Source: http://www.insurancejournal.com, May 19, 2015
By: Christopher J. Boggs
Never let it be said that an exclusion would or could be misapplied; but the absolute pollution exclusion likely qualifies as the most misapplied exclusion within the commercial general liability (CGL) policy. Reasons for improper denials by application of the pollution exclusion are varied, ranging from a misunderstanding of the injury’s or damage’s true proximate cause to a complete lack of understanding regarding the pollution exclusion itself. Courts, too, contribute to misapplication because of inconsistent rulings among jurisdictions.
Insurance Services Office’s (ISO’s) unendorsed commercial general liability policy contains what is historically referred to as the absolute pollution exclusion (APE). Although called an “absolute” exclusion, it is far from absolutely excluding all pollution-related injury or damage.
In fact a close reading of exclusion “2.f.” reveals five self-limiting factors, exceptions or requirements within the exclusionary wording. These are:

1. “Arising out of…”: Before the exclusion can apply, a causal connection must exist between the release (etc.) of the supposed pollutant and the “bodily injury” or “property damage.” Pollution’s presence does not and should not automatically trigger the use of the exclusion;
2. The substance must be considered a “pollutant;”
3. There must be release of “pollutants.” Some states consider it a “term of art” and limit the definition of release to the definition found in environmental laws. Other jurisdictions give the term a very broad meaning. One state limits the meaning of release to intentional releases only;
4. The pollution exclusion is limited to five specific operations, locations, activities or insureds. One of the main reasons the absolute pollution exclusion is not “absolute” is because it is limited to only five situations or conditions; and
5. There are exceptions to two of the five specific exclusions. Eight exceptions apply to the five specific exclusions. Six are explicit in the form; one is implied from the policy wording; and one is understood and created due to the lack of any exclusionary wording in the exclusion itself.

Five Specific Exclusions
Review of the absolute pollution exclusion reveals its specificity regarding what is actually excluded. The exclusion is “insured” specific, “location” specific, “activity” specific and “operations” specific. The five paraphrased exclusions under “2.f.(1)” are:

1. A pollution release at or from any premises, site or location which is or ever was owned or occupied by, rented to or loaned to any insured. This is an “insured” and “location” specific exclusion known as the “Owner/Occupier Exclusion.” Current and past pollution incidents, including long-tail claims for prior owners or occupiers of a property (potentially responsible parties) are effectively deleted by this exclusion. There are three exceptions to this exclusion, but only two apply to the building owner/occupier.
2. A release of pollutants at or from any premises, site or location which is or has ever been used to manage waste. “Manage” means to handle, store, dispose of or process. This is a “location” and “operation” specific exclusion with no explicit exceptions making it nearly absolute. Water treatment plants, dumps and possibly recycling centers are subject to this part of the exclusion depending on the jurisdiction’s definition of a “pollutant” and “release.”
3. Pollution release during the transportation or “management” of waste by the insured or anyone else on behalf of the insured. “Management” means handled, stored, treated, disposing or processing. An “activity” specific exclusion, this precludes coverage for insureds such as asbestos removal contractors. The exclusion has no exceptions making it, in a sense, absolute.
4. The release of a pollutant at or from any premises, site or location on which the insured (a contractor and not the owner of the site), or any of the insured’s contractors or subcontractors are working (“performing operations”). Because of exclusion “3.” above, this relates to contractors not specifically involved in managing pollution or waste – a regular artisan or trade-type contractor making this the “Contractor’s exclusion.” Notice this is an “operation” and “location” specific exclusion. Four express exceptions and one implied exception apply to this exclusion giving coverage back under specific circumstances.
5. Pollution released at or from any premises, site or location the insured contractor or any of its contractors or subcontractors is performing operations if those operations are related to the management of “pollutants.” Again “management” means testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing or assessing a pollutant. An “activity” specific exclusion that has no exceptions making it nearly absolute.

Coverage denials and court cases related to pollution and the applicability of the absolute pollution exclusion most often revolve around the five above-listed exclusions; but there are two more exclusions related to clean up and government suits for pollution incidents. Paragraph 2.f.(2) addresses these exclusions and the exception to these exclusions (taken from ISO’s CG 00 01 04 13):
(2) Any loss, cost or expense arising out of any:
(a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, “pollutants”; or
(b) Claim or “suit” by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of, “pollutants”.
However, this paragraph does not apply to liability for damages because of “property damage” that the insured would have in the absence of such request, demand, order or statutory or regulatory requirement, or such claim or “suit” by or on behalf of a governmental authority.
Essentially this section excludes all costs associated with testing, monitoring, cleaning up, etc. whether done by or paid for by the insured directly; or done or paid for by the government and billed back to the insured. This is a “business risk” exclusion with an exception for a non-business risk loss.
The exception gives back “property damage” coverage (no “bodily injury”) when the insured causes damage that is covered by one of the exceptions to the pollution exclusion. Clean up costs are generally considered part of the damages and would have to be paid even if there was no demand or order from a governmental authority.
Express Exceptions
As stated, there are six stated or express exceptions in the absolute pollution exclusion. Two apply to the “Owner/Occupant Exclusion” (“2.f.(1)(a)”) and four relate to the “Contractor’s Exclusion” (“2.f.(1)(d)”).
Owner/Occupant Exclusion Express Exceptions. The two express exceptions applying to this exclusion are:

• “Bodily injury” if sustained within a building and caused by smoke, fumes, vapor or soot produced by or originating from equipment that is used to heat, cool or dehumidify the building, or equipment that is used to heat water for personal use, by the building’s occupants or their guests; or
• “Bodily injury” or “property damage” arising out of heat, smoke or fumes from a “hostile fire.”

