Author: Chris Boggs

Amazingly claims adjusters still believe the commercial general liability's (CGL's) "absolute" pollution exclusion is, in fact, absolute. Bizarre stories abound of claim denials arising out of misapplications of the exclusion. Some accounts are myths and legends, but some are all too real.

Take a look at the following "watercooler" stories of adjusters misusing the absolute pollution exclusion. Your mission is to decide which are myth, which are legend and which are actual claim denials. Each case begins, "The insurance carrier denied…":

• …A residential HVAC contractor's claim when a weld on a pipe failed several months after completion of the job allowing oil to flood the basement of a house;
  
• …A sewer and water contractor's claim when a pipe on which they were working burst, releasing "effluent"-containing water into the room damaging a bank of computers;
  
• …A death claim following an office fire. Three office workers died from smoke inhalation which the carrier classified as "pollution" in their claim denial;
  
• …A death claim following a fireworks explosion. The employee of a contractor was killed while destroying old fireworks (done on purpose as part of a contract);
  
• …A slip and fall claim in a grocery store when a bottle of Clorox fell off a shelf, broke open and left a puddle resulting in a customer falling and breaking her hip; and
  
• …A slip and fall at a convenience store gas pump caused by a slick of oil.
  

Myth, Legend or Fact

Which of the above denials is insurance myth, urban legend or industry reality? Here is the big reveal…. All six are real. Carriers actually used the pollution exclusion to deny (or try to deny) these claims. Are you shaking your head in disbelief yet?

Undoubtedly the death claim denials seem a bit "out there," but they are real. Admittedly I pulled a fast one on you regarding the office fire death claim. This case involved a "Total" Pollution Exclusion endorsement. Still, the carrier did try to deny the claim stating that smoke was a pollutant and thus the three deaths were excluded by the total pollution exclusion. Luckily the carrier retracted its lawsuit and settled the claim before the case went to trial. (Great American Insurance Co. v. Boxer Property Management Corp. et al., case number 08-cv-03464.)

But ISO's standard "absolute" pollution exclusion applied to the fireworks death claim. Like the office fire, the carrier tried to deny the claim based upon the fact that the fireworks were being purposely destroyed making them "waste" and thus coverage was excluded. Don't believe me, here is the case reference: Charter Oak Fire Ins. Co. v. Endurance American Specialty Ins. Co., No. 13–00558.

Oh, and I also fibbed a bit regarding the Clorox claim. The carrier never officially denied the claim, but they did delay paying the claim for several weeks because they were considering whether or not they should apply the pollution exclusion and deny the claim.

Yes, ladies and gentlemen, carriers often attempt to improperly apply the pollution exclusion. Adjusters sometimes seem intent on ignoring the exceptions to and within the absolute pollution exclusion. And even if a "Total" pollution exclusion is attached, the wording does not preclude injury or damage just because a defined pollutant is involved or was present.

Let's take a few minutes to review the realities of Insurance Services Office's (ISO's) "absolute" and "total" pollution exclusions.

The Absolute Pollution Exclusion

To adequately assess the absolute pollution exclusion, we need to know what it says. Following is ISO's "absolute" pollution exclusion as found in the CGL (04/13 edition), which is referenced throughout this paper:

This insurance does not apply to:

f. Pollution
(1) "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured. However, this subparagraph does not apply to:

(i) "Bodily injury" if sustained within a building and caused by smoke, fumes, vapor or soot produced by or originating from equipment that is used to heat, cool or dehumidify the building, or equipment that is used to heat water for personal use, by the building's occupants or their guests;

(ii) "Bodily injury" or "property damage" for which you may be held liable, if you are a contractor and the owner or lessee of such premises, site or location has been added to your policy as an additional insured with respect to your ongoing operations performed for that additional insured at that premises, site or location and such premises, site or location is not and never was owned or occupied by, or rented or loaned to, any insured, other than that additional insured; or

(iii) "Bodily injury" or "property damage" arising out of heat, smoke or fumes from a "hostile fire"

(b) At or from any premises, site or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste;

(c) Which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for:

(i) Any insured; or

(ii) Any person or organization for whom you may be legally responsible; or

(d) At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations if the "pollutants" are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor. However, this subparagraph does not apply to:

(i) "Bodily injury" or "property damage" arising out of the escape of fuels, lubricants or other operating fluids which are needed to perform the normal electrical, hydraulic or mechanical functions necessary for the operation of "mobile equipment" or its parts, if such fuels, lubricants or other operating fluids escape from a vehicle part designed to hold, store or receive them. This exception does not apply if the "bodily injury" or "property damage" arises out of the intentional discharge, dispersal or release of the fuels, lubricants or other operating fluids, or if such fuels, lubricants or other operating fluids are brought on or to the premises, site or location with the intent that they be discharged, dispersed or released as part of the operations being performed by such insured, contractor or subcontractor;

(ii) "Bodily injury" or "property damage" sustained within a building and caused by the release of gases, fumes or vapors from materials brought into that building in connection with operations being performed by you or on your behalf by a contractor or subcontractor; or

(iii) "Bodily injury" or "property damage" arising out of heat, smoke or fumes from a "hostile fire".

