Source: http://www.lexology.com, July 1, 2013
By: John O’Connor and Christopher M. Dougherty, Steptoe & Johnson LLP
In Colonial Oil Industries Inc. v. Indian Harbor Ins. Co., No. 12-4063-cv, 2013 US App. LEXIS 12946 (2d Cir. June 25, 2013), the Second Circuit, applying New York law, ruled that an insurer did not owe defense and indemnity coverage under a Pollution and Remediation Legal Liability (“PLL”) policy for costs incurred from the transfer of contaminated fuel oil from one container to another. Because “the unwitting introduction and transfer of polluted oil into containers otherwise meant to hold that oil” did not fall within the scope of a “pollution condition” as defined by the policy, the court affirmed the grant of summary judgment to the insurer. Id. at *10.
In Colonial Oil Industries, the policyholder’s business involved the transportation, storage and sale of fuel oil. Id. at *2. Over the course of two weeks in September 2009, the policyholder received 25 truckloads of oil from a third-party seller, which were placed into a partially-filled storage tank. Id. After some of the oil in the tank had been delivered to a customer, the policyholder discovered that the fuel oil it had received was contaminated with polychlorinated biphenyl (“PCB”). Id. This contamination resulted in lost oil and decontamination and remediation costs to both the policyholder and its customer. Id.
The policyholder sought coverage under the PLL policy, which covered “costs ‘resulting from any POLLUTION CONDITION on, at, under or migrating from any COVERED LOCATION.” Id. at *3. The policy defined “pollution condition” as “‘[t]he discharge, dispersal, release, seepage, migration, or escape of POLLUTANTS into or upon land, or structures thereupon, the atmosphere, or any watercourse or body of water . . . .’” Id. The insurer denied coverage, and the policyholder brought a breach of contract action. Id. The Southern District of New York entered summary judgment for the insurer, holding that

“the only plausible reading of the Policy is that it provides coverage in the event that a pollutant is discharged from containment into land, structures, the atmosphere or water, but not when, as here, the pollutant remains contained in vessels where it is intended to be kept and which were created for the very purpose of holding the pollutant until it is intentionally removed into a different container.”

Id. at *4 (quoting Colonial Oil Indus., Inc. v. Indian Harbor Ins. Co., No. 11 Civ. 5018 (DAB), 2012 US Dist. LEXIS 130122, at *10 (S.D.N.Y. Sept. 10, 2012)). The policyholder then appealed to the Second Circuit. Id. at *5.
The parties agreed that the policy was governed by New York law and that the PCB-contaminated oil was a “pollutant.” Id. at *4. Accordingly, the question on appeal was whether “the act of unloading the contaminated fuel oil from [the seller’s] truck into [the policyholder’s tank] created a ‘pollution condition’ within the terms of the Policy by discharging a pollutant, PCV, into a structure.” Id. at *5.
The court stated that, under New York law, “insurance policies are read ‘in light of common speech and the reasonable expectations of a businessperson.’” Id. at *6 (quoting Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 383 (2003). Recognizing that New York courts had not previously addressed the language presented, the court referred to decisions by the New York Court of Appeals and New York federal courts interpreting the CGL pollution exclusion, where courts have held that the same terms used in the PLL policy’s pollution condition – “discharge, dispersal, release, seepage, migration, or escape” – “are terms of art in environmental law used with reference to damage or injury caused by disposal or containment of contaminated waste.” Id. at *8-9 (citations omitted). The court concluded that “[t]hese cases make clear that the ‘reasonable expectations of a businessperson’ viewing the contested Policy language would be that it is intended to provide coverage for environmental harm resulting from the disposal or containment of hazardous waste.” Id. at *9. The court therefore held that the facts before it did not give rise to a “pollution condition” under the policy. Id. at *10.
The court’s ruling indicates that New York courts will read the terms of art used in the definition of “pollution condition” in a PLL policy consistent with their interpretation of those same terms when used in the pollution exclusion in a CGL policy, and that acts that do not involve environmental harm arising from the disposal of or failure to contain hazardous waste will not be covered under a PLL policy.