Author: VU Faculty

A contractor was hauling an oil tank on his flatbed trailer to a disposal site. The tank leaked a small amount of oil onto the road and a motorcycle in back of the truck slid on the oil, injuring the driver. The insurance carrier denied the loss based on the pollution exclusion. Do you agree? We don't and here's why....

Here's a question that has come up several times in our "Ask an Expert" service:

"A contractor client of mine was hauling an oil tank on his flatbed trailer to a disposal site. The tank leaked a small amount of oil onto the road and a motorcycle in back of the truck slid on the oil, injuring the driver.

"The insurance carrier denied the loss based on the pollution exclusion on the business auto policy, citing exclusion B item 11. My argument is that the intent of the claim is to exclude damage caused by pollutants and that had the liquid leaking been honey or ice cream, or even water for that matter, the claim would have been paid.

"They responded that while they agree that 'the fact pattern with this claim is not your typical claim to consider the pollution exclusion,' that 'there is no case law to refute the intent of this exclusion, we must rely on the wording on the policy.'"

"I can't believe that this type of claim has never come up before and been challenged. Can you give me any assistance here? Thanks for your help."

If they want to address case law, it is the insurer's obligation to produce the case law that SUPPORTS the exclusion. Liability coverage is akin to "all risk" or named exclusions property insurance...the burden of proof is on the insurer, not the insured, to produce evidence to support an exclusion. Our consensus is that this denial is not in keeping with the spirit of the pollution exclusion, as the VU faculty comments below demonstrate.

This is living proof that a little bit of knowledge is dangerous. "Pollution" didn't cause the motorcycle rider to fall...the negligence of the insured who allowed oil to leak from his vehicle onto the roadway caused the loss and this would be so if he was leaking water, extra virgin olive oil, or CocaCola. The adjuster needs to use an exclusion, not an excuse.

If some materials had fallen off the trailer and caused the accident, there would be no issue of coverage. This is the same type of loss. The BI or PD did not occur because of irritation or contamination by the material within its potential nature as a pollutant. Just because a substance might meet the definition of "pollutant" doesn't mean that every loss involving that substance triggers the pollution exclusion. You have to look at the verbs in the exclusion, not just the noun. Nothing was "polluted." This is no different than the lady who slips at a grocery store because of wet detergent on the floor.

The company is stretching the intent of the pollution exclusion. Of course it might take a court to change their mind. The ISO BAP excludes BI or PD arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants" that are, or that are contained in any property that is being transported by the covered auto. The company is probably relying on this wording. 

I have always felt that the pollution exclusion dealt more with environmental impairment; however the company can rely on the strict interpretation of the wording. I'm assuming the company's policy reads like ISO. Your insured might have to get an attorney to get this resolved.

How is the industry treating slips and falls arising out of oily spots in parking lots? Parking lots often have uneven surfaces arising from the parked vehicles causing depressions in the pavement over time. Oil leaks on the curved surfaces are often slick - particularly after a rain. There are lots of losses from this exposure.  How are they treated?

Not every state court would agree with the insurer's decision. I think most would disagree from what I have seen in past VU discussions. I assume the injured party will sue your insured. The insurer will need to defend and pay any damages awarded by the court, defend under a non-waiver of rights (where the cost of defense is paid but they can still deny payment of damages), or seek a declaratory judgment from the court that they do not owe any defense (your insured would hire a lawyer out of their own pocket to show the insurer did owe a defense). During the course of that, the court should decide the issue of coverage.

The BAP defines "pollutants" as follows:

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

The exclusion applies to BI or PD "arising out of" a "pollutant." The BI or PD did not arise out of the pollutant within the context of being an irritant or contaminant. This is the equivalent of a slip and fall and the coverage denial is a ludicrous distortion of the intent of the exclusion.

To me, the very nature of the pollution exclusion (assuming ISO wording) is that the loss "arises out of" the pollutant as an irritant, contaminant, etc. I think a loss like this is comparable to an actual claim where a lady slipped in a puddle of Clorox that had spilled from a bottle that had fallen off a shelf in a grocery store. The injury didn't arise out of the substance's unique nature as a pollutant. I can't say, though, that I have any case law on this.

The pollution exclusion, within the definition of "pollutants" requires an irritation or contamination. How did the oil irritate or contaminate to cause the BI/PD? Answer:  It didn't. The claim denial was a far greater irritation than the "pollutant."