Source: http://www.lexology.com, September 22, 2014
By: Amy B. Briggs, David B. Killalea , Stephen T. Raptis, Robert H. Shulman and Susan P. White, Manatt Phelps & Phillips LLP
Why it matters
A federal district court in Texas strictly construed a pollution exclusion in finding that hazardous materials embedded in mud were not “dispersed” and thus did not fit the terms of the exclusion. The insurer had refused to defend in reliance on the pollution exclusion, which applied to bodily injury claims arising from the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The decision is significant because it limits insurers’ ability to deny a defense to insureds unless exclusionary terms, strictly construed, clearly apply.
Detailed Discussion
The underlying claimant alleged exposure to chemicals while cleaning mud tanks used in oil and gas drilling operations. The claimant was not informed by the policyholder, JC Instride (“JCI”), that the mud tanks contained large quantities of caustic materials and entered the mud tank without proper safety equipment. As a result, he was severely burned and sued a number of defendants, including JCI.
JCI was covered under an insurance policy issued by the Burlington Insurance Company. The policy contained a pollution exclusion barring coverage for “bodily injury . . . which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The term “pollutants” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
Burlington sought a declaratory judgment that it had no duty to defend or indemnify JCI due to the pollution exclusion. Both parties moved for summary judgment.
The district court ruled that the pollution exclusion did not apply because the underlying complaint alleged that the “mud tanks contained large quantities of caustic materials” and, while the claimant came in contact with the caustic materials, there was no “dispersal” of “pollutants.”
The court looked to the Merriam-Webster Dictionary for the meaning of “dispersal” and concluded that “‘[t]o disperse a pollutant means to break it up and scatter it about.’” The claimant, however, did “not allege that caustic materials were ‘dispersed’ in the mud tank. Rather, [he] alleges that the ‘mud tanks contained large quantities of caustic materials’ and that, as he was wading in drilling mud, he was ‘expos[ed] to the caustic materials.’”
Accordingly, the district court required the insurer to defend, but reserved ruling on indemnity.
To read the order in The Burlington Ins. Co. v. JC Instride, Inc., click here.