), Risk & Insurance Management Society (RIMS presentation August 22, 2002). Providers of environmental risks insurance include AGI, ECS-XL Capital, Chubb, Liberty, Gulf, Kemper and Zurich.  

Because environmental insurance premiums can be high, a contractor should only insure against risks it is not willing to assume. Premiums can be held to a minimum by determining which types of coverage best suit its circumstance and then by selecting from a “cafeteria menu” of on-site, under-site and off-site coverage, with scope of coverage alternatives ranging from personal injury coverage to property damage to economic loss (including business interruption), to government-ordered remediation clean up to third-party contribution claims coverage. Besides ongoing pollution events, a variety of risks can be insured, including unknown pre-existing conditions, non-owned disposal site coverage. Furthermore, a property owner can purchase a property transaction policy (to cover possible environmental liability upon sale of property). By having Phase I (and if necessary Phase II) environmental audit on property prior to closure on the sale, insurance premiums can be reduced and the purchaser is more likely to qualify for the innocent landowner defense to CERCLA. Because CGL policies are rarely adequate to cover all of the expenses associated with environmental risk, specialized pollution insurance policies need to be obtained in advance of the triggering event. Since most policies are “claims made” (rather than “occurrence-based”) policies, and may include high deductibles and/or cost caps, umbrella and excess liability policies should be considered also. 

Alternate Legal Theories that Afford the Contractor Protection

This article concludes by briefly outlining alternative legal theories that afford the contractor some protection in the case of CERCLA incident. These theories, like all such legal avenues, would be expensive to litigate.  

1. Owner-indemnification of Contractor for Hazardous Materials Damage

All contractors should have a provision in their contract with the owner similar to AIA A201-1997 § 10.3 entitled ‘Hazardous Materials’. This provision basically requires the owner to indemnify the contractor from bodily injury or death caused by hazardous materials. The contractor is required to stop work when hazardous materials are discovered and report them to the owner. The owner is required to render the hazardous materials and area harmless. The contract time will be increased and contractor’s reasonable costs of shut-down should be paid for by the owner. 

The owner agrees to indemnify and defend the contractor against all claims related to bodily injury and death, but also to injury to or destruction of tangible property unless the damages is caused by the sole negligence of the contractor. AIA A201-1997 § 10.3.3. This does not shield the contractor from liability to the EPA or a third party, but assures indemnification if the owner is solvent. In addition, the owner is not responsible for any materials or substances brought on-site by the contractor, unless those materials or substances were specifically required by the contract. The existence of a clause similar to AIA A201-1997 § 10.3 entitled ‘Hazardous Materials’ would entitle the contractor to indemnification from the owner. AIA A201-1997 § 10.5 is the clearest language protecting the contractor. It basically states that if the contractor “is held liable for the cost of remediation of hazardous material solely by reason of performing Work required by the Contract Documents, the Owner shall indemnify the Contractor for all cost and expense thereby incurred.”  

Contractors must realize that these contract provisions protect the contractor only in certain circumstances. For example, if the damage is jointly caused by the contactor and the owner, the owner is responsible. However, if the damage is caused solely by the contractor, the contractor is responsible. For example, if the contractor discharges oil or other hazardous substances at the site in contravention to the Clean Water Act [33 U.S.C. § 1321(b)(1) (2000)] or any state environmental laws, these provisions would not require the owner to bear the liability.  

Many environmental statutes require contractors to have plans in place to prevent and/or promptly report environmental accidents. Failure to provide prompt notice to the National Response Center of releases of hazardous substances or falsification of records can result in up to five years in prison and a $10,000 fine. [42 U.S.C. § 9603.] In addition to penalties for violating EPA regulations, the failure to comply with such regulations could subject the contractor to a claim of negligence or prevent or limit the application of the contract provisions. See, Freeze, von Oppenfeld, Hiser (2003). 

In addition, the EPA has implemented an Audit Policy which encourages business to audit their own facilities to determine compliance with environmental regulations. If a regulated entity discovers violations through self-investigation and reports the violations, the EPA mitigates the gravity-based portion of the penalty by up to 100%. See EPA, Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations. The Small Business Compliance Policy provides similar protection to small businesses. See Small Business Compliance Policy.  Contractor failure to conduct an audit could possibly be considered negligence and therefore relieve the owner of its contractual indemnification obligations.

2. Common Law Indemnity and Contribution

Even if no clause existed in the contract indemnifying the contractor, the contractor could seek indemnity or contribution from the owner. With the complex relationships and division in a construction project it is often true that several entities contribute to one loss. An “indemnity action” is one in which one party, for example the contractor, sues or brings into an existing lawsuit (through impleader), another party, such as the owner claiming that the owner is responsible for the damage. A “contribution action arises after one party or its insurance has paid a claim and then sues all the parties believed to have contributed to the injury in an attempt to force each to pay their “fair share.” In that case the law will apportion the liability among the contributing parties based upon their level of fault. (citation temporarily removed). But see discussion supra, wherein the EPA can collect from any prp without respect to percentage of fault, leaving the prp to pursue § 113 claims for contribution. 

3. Duty to Defend 

An insurance company often has an independent duty to defend the insured, despite the indemnification liability exclusion clauses where the petition alleges facts that would support a claim within the scope of the policy. Superior Equip. Co. Inc., et al v. Maryland Gas Co. In that case the insurance company was required to supply its insured with legal counsel to defend the lawsuit, where the interpretation of coverage was in doubt. However, where the pollution exclusion clauses are clearly applicable, some courts do not require the insurance company to defend. See, Shalimar Contractors, Inc. v. American States Ins. Co. (applying Alabama law).

Summary

A typical “absolute” pollution exclusion clause states that the insurance company need not defend nor pay for damages relating to pollution or hazardous wastes. For the most part these clauses are carefully written by insurance companies and are enforceable so that the comprehensive general liability insurance does not cover pollution or hazardous wastes. Contractors can obtain coverage for pollution or hazardous wastes by purchasing specialized insurance to cover related risks.  

References 

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