According to Mr. Klick, carbon monoxide gas, which had built up in the engine compartment, exited the engine compartment and poisoned the three men. Mr. Klick's two companions died, while Mr. Klick – who fell from the wheelhouse into the engine compartment – suffered brain damage and burns.

Mr. Klick's claims against Choice Financial and Rainy River stemmed from factual allegations that:

- Choice Financial and Rainy River had serviced and sold the fishing boat to Mr. Klick's companion prior to the accident;

- the fishing boat's exhaust system had malfunctioned and leaked carbon monoxide; and

- the leaked carbon monoxide had injured Mr. Klick.

Rainy River requested that Travelers Property Casualty Company of America, which had issued Rainy River a marine general liability insurance policy, defend Rainy River in the litigation.

Travelers went to court, seeking a declaration that it had no duty to defend or indemnify Rainy River in connection with the underlying personal injury lawsuit.

The insurer moved for summary judgment, arguing that the policy's pollution exclusion precluded coverage because Mr. Klick's injuries arose out of carbon monoxide released from the fishing boat into the outside air.

For their part, Mr. Klick and Rainy River contended that the pollution exclusion did not apply because the carbon monoxide had been released from the fishing boat's engine into the engine compartment and then re-released into the air surrounding the boat, including the wheelhouse where Mr. Klick was located. Mr. Klick and Rainy River asserted that the air in the engine compartment and the air in the wheelhouse did not constitute “atmosphere.”

The Travelers Policy

The Travelers policy provided that Travelers would pay, on behalf of Rainy River, amounts that Rainy River:

shall become legally obligated to pay as damages

as a result of certain:

bodily injury

The policy's pollution exclusion stated:

This insurance does not apply to: … Any liability for loss, injury, damage or expense arising out of the actual, alleged or threatened seepage, discharge, dispersal, disposal or dumping, release, migration, emission, spillage, escape, or leakage of “pollutants” into or upon land, atmosphere, environment, or any watercourse or body of water ….

It defined:

pollutant

as:

any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapors, soot, fumes, acids, alkalis, petroleum products or derivatives, chemicals, sewerage, spoils, and waste materials or substances. 

The district court granted Travelers' motion.

In its decision, the district court explained that the pollution exclusion in the Travelers policy precluded coverage for injury arising out of the release of pollutants into “atmosphere.” Under Minnesota law, it continued, the pollution exclusion applied when a pollutant was released “directly into ambient or outdoor air,” even if the pollutant indirectly affected air inside an enclosed structure. Conversely, the district court observed, the pollution exclusion did not apply when a pollutant was released directly into air inside an enclosed structure such as a house or other building.

In this case, the district court ruled, all of the legal claims in the underlying complaint stemmed from the allegation that while Mr. Klick and his companions were aboard a fishing boat on Lake of the Woods, “the boat's exhaust system seriously malfunctioned and leaked carbon monoxide, which … caused serious and permanent physical injury to [Mr. Klick].” The underlying complaint did not allege how or where the carbon monoxide was released, the district court added. Therefore, it found, looking only at the underlying complaint, it was possible that carbon monoxide had been released into an enclosed cabin, rather than into ambient air, and that the policy's pollution exclusion would not apply.

Accordingly, because the claims in the underlying complaint arguably fell within the scope of coverage, the district court ruled, Travelers had a duty to defend Rainy River in the underlying personal injury suit.

The district court, however, reached a different result with respect to Travelers' duty to indemnify.

The district court noted that the duty to indemnify required an insurer to pay damages “only if the insured ultimately prove[d] facts showing coverage.”

Examining the entire factual record, rather than just the underlying complaint, the district court found that the undisputed facts showed that:

- Mr. Klick's injuries had occurred while the fishing boat was outside on Lake of the Woods;

- Due to an engine malfunction, carbon monoxide gas built up in the fishing boat's engine compartment before it was released into the open air when the compartment was opened;

- The carbon monoxide then traveled into the wheelhouse where Mr. Klick was standing and caused his injuries; and

- The wheelhouse had a roof and three sides but was open in the back.

The district court concluded that because the pollution exclusion applied when a pollutant was released directly into “atmosphere” – i.e., ambient air – it applied in this case, where carbon monoxide gas “was released into the unenclosed air surrounding the fishing boat.”

The case is Travelers Property Cas. Co. of America v. Klick, No. 15-2403 (DWF/LIB) (D. Minn. Sept. 23, 2016). Attorneys involved include: Stacy E. Ertz, Esq., Borgelt, Powell, Peterson & Frauen, S.C., and Daniel A. Haws, Esq., HKM Law Group, counsel for Plaintiff; Stephen F. Rufer, Esq., Pemberton Sorlie Rufer & Kershner, counsel for Defendants Christopher A. Klick and Rainy River Marina, Inc.