Making the Effort to Define Traditional Environmental Pollution

"What is traditional environmental pollution?" is a question that deserves more than the cursory discussion and self-defining answer that many courts give it. This is especially the case considering that courts that arrived at a narrow interpretation of the pollution exclusion in the first place got there by taking a detour from the plain language of the policy. While the court may still conclude, following an adequate analysis, that the substance at issue is not traditional environmental pollution, at least it would have done so after thoroughly vetting the issue. Additionally, the court would be leaving behind a more useful roadmap for future litigants than the bread crumbs that are currently being dropped.

For example, earlier this year, the Appellate Court of Illinois was called upon to address the absolute pollution exclusion and gave considerable thought—much more than most courts—to what is meant by traditional environmental pollution. In Connecticut Specialty Insurance Company v. Loop Paper Recycling, Inc., 824 N.E. 2d 1125 (Ill. App. 2005), the court examined coverage for diagnosis and medical monitoring necessitated by the release of smoke and hazardous substances caused by a cardboard fire at the insured's recycling facility. The insurer undertook the insured's defense under a reservation of rights and then filed a declaratory judgment action, arguing that the absolute pollution exclusion precluded any obligation to defend or indemnify the insured. The trial court held that the pollution exclusion barred coverage for bodily injury and personal injury, if personal injury was even alleged.[5]

The Illinois appeals court recognized that the starting point for its analysis had to be the Illinois Supreme Court's decision in American States Insurance Co. v. Koloms, supra. In Koloms, the court concluded that, in order for the absolute pollution exclusion to apply, there must be traditional environmental pollution, which includes any discharge, dispersal, release or escape of a pollutant into the environment. Applying this rule, the Koloms court concluded that the absolute pollution exclusion did not bar coverage for injury caused by the accidental release of carbon monoxide inside a building. Loop Paper at 1136 – 1137.

The Loop Paper court also noted that in Kim v. State Farm Fire and Casualty Co., 728 N.E. 2d 530 ( Ill. 2000), the Illinois Supreme Court held that the absolute pollution exclusion barred coverage to an insured cleaning company because, unlike in Koloms, the hazardous material had escaped beyond the walls of the insured's building and into the soil below. Therefore, the court found that traditional environmental pollution had occurred. Loop Paper at 1137.

With this background, the Loop Paper court turned to its own situation: whether the smoke and hazardous substances at issue qualified as traditional environmental pollution. Unlike many others, the Loop Paper court gave the issue deserved analysis and adopted the following test for determining whether a substance is a traditional environmental pollutant:

     Though not explicitly stated in either Koloms or Kim, a primary factor to consider in determining if an occurrence constitutes "traditional environmental pollution" and thus is not covered under an absolute pollution exclusion, rests upon whether the injurious "hazardous material" is confined within the insured's premises or, instead, escapes into "the land, atmosphere, or any watercourse or body of water." This distinction becomes even more reasonable when the purpose behind an absolute pollution exclusion is taken into account: to exclude governmental clean up costs and avoid the enormous expense and exposure resulting from the explosion of environmental litigation. Loop Paper at 1137-1138 (citations omitted).

The court held that, because the toxic smoke containing chemicals emitted from the burning cardboard was not confined to the insured's facility, but, instead, spread to the surrounding neighborhoods, traditional environmental pollution occurred and the absolute pollution exclusion barred coverage. Id. at 1138.

The Loop Paper court seemed to sense that its test for determining traditional environmental pollution would be met with some criticism. It attempted to mollify its critics with the following:

     We note that "the distinction we draw here is by no means scientific, but one must remember that insurance contract interpretation is at bottom a practical art." Pipefitters, 976 F.2d at 1044, quoting Continental Casualty Co. v. Pittsburgh Corning Corp., 917 F.2d 297, 301 (7th Cir. 1990). Nevertheless, we draw this distinction because we are not satisfied, nor is it helpful, to have a "We-know-it-when-we-see-it" standard for what constitutes traditional environmental pollution. Id.[6]

Knowing Traditional Environmental Pollution When You See It

The Loop Paper court gets high marks for making an effort to define traditional environmental pollution. But a look at some recent decisions addressing the absolute pollution exclusion reveals that other courts are coming up short in providing an adequate analysis of this issue. The consequence of this shortcoming is that they are simply setting the stage for more disagreement—translation: reasons to litigate—over the scope of the exclusion. This could hardly be the intended result after a state supreme court has handed down a detailed opinion addressing an issue.

