Source: http://www.lexology.com, July 23, 2014
By: David A. Attisani, Robert A. Kole, A. Hugh Scott, John A. Nadas and Mark D. Cahill, Choate Hall & Stewart LLP
What you need to know:
The Fifth Circuit Court of Appeals, applying Texas law, held that a Total Pollution Exclusion Endorsement in a CGL Policy did not irreconcilably conflict with, and therefore was not superseded by, an Underground Resources and Equipment Coverage endorsement.  In so holding, the Court resolved conflicting state and federal court decisions in Texas.
What you need to do:
Under Texas law, an insurer can rely on an exclusion to decline coverage in the face of an endorsement which arguably adds coverage, as long as applying the exclusion would not completely negate or render superfluous the additional coverage.  Thus, insurers should feel confident relying on a TPEE to exclude pollution claims tendered by oil and gas companies, even in the face of a UREC or other similar endorsement.
Background
In 2010, Linn Energy LLC was sued in Louisiana state court by several Louisiana property owners.  The Louisiana Plaintiffs alleged that Linn Energy – through a leak from its pipeline, as well as other oil and gas activities – contributed to the contamination of the Louisiana Plaintiffs’ property.
Linn Energy sought defense and indemnity from Liberty Mutual Insurance Company, under successive CGL policies issued by Liberty Mutual to Linn Energy in 2009 and 2010.  The Liberty Policies contained three provisions particularly pertinent to Linn Energy’s claim:

• a TPEE, which broadly excluded liability arising out of the discharge of “pollutants”;
• a Time Element Endorsement, which modified the TPEE and granted pollution coverage in limited circumstances; and
• a UREC endorsement, which covered certain damages to underground resources and equipment, including specifically property damage to “oil, gas, water or other mineral substances which have not been reduced to physical possession above the surface of the earth or above the surface of any body of water.”

Liberty Mutual declined coverage under the TPEE, and filed a declaratory judgment action in the US District Court for Southern District of Texas (Houston Division).  Linn Energy argued that the TPEE conflicted with, and therefore was superseded by, the UREC, because:

• the UREC specifically added coverage for groundwater pollution claims;
• the TPEE could not exclude coverage for claims that otherwise fell within the coverage expressly provided by a so-called coverage-adding endorsement;
• the Liberty Policies did not indicate that the UREC was subject to the TPEE; and
• at a minimum, the parties had each advanced reasonable interpretations of the Liberty Policies, and the Court was required under Texas law to adopt the policyholder’s construction in those circumstances.

Liberty Mutual countered by arguing that:

• the UREC did not specifically add, or even mention, pollution coverage;
• the two endorsements could be read together without rendering the UREC meaningless, such that no irreconcilable conflict existed under Texas law;
• Linn Energy could not satisfy the conditions of the TEE; and
• the TPEE was unambiguous, and should be applied in accordance with its plain terms to exclude coverage for the pollution claims asserted against Linn Energy in the Louisiana Action.

The parties filed cross-motions for summary judgment in the District Court, which ruled in favor of Liberty Mutual.  Linn Energy appealed the District Court’s decision to the Fifth Circuit Court of Appeals.
The Fifth Circuit’s Ruling
The Fifth Circuit Court of Appeals, in a per curium opinion, recently affirmed the trial court’s grant of summary judgment in favor of Liberty Mutual.  The Court held that, under Texas law, “two provisions of an insurance policy are irreconcilable only when they contradict to the point that one would completely ‘negate or render superfluous the additional coverage’ provided by the other.”  Applying that standard – which Linn Energy had disputed applied – the Court concluded that the TPEE did not render the UREC “wholly meaningless,” because the UREC still provides coverage for non-pollution property damage claims, such as the depletion of a reservoir.  The Court also concluded that the Liberty Policies were unambiguous, and that the TPEE is “exactly what it purports to be: a totalpollution exclusion.”  As a result, allowing the UREC to trump the TPEE, as Linn Energy proposed, would “rob [the TPEE] of its meaning in contravention of the policy’s plain language.”
Conclusion
The Fifth Circuit Court of Appeals held that a total pollution exclusion unambiguously excludes all property damage caused by pollutants, and is only superseded whereby application of the exclusion would render the coverage provided by a competing policy provision wholly meaningless.  Thus, as long as circumstances exist where the coverage provision would apply despite the exclusion, no irreconcilable conflict exists, and the exclusion should apply according to its plain terms