What is a Pollutant? Recent Texas Decision Highlights Competing Interpretations

Insurance policies often contain a pollution exclusion that says something similar to:

This insurance does not apply to:

  • Any liability arising out of or in any way related to the actual or alleged presence, discharge, dispersal, seepage, migration, release, or escape of “pollutants,” however caused.
  • “Pollutants” means any solid, liquid, gaseous, or thermal irritant or contaminant, including but not limited to smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste material. Waste material includes materials which are intended to be or have been recycled, reconditioned or reclaimed.

The exclusion, particularly the definition of pollutants, is broad. The plain language of the exclusion appears to cover almost anything that could be considered an “irritant” or “contaminant.” As a result of this broad language, courts across jurisdictions have long struggled with how to apply the exclusion.

What is a Pollutant?

Two approaches have emerged to answer this question. Headwaters Res. Inc. v. Ill. Union Ins. Co., 770 F.3d 885, 889 (10th Cir. 2014). Many courts broadly apply the exclusion, finding that the language clearly and unmistakably precludes coverage for loss resulting from anything that is—or can become—a contaminant or irritant. See, e.g., Maxine Furs, Inc. v. Auto-Owners Ins. Co., 426 Fed. Appx. 687, 688 (11th Cir. 2011) (“We do not think a person of ordinary intelligence could reasonably conclude that curry aroma is not a contaminant under these circumstances.”) (emphasis added). Other courts narrowly apply the exclusion only to those irritants or contaminants that traditionally constitute environmental pollution. See, e.g., EFK Invs. LLC v. Peerless Ins. Co., No. 3:13-cv-5910, 2014 WL 4802920 (N.D. Cal. Sept. 26, 2014) (“Giving the pollution exclusion an overly broad interpretation would be unreasonable since ‘virtually any substance can act under the proper circumstances as an irritant or contaminant….’ The pollution exclusion clause should be read as limited to ‘injuries arising from events commonly thought of as pollution, i.e. environmental pollution.’”) (internal citations omitted).

Texas Decision Emphasizes the Importance of Determining the Right Interpretation

Great American Insurance Co. v. ACE American Insurance Co., No. 4:18-cv-114, 2018 WL 3370620 (N.D. Tex. July 10, 2018), illustrates the importance of determining which approach applies in every coverage dispute. Eastern Concrete Materials, Inc. (“Eastern”) operated a rock quarry in New Jersey. Id. at *2. Quarrying the rocks created small stones and “fines,” which are small particles of rock that are used in a variety of construction applications. After creating the fines, Eastern would wash them with water and place them in settling ponds. Id. Once the fines settled and were dried out, Eastern would use or sell them. Id.

In the summer of 2017, Eastern began pumping water out of the settling ponds into a nearby waterway, as its permit allowed. Id. at *3. Unfortunately, the quarry manager did not shut off the pump, and a day later the rock fines began pumping into the waterway. Id. The rock fines changed the flow and contours of the stream, and, in some spots, up to two feet of rock fines were deposited. Id. New Jersey regulatory agencies issued notices contending that Eastern had violated various New Jersey statutes, including the Water Pollution Act, the Freshwater Wetland Protection Act, the Fish and Game Act, and the Flood Hazard Area Control Act. Id.

Eastern was insured under its parent company’s CGL and commercial umbrella policies. Id. at *2. Eastern demanded coverage from its carriers, and the commercial umbrella carrier contended that the pollution exclusion precluded coverage. The insurer filed suit in federal district court in Texas, where Eastern’s parent company purchased the policy. After the insurer filed suit in Texas, Eastern filed suit in New Jersey. Id. at *3.

Recognizing that the dispute would turn on whether Texas or New Jersey law applied, Eastern argued for the application of New Jersey law. New Jersey courts narrowly apply the pollution exclusion; whereas Texas courts broadly apply it. Compare Nav-Its, Inc. v. Selective Ins. Co., 869 A.2d 929, 936 – 37 (N.J. 2005) (“[T]he history of the pollution-exclusion clause in its various forms demonstrates that its purpose was to have a broad exclusion for traditional environmentally related damages.”); with Clarendon Am. Ins. Co. v. Bay, Inc., 10 F. Supp. 2d 736, 743 – 44 (S.D. Tex. 1998) (applying Texas law) (holding that the pollution exclusion is not limited to traditional environmental pollution).

The court rejected Eastern’s arguments, applied Texas law, and found that the pollution exclusion precluded coverage. 2018 WL 3370620 at *5. The court reasoned that the rock fines were pollutants because they were waste materials and “became irritants or contaminants when they were discharged and dispersed where they did not belong.” Id. The court was not persuaded by the fact that the rock fines “are wanted or useful” and opined that “substances can constitute pollutants regardless of their ordinary usefulness.” Id.

Separate Insurance for Environmental Risks

This case illustrates the important distinction in how different states interpret the pollution exclusion. If New Jersey law had applied, it is likely that the pollution exclusion would not have precluded Eastern’s claim for coverage. In Eastern’s defense, it was one of many subsidiaries of its parent company, and neither it nor its parent company may have considered the breadth of the pollution exclusion when purchasing the policy.

Importantly, many insurers offer policies that will cover environmental risks. In fact, in its decision, the court noted that Eastern and its parent company “d[id] not maintain insurance to cover environmental liabilities.” Id. at *2. Had such coverage existed here, there may have been no reason to litigate the pollution exclusion.