(e) At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, "pollutants".

(2) Any loss, cost or expense arising out of any:

(a) Request, demand, order or statutory or regulatory requirement 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 effects of, "pollutants" or

(b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of, "pollutants".

However, this paragraph does not apply to liability for damages because of "property damage" that the insured would have in the absence of such request, demand, order or statutory or regulatory requirement, or such claim or "suit" by or on behalf of a governmental authority.

Note the three "howevers" found in this exclusion. "Howevers," as used in the context of this exclusion, give back or solidify protection for certain liability claims. Six specific "however" exceptions are found in this exclusion. Further, three implied coverage grants flow out of the strict application of the exclusion's wording.

"However" #1 and its 3 Exceptions

Exclusion f.(1)(a), when read as a whole, states: "This insurance does not apply to 'bodily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured."

This can be referred to as the "Building Owner or Occupier Exclusion." Note the requirements for the application of this exclusion:

1. There must be actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants;"
   
2. The substance must be a pollutant; and
   
3. The premises must be owned by, occupied by, rented to, or loaned to the insured:
   

a. Owned by: Rather self-explanatory;

b. Occupied by: Defined in part by Black's Law Dictionary to mean, "To live or stay in a place." A long-term, somewhat permanent arrangement.

c. Rented to: The occupier pays rent for the use of space; and

d. Loaned to: An area a person or entity is allowed to use for some period for their/its personal benefit.

All requirements must be met for the exclusion to apply. If any does not apply to the loss, this exclusion cannot be applied. For instance, work done by a contractor on another person's or entity's premises is not excluded by this wording.

If all three conditions are met, there are still two exceptions that must be considered:
However, this subparagraph does not apply to:

(i) "Bodily injury" if sustained within a building and caused by smoke, fumes, vapor or soot produced by or originating from equipment that is used to heat, cool or dehumidify the building, or equipment that is used to heat water for personal use, by the building's occupants or their guests; or

(ii) (Discussed in the next section.)

(iii) "Bodily injury" or "property damage" arising out of heat, smoke or fumes from a "hostile fire."

If either (i) or (iii) applies, coverage is given back to the insured building owner/occupier.

A third exception, f.(1)(a)(ii), is found in this subparagraph, but it does not apply to the building owner or occupier. It is a contractor-specific exception discussed in the next section.

"However" #2 and its 3 Exceptions

Exclusion f.(1)(d) is the "Ongoing Operations Exclusion." When read as a whole, this subparagraph deletes coverage for certain ongoing operations as follows: "This insurance does not apply to 'bodily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations if the 'pollutants' are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor."

Like the "Building Owner and Occupier Exclusion," certain requirements must be met before the "Ongoing Operations Exclusion" applies:

1. There must be actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants" (we will come back to the "release" requirement later in this article);
   
2. The substance must be a pollutant;
   
3. The insured, contractor or subcontractor (on the insured's or contractor's behalf) must be performing operations;
   
4. The "pollutants" must be brought onto the premises, site or location by the insured; and
   
5. The "pollutants" brought to the site must be connected to the operations.
   

If any of the five requirements is missing, the exclusion does not apply. But even if all five requirements are met, three exceptions within the form still allow coverage to extend from the CGL. The "however" wording in this subparagraph gives back coverage for:
(i) "Bodily injury" or "property damage" arising out of the escape of fuels, lubricants or other operating fluids which are needed to perform the normal electrical, hydraulic or mechanical functions necessary for the operation of "mobile equipment" or its parts, if such fuels, lubricants or other operating fluids escape from a vehicle part designed to hold, store or receive them. This exception does not apply if the "bodily injury" or "property damage" arises out of the intentional discharge, dispersal or release of the fuels, lubricants or other operating fluids, or if such fuels, lubricants or other operating fluids are brought on or to the premises, site or location with the intent that they be discharged, dispersed or released as part of the operations being performed by such insured, contractor or subcontractor;
(ii) "Bodily injury" or "property damage" sustained within a building and caused by the release of gases, fumes or vapors from materials brought into that building in connection with operations being performed by you or on your behalf by a contractor or subcontractor; or
(iii) "Bodily injury" or "property damage" arising out of heat, smoke or fumes from a "hostile fire"