For example, compare Loop Paper to another court that was required to address whether a substance qualified as traditional environmental pollution and did so based solely on whether it knew it when it saw it. In Merchants Insurance Company of New Hampshire, Inc. v. Hessler, 2005 U.S. Dist. LEXIS 18173 (D.N.J.), the District Court of New Jersey addressed the applicability of the pollution exclusion to a claim for bodily injury and property damage caused by exposure to lead paint. Homeowners hired the insured to paint the exterior of their home and alleged that the insured's negligent performance caused such exposure.

The Hessler court stated that the New Jersey Supreme Court had recently defined the parameters of the pollution exclusion in Nav-Its, Inc. v. Selective Insurance Company of America , 869 A.2d 929 (N.J. 2005). According to Hessler, in Nav-Its the Supreme Court "reviewed the history and development of pollution exclusions and held that these exclusions 'should be limited to injury or property damage arising from activity commonly thought of as traditional environmental pollution. …' Traditional environmental pollution was defined as 'environmental catastrophe related to intentional industrial pollution.'" Hessler at *9, citing Nav-Its.

The Hessler court rejected the insurer's argument that there was an environmental component to the homeowners' claims inasmuch as the insured was requested by the health department to remediate the lead paint chips by removing the top layer of soil from the property and lay down fresh soil. Instead, the Hessler court stated that the pollution exclusion did not apply because "the act of removing the top layer of soil does not constitute an 'environmental catastrophe related to intentional ind ustrial pollution.'" Hessler at *10. That was the extent of the Hessler court's traditional environmental pollution analysis. Blink and you missed it.

By simply dismissing the traditional environmental pollution issue out of hand, the Hessler court ignored the fact that in Nav-Its, the New Jersey Supreme Court unanimously stated: "[T]he available evidence most strongly suggests that the absolute pollution exclusion was designed to serve the twin purposes of eliminating coverage for gradual environmental degradation and government-mandated cleanup such as Superfund response cost reimbursement." Nav-Its at 936, citing Jeffrey W. Stempel, "Reason and Pollution: Correctly Construing the 'Absolute' Exclusion in Context and in Accord with Its Purpose and Party Expectations," 34 Tort & Ins. L.J. 1, 29-32 (1998). See also MacKinnon, supra at 1211.

To summarize, Nav-Its stated that the pollution exclusion was designed to eliminate coverage for government-mandated cleanup such as Superfund response costs. In Hessler, an insured was ordered by the health department to remediate lead paint chips by removing the top layer of soil from property and laying down fresh soil. Yet, the court still concluded that the pollution exclusion did not apply. Not to mention, by deciding the issue so matter-of-factly, the Hessler court seemed to be saying that it wasn't even close enough to warrant any analysis.

Taking a Closer Look at the "CERCLA Rationale"

In the words of the Loop Paper court, the Hessler court knew environmental pollution when it saw it, and the health department-mandated remediation of lead paint chips by the removal and replacement of soil was not it. The Hessler court may have been quick to decide that the lead paint remediation at issue was not environmental pollution based on an erroneous belief that CERCLA—pointed to just a few months earlier by Nav-Its as the impetus for the pollution exclusion—somehow only applies to the remediation of waste sites. CERCLA's applicability, however, is not nearly so limited—as its legislative history shows:

     Doubtless CERCLA found its start in the publicity and concern that surrounded toxic waste sites. That theme resonated throughout the legislative process and became the moving force behind the creation of the Superfund. Nevertheless, nothing in the legislative record indicates that Congress intended to restrict CERCLA to that sole purpose. To the contrary, the legislative materials on the passage of the statute show, with reasonable clarity, that over the course of the legislative process Congress expanded the statute beyond its original underpinnings so as to address releases of hazardous substances generally, not just disposals at toxic waste sites. Uniroyal Chemical Company, Inc. v. Deltech Corp., et. al., 160 F.3d 238, 248 (5th Cir. 1998).[7]

In reaching this conclusion, the Uniroyal court did not ignore the fact that several courts have "labored under the conception that CERCLA applies only to waste disposal sites." Uniroyal at 249. Uniroyal also did not try to sweep the following unpleasant comments made by other courts about CERCLA and its legislative history under the rug: "The legislative history of CERCLA gives more insight into the ' Alice-in-Wonderland '-like nature of the evolution of this particular statute than it does helpful hints on the intent of the legislature."; "CERCLA is not a paradigm of clarity or precision. It has been criticized frequently for inartful drafting and numerous ambiguities attributable to its precipitous passage."; and "The legislative history of CERCLA is unusually riddled by self-serving and contradictory statements." Uniroyal at 246 (citations omitted). But despite this criticism, the Uniroyal court undertook its own review of CERCLA's legislative history and concluded that it was "remarkably clear with respect to the core legislative purpose behind the passage of the statute." Id. (emphasis added).

