Source: http://www.jdsupra.com, February 23, 2016
By: Traub Lieberman Straus & Shrewsberry LLP
In its recent decision in Nat’l Fire Ins. Co. v. James River Ins., 2016 U.S. Dist. LEXIS 19076 (D. Ariz. Feb. 16, 2016), the United States District Court for the District of Arizona had occasion to consider the application of a manuscript pollution exclusion to a matter involving non-traditional environmental harms.
At issue was coverage for defectively installed plumbing pipes and fixtures at a shopping center in Mesa, Arizona installed by James River’s insured, Quik Flush. Subsequent to the installation of the plumbing, retail tenants began to complain of noxious odors  – caused by hydrogen sulfide gas – that interfered with their businesses, ultimately forcing them to shut down. These tenants filed suit against the developer for the impact that the odors had on their businesses; specifically, loss of revenue, loss of good will, operating losses and lost future profits. The general contractor on the project sought coverage as an additional insured under Quick Flush’s policy, at which time James River disclaimed coverage on several grounds, most notably the pollution exclusion.
The exclusion in the James River policy was not a standard ISO pollution exclusion.  Rather, as set forth in an endorsement to the policy, the exclusion stated that:

Pollution/ environmental impairment/ contamination is not covered under this policy, nor are any expenses nor any obligation to share damages with or repay anyone else who must pay damages from same in conjunction with occurrences arising out of or alleged to have arisen out of same. All liability and expense arising out of or related to any form of pollution, whether intentional or otherwise and whether or not any resulting injury, damage, devaluation, cost or expense is expected by any insured or any other person or entity is excluded throughout this policy.
This insurance does not apply to any damages, claim, or suit arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ including but not limited to any:
a. ‘Bodily injury’, ‘personal and advertising injury’, ‘property damage’, or damages for the devaluation of the property, or for taking, use or acquisition or interference with the rights of others in or on property or air space, or any other type injury or expense; or
b. Any loss, cost, expense, fines and/or penalties arising out of any (1) request, demand, order, governmental authority or directive or that of any private party or citizen action that any insured, or others, test for, monitor, clean up, remove, contain, treat, detoxify or neutralize or in any way respond to, or assess same, the effects of ‘pollutants’, environmental impairments, contaminants or (2) any litigation or administrative procedure in which any insured or others may be involved as a party as a result of actual, alleged or threatened discharge, dispersal, seepage, migration, release, escape or placement of ‘pollutants’, environmental impairments, or contaminants into or upon land, premises, buildings, the atmosphere, any water course, body of water, aquifer or ground water, whether sudden, accidental or gradual in nature or not, and regardless of when.
This exclusion applies regardless of whether:
1. Injury or damage claimed is included within the ‘products-completed operations hazard’ of the policy; or
2. An alleged cause for the injury or damage is the insured’s negligent hiring, placement, training, supervision, retention, act, error or omission.

The court readily agreed that the gas emitted at the shopping center, in the form of hydrogen sulfide, was a pollutant. The remaining issue was whether in light of Arizona precedent on the pollution exclusion, the exclusion could apply to non-traditional environmental harm such as alleged in the underlying suit. In Keggi v. Northbrook Prop. & Cas. Ins. Co., 199 Ariz. 43 (Ariz. App. 2000), the Arizona Court of Appeals held that the standard pollution exclusion is, in fact, limited to traditional environmental harms.
James River argued that regardless of case law limiting the pollution exclusion to traditional environmental harm, its exclusion was drafted to be broader than the standard pollution exclusion. Specifically, the exclusion was extended to apply to any “environmental impairments” in any form, and as such, case law such as Keggi is inapplicable.
The court rejected this argument, noting that the term “impairment” is just as “hopelessly precise” as terms such as “irritant” or “contaminant,” and that as such, these environmental terms of art “must be read in light of the historical purpose of the pollution exclusionary clause—as interpreted by the Arizona Court of Appeals—to preclude coverage for ‘traditional environmental pollution.’” In so holding, the court concluded that more distinct language would be required to demonstrate that the exclusion applied to matters thought of as non-traditional environmental harms. As the court explained:

… absent clear language in the Policy’s clause divorcing it from the clause’s historical underpinnings, the terms “pollution” and “impairment”—similar to “irritant” and “contaminant”—must be read in light of Keggi, to exclude “traditional environmental pollution.” The presence of this language, while absolute in nature, nonetheless fails to render the Policy’s clause meaningfully distinct from Keggi’s.