In addition to these three, there is a fourth ongoing operations exception, as mentioned previously, that is contractor class-specific, found in the exceptions to the "Building Owner and Occupier Exclusion." Exception f.(1)(a)(ii) is inserted to assure the carrier does not try to exclude coverage for a contractor simply because a building owner or occupier is named as an additional insured on the contractor's policy. Exception f.(1)(a)(ii) reads:

"However, this subparagraph does not apply to 'bodily injury' or 'property damage' for which you (the named contractor) may be held liable, if you are a contractor and the owner or lessee of such premises, site or location has been added to your policy as an additional insured with respect to your ongoing operations performed for that additional insured at that premises, site or location and such premises, site or location is not and never was owned or occupied by, or rented or loaned to, any insured, other than that additional insured."

In addition to the four explicit exceptions, there is an implied exception within the main exclusionary wording that is easy to miss. Exclusion f.(1)(d) specifically excludes pollutants, "…if the 'pollutants' are brought on or to the premises, site or location…." The exclusion is self-limited to pollutants brought to the place of operations by or for the contractor's use in its ongoing operations. There is no exclusion for the unintentional release of pollutants arising out of the operations of the insured if such material was not brought by or for the insured.

The Last "However"

Paragraph (2), printed above, essentially excludes coverage for costs associated with testing, monitoring, removing, etc. pollution. To eliminate the possibility that a carrier would try to over-extend this exclusion and deny a claim simply because of the assessment of these costs, the last "however" is inserted:

"However, this paragraph does not apply to liability for damages because of 'property damage' that the insured would have in the absence of such request, demand, order or statutory or regulatory requirement, or such claim or 'suit' by or on behalf of a governmental authority."

Essentially, if one of the exceptions gives back coverage for property damage, the carrier cannot use a regulatory action to exclude the entire claim amount. Only the cost to satisfy the regulatory demand is excluded.

Three Absolute Exclusions

Although the "absolute" pollution exclusion is not absolute overall, three exclusions are truly absolute – meaning there are no specific or even implied exceptions. These are the "Handlers" and "Environmental Contractors" exclusions (our terminology).

Absolute Exclusions 1 and 2

Exclusions f.(1)(b) and f.(1)(c) combine to create the "Handler's Exclusion." Together they absolutely exclude all locations and activities associated with "pollution" classified as waste and handled by the insured. (Waste means, "Material that is not wanted; the unusable remains or byproduct of something.")

• Exclusion f.(1)(b) is location specific. It excludes: "'Bodily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at or from any premises, site or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste." 
  
• Exclusion f.(1)(c) is activity specific. It excludes: "'Bodily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for any insured; or any person or organization for whom you may be legally responsible."
  

Let's test the "absolute" nature of both "Handler's Exclusions."

• The location-specific exclusion: The insured is a paint and body shop storing 100 gallons of paint and other flammable and combustible liquids. The body-shop's forklift driver misjudges the distance to a drum and punctures the side releasing most of the liquid into a stream running through the property. Since the paint is not waste, this loss is not excluded by the "Handler's Exclusion" f.(1)(b). However, the "Building Owners or Occupiers Exclusion" (f.(1)(a)) applies. The loss occurred at or emanated from premises owned or occupied by the insured, none of the exceptions apply, thus the loss is excluded.
  
• The activity-specific exclusion: A separate insured operation supplies paint to auto body shops in 55-gallon drums. While transporting a drum from the delivery truck to the buyer's loading dock, the supplier's forklift driver hits a pot hole, drops the drum and releases all the paint into the stream next to the body shop. Exclusion f.(1)(c) does not apply because the paint is not waste; exclusion f.(1)(a) does not apply because this did not occur on or emanate from the supplier's premises. However, the "Ongoing Operations Exclusion" f.(1)(d) applies. Nothing in exclusion f.(1)(d) limits its application to contractors; it is an ongoing operations exclusion that happens to mention contractors and subcontractors. The insured supplier is conducting its normal ongoing operations when its actions resulted in the spill; further, none of the exceptions to the ongoing operations exclusion applies. The loss is excluded.
  

Absolute Exclusion 3
Exclusion f.(1)(e) is the third truly "absolute" exclusion. The "Environmental Contractors Exclusion" specifically excludes: "'Bodily injury' or 'property damage' arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, 'pollutants.'"