Besides CERCLA being more than a waste site statute, there is also no minimum level of hazardous substance required to implicate the Act. This point was made clear by the Ninth Circuit in A & W Smelter & Refiners v. Clinton, 146 F.3d 1107, 1110 (9th Cir. 1998) (citations omitted):

     A & W asks us to read a minimum level requirement into the statute and regulations. It argues that trace levels of hazardous substances are present just about everywhere. Read as the EPA suggests, CERCLA seems to give the agency carte blanche to hold liable anyone who disposes of just about anything. Drop an old nickel that actually contains nickel? A CERCLA violation. Throw out an old lemon? It's full of citric acid, another hazardous substance.

     It is not surprising that an agency would urge an interpretation which gives it such broad discretion. Perhaps more surprising is that CERCLA leaves us little choice but to agree. Section 9601(14) refers simply to "any substance" designated under one of the various regulations, and the regulations in turn give no minimum levels. The table in 40 C.F.R. § 302.4 does list reportable quantities, but this refers to notification requirements under 42 U.S.C. §§ 9602 & 9603. Nothing in the law suggests that quantities of a hazardous substance below its reportable level render it no longer hazardous. The Second, Third and Fifth Circuits have faced this very question and all agree that CERCLA's definition of hazardous substance has no minimum level requirement. We see no basis for parting company.[8]

Thus, if the Hessler court was thinking that the remediation of lead paint arising out of residential house painting was not on a wide enough scale to qualify as an "environmental catastrophe related to intentional ind ustrial pollution," it failed to appreciate the manner of operation of the federal environmental law discussed in Nav-Its.

If CERCLA does not apply to a localized release of lead dust, don't tell that to the defendant in BCW Associates, Ltd. v. Occidental Chemical Corp., 1988 U.S. Dist. LEXIS 11275 (E.D. Pa.). And if CERCLA does not apply to the contamination of soil with lead (and other substances) by a seemingly small excavating company during the course of its operations, don't tell that to the defendant in Kaiser Aluminum & Chemical Corporation v. James L. Ferry & Son, Inc., 976 F.2d 1338 (9th Cir. 1992). In both of these cases, the defendants were found liable under CERCLA in these circumstances.

The failure of courts to appreciate the scope of environmental laws, when considering the applicability of the absolute pollution exclusion, is a point that was made, albeit in vain, by Judge Glickman in his dissenting opinion in Richardson v. Nationwide Mutual Insurance Company, supra:

     Although the majority thinks that the absolute pollution exclusion should be interpreted in light of federal environmental laws, the majority makes no effort whatsoever to ascertain whether those laws are limited to industrial pollution or in fact might apply to non-industrial indoor air pollution.… [T]he requirements of CERCLA are by no means applicable only to industrial pollution. The definition of a "hazardous substance" in CERCLA makes no distinction dependent upon whether the substance's source was industrial, commercial, municipal or household. Whether the substance is a consumer product, a manufacturing byproduct, or an element of a waste stream is irrelevant.… Moreover, quantity or concentration of the hazardous substance is not a factor either. Even minimal amounts of pollution are within CERCLA's purview. Richardson at 349 (citations omitted).

Policyholders will likely criticize an interpretation of traditional environmental pollution that takes into account whether the underlying release qualifies for CERCLA liability as overly inclusive. While CERCLA is unquestionably a broad remedial statute, it is subject to a consumer product exception. The plaintiff in a CERCLA private cost recovery action must prove, among other things, that the site in question is a facility under 42 U.S. C. § 9607(a). The definition of facility excludes any consumer product in consumer use.

In Uniroyal, supra the Fifth Circuit held that "[b]ased on the plain language of the exception, the applicable legislative history, and the broad remedial purpose of CERCLA, … 'consumer product in consumer use' means any good normally used for personal, family, or household purposes, which was being used in that manner when the subject release occurred." Uniroyal at 257.

California Approach: Knowing It When You See It Through Sunglasses

Hessler was not the only court of late that found it necessary to determine whether a certain substance qualified as traditional environmental pollution, and, with no guidance available, simply went with its gut. In SEMX Corporation v. Federal Insurance Company, United States District Court for the Southern District of California, No. 04-CV-2449-WQH (WMc) (Order, August 31, 2005), the court held that the pollution exclusion did not preclude coverage for damages caused by a release of ammonia gases from the insured's facility into the air. In reaching this decision, the SEMX court stated that, in MacKinnon, the California Supreme Court "pointed out that the purpose of the pollution exclusion was originally an effort by the insurance industry to avoid claims based on new environmental laws passed in the 1970s and 1980s—not to avoid coverage for ordinary acts of negligence." SEMX at 21, citing MacKinnon.

