March 29, 2007

When insurers see clean dirt as a pollutant

  • Insurance companies are relying more on pollution exclusions to deny coverage for soil erosion.
    Heller Ehrman

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    Nieman Kamins

    If your business involves any earth movement you might be surprised to know that your insurance company may claim that pure, uncontaminated dirt is a “pollutant” that is not covered under your policy.

    Many companies move dirt and soil in the usual course of business, and when dirt goes astray, the cleanup costs can be immense. But many insurance companies believe that much, if not all of those costs, are excluded under pollution exclusions that they write into their policies — and some courts agree.

    Just last summer, a court in California held that an insurer had no obligation to cover a company when dirt washed from a construction site into the Lucas Canyon Creek in Orange County. When storms washed out the access road to the company’s quarry, Ortega Rock Quarry placed fill dirt from its quarry along the road. Fill dirt washed into the river, prompting the EPA to cite Ortega for unauthorized discharges of fill material and requiring Ortega to restore the creek.

    Ortega’s insurers refused to cover, arguing that the dirt that ended up in the river was a pollutant. Although Ortega argued that dirt could not be a pollutant because it occurs in nature, the court concluded that Ortega’s action in moving the dirt was an unnatural process that altered the location of the dirt and brought it within the pollution exclusion of its insurance policy.

    More pollution exclusions

    Pollution exclusions broadly define a pollutant as “an irritant or contaminant.” But as many courts have observed, such a broad definition could include virtually any substance. Generally, pollution exclusions contain standard language or a slight variation on the same language.

    While the interpretation of these exclusions is a matter of state law and determined by a strict reading of the policy language, rulings in one or more states often signify a trend that influences how other states interpret the same or similar language. Around the country, insurers are aggressively attempting to expand their pollution exclusions. In Washington, that effort has so far been limited, with the most extreme case confined to the classification of sewage gases and odors as pollutants.

    However, in other states, insurance companies have argued, for example, that substances from carbon monoxide, to manganese fumes, to mold and mildew are pollutants. Just last year a court in Michigan held that a fatty acid released by a company in its manufacturing process fell under the pollution exclusion in the company’s commercial liability policy — even though the damage being sued for was caused by another substance that was released by the chemical reaction between the fatty acid and the environment. Showing the breadth of its holding, the court pointed out that if someone slipped and fell on the fatty acid that accident would not be excluded from coverage under the insurance policy.

    In Washington, insurers have thus far mainly attempted to expand the reach of pollution exclusions by focusing on the cause of any claimed damage or injury rather than the nature of the substance. In 2005, the Washington Supreme Court ruled that a pollution exclusion precluded coverage for injuries caused by sealant fumes that were negligently allowed to enter an apartment building and injure an inhabitant.

    This ruling dramatically differed from a case decided a mere five years earlier in which the Washington Supreme Court ruled that there was coverage for diesel fuel that spilled through a faulty intake valve onto a person because the pollution exclusion was meant only to apply to traditional environmental harms.

    Watch your policy

    As insurers seek to expand the application of their exclusion, it is important for policyholders to be aware of that as they place their insurance policies. If a company moves dirt as part of its work, this should be made evident to its insurers. In the unfortunate circumstance that a company faces liability to the government or other third parties for dirt that has washed into water bodies, the company should immediately notify its insurer. If the insurer refuses to provide coverage, legal counsel should be consulted and the insurer’s refusal should be challenged.

    When companies involved with earth movement pay substantial insurance premiums, they should expect their primary exposure to liability for erosion or other soil problems to be covered under their liability policy.

    Angela Niemann is a lawyer who focuses on insurance recovery. She is co-chair of Heller Ehrman’s Northwest Litigation Department and serves on the Seattle Office Management Committee. Andrew Kamins joined Heller Ehrman in 2004 and is a member of the firm’s Insurance Recovery Practice Group.

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