Coverage for bodily injury or property damage arising out of or caused by essentially any activities related to the operations of environmental contractors is specifically excluded. There are no exceptions and very little question over the absolute nature of this exclusion. There is more appropriate coverage for these insureds.

Two Implied Exceptions

Two implied pollution exceptions result from the lack of exclusionary wording to the contrary.

Nothing in the absolute pollution exclusion removes coverage for completed operations. This is only an ongoing operations exclusion (f.(1)(d)). Neither is there a products exclusion anywhere in the wording. Because these exclusions are conspicuously absence, there is coverage for products-completed operations claims.

The second implied exception is particularly weird if you think about it. Pollution is NOT excluded. Bodily injury or property damage arising out of or caused by the release of pollution (with certain exceptions) is excluded, but pollution itself is not excluded. This literally means that the mere presence of a pollutant is NOT sufficient to trigger the pollution exclusion. For any of the exclusionary wording to apply, the pollutant must be the cause-in-fact of the injury or damage.

Pollution is the cause-in-fact only if the injury or damage would not have occurred but for the harmful actions of the pollutant, not just the presence of a pollutant. Any other application of the exclusionary wording would be unconscionably broad.

The Total Pollution Exclusion

Some underwriters don't want any perceived exposure to a pollution claim, thus they attach a Total Pollution Exclusion (CG 21 49 or proprietary form). The intent is obvious, to remove any and all coverage for injury or damage caused by the release of a pollutant.

Surprisingly, this exclusion isn't absolute or total either. As introduced in the implied exceptions, even this exclusionary wording requires the pollutant to be the proximate cause of the injury or damage. Again, the mere presence of a pollutant does not preclude coverage when this endorsement is attached.

ISO's Total Pollution Exclusion excludes, "'Bodily injury' or 'property damage' which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at any time." The key phrase is, "which would not have occurred…but for…."

Pollution must be the cause-in-fact of the injury or damage for the exclusion to apply. If the polluting-component is removed but the injury or damage would still have occurred, the pollutant is NOT the proximate cause of the injury or damage. For example, a sewer contractor cracks a pipe releasing water containing materials that would likely be considered pollutants which results in damage to all the computers in the room. Although there is pollution present, the effective proximate cause of the damage is the liquid. Even if it was pure water, the computers would still have been damaged. Removing the pollutant does not affect the damage caused.
 
Full Circle – The Original Denials

Six actual pollution-based claim denials were presented in the introduction. Let's review each denial and explain how the carrier misapplied the pollution exclusion. The reasons provided may not be the only ones applicable:

• A residential HVAC contractor's claim when a weld on a pipe failed several months after completion of the job allowing oil to flood the basement of a house:
• The pollutant was not brought to the site by the contractor;
• Completed operations is not excluded.
• A sewer and water contractor's claim when a pipe on which they were working burst, releasing "effluent"-containing water into the room damaging a bank of computers:
• The pollutant was not brought to the site;
• Pollution was not the cause-in-fact of the damage. Pure water would have caused the same damage, there just happened to be pollution present.
• A death claim following an office fire. Three office workers died from smoke inhalation which the carrier classified as "pollution" in their claim denial:
• The proximate cause of the smoke was fire. Even though the Total Pollution Exclusion was attached, the deaths did not arise out of pollution.
• A death claim following a fireworks explosion. The employee of a contractor was killed while destroying old fireworks (done on purpose as part of a contract):
• The proximate cause was an explosion, not a pollutant or waste.
• A slip and fall claim in a grocery store when a bottle of Clorox fell off a shelf, broke open and left a puddle resulting in a customer falling and breaking her hip:
• Let's go back to cause-in-fact. Would the slip and fall have occurred if there was a puddle of water? The fact that the liquid was a pollutant did not trigger the injury.
• A slip and fall at a convenience store gas pump caused by a slick of oil:
• Again, cause-in-fact. It wasn't the deleterious effect of the oil that caused the injury, it was the slipping and falling that caused the injury. 
  

There is a great deal about the pollution exclusion we have not discussed in this paper:

• The laws and court decisions that ultimately lead to the creation of the pollution exclusion;
  
• The evolution of the pollution exclusion;
  
• Options other than the Total Pollution Exclusion;
  
• What constitutes a "pollutant;" and
  
• What is a "release"?
  

On March 15, 2017, the Virtual University presented the webinar, "Is the Absolute Pollution Exclusion Really Absolute? Hint: NO!" We detailed all the information introduced in this article and explored the topics not discussed. Take a look at the recording and transcript​ for greater detail on this topic. 

Last Updated: January 27, 2018
First Published: March 3, 2017