The SEMX court was not persuaded that, following the California Court of Appeals' decision in Garamendi v. Golden Eagle Insurance Company, 127 Cal. App. 4th 480 (2005), review denied 2005 Cal. LEXIS 6676, the pollution exclusion precluded coverage. In Garamendi, the California appeals court held that the pollution exclusion served to preclude coverage for claims for injuries caused by the repeated long-term exposure to silica dust. The Garamendi court stated:

     [U]nder MacKinnon the mere fact that silica, like almost anything else, may be an irritant or contaminant under some circumstances is not dispositive. But unlike the residential use of a pesticide for the purpose of killing insects, the widespread dissemination of silica dust as an incidental by-product of industrial sandblasting operations most assuredly is what is "commonly thought of as pollution" and "environmental pollution." Garamendi at 486.

While the SEMX court gave Garamendi some thought, it ultimately rejected the argument that the ammonia release fell into the category of industrial operations commonly thought of as pollution:

     [T]he court concludes that the facts in the instant case more closely resemble those in MacKinnon than the facts in Garamendi. Here, unlike Garamendi, the injury causing event was a one-time release of ammonia in a high concentration into the air. There is no suggestion that Plaintiff's normal operations released large quantities of ammonia into the air. By contrast, in Garamendi the insured's normal operations released silica and silica dust into the air. SEMX at 26.

The SEMX court determined that the applicability of the pollution exclusion turned on whether the release at issue was one-time versus the result of an insured's normal operations. The flaw in this distinction is that, in MacKinnon, the court stated that there is little dispute that the pollution exclusion was adopted to address the enormous potential liability resulting from antipollution laws enacted between 1966 and 1980. So when you consider that no minimum level of "hazardous substance" is required to implicate CERCLA, the SEMX court's one-time versus normal operations distinction makes little sense. See United States v. Alcan Aluminum Corp., 964 F.2d 252, 260 (3rd Cir. 1992) ("It is difficult to imagine that Congress intended to impose a quantitative requirement on the definition of hazardous substances and thereby permit a polluter to add to the total pollution but avoid liability because the amount of its own pollution was minimal.… [C]ourts that have addressed this issue have almost uniformly held that CERCLA liability does not depend on the existence of a threshold quantity of a hazardous substance.")

Another recent California decision also demonstrates that, without guidance, the question whether something qualifies as traditional environmental pollution is a case of first impression every time. In Garamendi v. Mission Insurance Company, 2005 Cal. App. Unpub. LEXIS 4293, the Court of Appeal of California failed to see the SEMX court's distinction that the applicability of the pollution exclusion turned on whether the release at issue was one-time versus the result of an insured's normal operations. Here the court held that the pollution exclusion did not apply to preclude coverage for claims brought by over 600 plaintiffs for injury due to chemical exposure at a Lockheed facility from the 1940s through 1995. Surely claims involving exposure to chemicals over a 50 year period is more closely akin to an insured's normal operations than a one-time release. Thus, under the SEMX court's test, the pollution exclusion should have applied to preclude coverage.

But the Garamendi v. Mission Insurance Company court did not analyze the issue that way. Instead, the court took its own know-it-when-it-sees-it approach to industrial pollution and did not see it: "On balance, we conclude that the Lockheed litigation does not qualify as an 'environmental catastrophe[] related to intentional industrial pollution,' although clearly it involved more widespread dispersal of toxic substances than the residential application of bug spray." Garamendi v. Mission Insurance Company at *35-*36. The court's decision provided no guidance on what qualifies as traditional environmental pollution, other than to say that, while exposure to chemicals over a 50 year period is not it, the insurer was getting warmer.

SEMX and the two Garamendi decisions demonstrate the complete lack of predictability that is left in the wake of courts, like MacKinnon, that score points for providing a detailed rationale for their interpretation that the absolute pollution exclusion is fundamentally limited to traditional environmental pollution, but then drop the ball when it comes to providing a useful definition of that term.

Conclusion

There is no simple solution to prevent absolute pollution exclusion decisions from continuing to leach from America 's courthouses. Nonetheless, a step in that direction would be taken if courts that determine to limit the exclusion's applicability to traditional environmental pollution give the meaning of that term adequate consideration.

The point of this article is not to advocate for one particular definition or test of traditional environmental pollution. Rather, it is simply to make the case that one is needed. As the Loop Paper court astutely observed, it is not helpful to have a "We-know-it-when-we-see-it" standard for what constitutes traditional environmental pollution. While the California Supreme Court's decision in MacKinnon is a contribution to the problem, at least the court also acknowledged a willingness to consider a solution when it noted that the term "environmental pollution" is not a "paragon of precision" and that further clarification may be required. Moreover, when providing that clarification, courts that point to CERCLA as the basis for their narrow ideological interpretation of the absolute pollution exclusion should at least consider the actual scope of CERCLA, and not simply rely on its reputation.