Summary
- Insurance coverage practitioners should regularly check on new pollution exclusion cases around the country,
- The court decisions and the arguments made can inform strategy in existing litigation, even in another state or court.
A New York appellate court has held that pollution exclusions (including exclusions with the “sudden and accidental” exception) in the insured’s general liability policies preclude coverage for claims alleging environmental contamination from releases of the fuel additive methyl tertiary butyl ether (MTBE), which qualifies as a pollutant.
In June 2024, St. Paul Fire & Marine Ins. Co. v. Getty Props. Corp., 228 A. D. 3d 979 (N.Y. App. Div. 2024), the New York Supreme Court, Appellate Division, Second Department rejected the insured’s arguments that MTBE is not a pollutant because the insured did not know MTBE was harmful and its use as an additive was required by EPA. The court held that the insurance policies “make no mention of the legality of the insured’s use or release of the claimed pollutant, and the [New York] Court of Appeals has rejected an insured’s claim that if discharge of a substance was legal, it could not be considered a pollutant under a pollution exclusion.” Id. at 982. The court stated the exclusions apply even if MTBE was not specifically named as a pollutant. And the exclusions apply even if it was not known that MTBE harmed the environment at the time the policies were issued. With respect to policies with the sudden and accidental exception to the exclusion, the court held that the temporal requirement was not met because the pollution alleged “occurred undetected over many years.” Id. at 983.
In June 2024, an Oregon appeals court held that a “contaminants exclusion” in a landlord’s first party property policy that insures for “accidental direct physical loss” precluded coverage for damage allegedly caused by a tenant’s personal use of methamphetamine. In Lockner v. Farmers Ins. Co. of Or., P. 3rd 975 (Or. Ct. App., 2024), the policy excluded “loss either consisting of, or caused directly or indirectly by. . .[the] release, discharge or dispersal of contaminants, pollutants, insecticides, or hazardous gasses or chemicals.” The court found that the damage to the property and HVAC system was caused by the release of contaminants from smoking meth. The court then held coverage was precluded by the “contaminants exclusion.”
In reaching its decision, the court addressed an earlier Oregon appellate court case that the policyholder contended held that contamination exclusions do not, as a matter of law, preclude coverage for property damage caused by the release of methamphetamine indoors. The Lockner court distinguished Largent v. State Farm Fire & Cas. Co., 842 P.2d 445 (Or. Ct. App. 1992) because that case involved a meth lab operation and a different exclusion, which listed “contamination” along with other terms like “wear and tear” that “represented gradual processes,” and did not apply to “sudden damage” such as occurs from production. Id. at 979. Here, the court said, the policy has a stand-alone exclusion and it applies to the release of methamphetamine in the residence. The insured also argued that the loss was covered as “vandalism” under the “efficient proximate cause” rule. The court rejected this argument as well because there was no evidence the tenant intended to cause damage or knew or should have known it was likely to occur (i.e., “the personal use of [meth] is not vandalism”) and the rule did not apply as the record established only one relevant cause of damage. Id. at 980.
Insurance coverage practitioners should regularly check on new pollution exclusion cases around the country, because both the court decisions and the arguments made can inform strategy in existing litigation, even in another state or court.