Both exceptions are somewhat self-explanatory. But each has a limited scope. The first applies only to “bodily injury” (no “property damage” extension) and is positionally limited to injury sustained “within” the building.  The second exception applies to both “bodily injury” and “property damage,” but is limited by the definition of a “hostile fire.” A “hostile fire” is one that is uncontrolled or is outside of its intended area.
Contractor’s Exclusion Express Exceptions. Four express exceptions apply specifically to contractors. One is pulled from the “owner/occupant exclusion” but specifically relates to contractors providing additional insured status to the building owner or occupant. The three express exceptions listed under the specific exclusion are:
The first applies to the unintentional release of a pollutant from “mobile equipment” at an off premises site at which the insured is actively performing operations (not just storing the equipment).
The second exception gives coverage back if there is “bodily injury” or “property damage” sustained within a building (not outside of the building); and the materials releasing the gases, fumes or vapors must have some connection to the operations being performed by the contractor.
“Bodily injury” or “property damage” arising out of heat, smoke or fumes from a “hostile fire” is the third exception.
A fourth “contractor’s exclusion” express exception may apply; but its applicability is dependent upon the building owner’s or occupants’ additional insured status on the contractor’s policy.
Key terms in this exception indicate its purpose – to protect the insured when they contractually accept liability in a construction contract. A building owner or occupant can be held vicariously liable for the actions of a contractor working on the premises; thus many, if not most, owners/occupiers transfer that liability down to the party closest to the activity and presumably best able to avoid the loss or damage – the contractor.
Three points of this exception; 1) for it to apply the owner/occupier must be first added to the contractor’s policy as an additional named insured; 2) it only applies to ongoing operations; and 3) the insured contractor does not now and has never owned or occupied the premises (other than to work there).
Contractor’s Exclusion Implied Exception
One implied exception to the “contractor’s exclusion” is found in the express wording in the CGL form. Exclusion “f.1.(d)” specifically excludes pollution injury or damage “at or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations if the “pollutants” are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor.” This means that if the pollutant was not brought to the site by the insured or its subcontractor, injury or damage arising out of pollution and caused by the insured’s (or its subcontractor’s) operations is covered by the policy.
Coverage is created by the “gap” in the exclusion; and the “gap” makes sense. Why should the insured contractor be punished for something that is already on the site?
The “Lack of Exclusion” Exception
Coverage “A” in the CGL provides protection for the financial consequences of “bodily injury” and “property damage” for which the insured is held legally liable provided there is no applicable exclusion. The last implied exception in the pollution exclusion is understood and created by the conspicuous absence of any exclusionary wording to the contrary. Products-completed operations injury or damage is not excluded by the pollution exclusion; and since there is no exclusion, coverage exists for pollution losses falling under the products-completed operations coverage definition.
What These Exceptions “Say” 
These eight exceptions point to the historical purpose for the creation of the pollution exclusion. Birthed in the mid-1970’s in response to federal environmental laws (i.e. the clean water act (CWA), the resource conservation and recovery act (RCRA) and the Superfund Act (aka the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA))); the original intent of most standardized pollution exclusions was to exclude losses arising out injury or damages from environmental pollution falling under the jurisdiction of these laws (now known as “traditional environmental pollution”). In fact, a 2010 New Jersey Supreme Court ruling, Nav-Its v. Selective Insurance, noted that the exclusion’s terminology is taken from environmental laws and intended to be interpreted in light of those laws.
But not every state court agrees with this use and interpretation. Current application of this exclusion by many jurisdictions seem to stray from this original intent and purpose.
“Arising out of…” – The Self-Limiting Causal Connection Requirement 
Pollution is not excluded by the policy wording! Excluded is “bodily injury” or “property damage” “arising out of…” or caused by the release of a pollutant. Literally, this means that the mere presence of a “pollutant” (a term defined in the policy and interpreted by the courts) is not sufficient to trigger the pollution exclusion. The pollutant must be the cause-in-fact of the injury or damage.
For pollution to qualify as the factual cause means that the injury or damage would not have occurred apart from the actions of a pollutant. The pollutant must be the cause of the injury or damage, not just a byproduct of the negligent event or simply present at the time or place of the loss. Any other interpretation of this exclusionary wording makes the absolute pollution exclusion unconscionably broad.
When analyzing any attempt to apply the pollution exclusion apply this key question, “Is the injury or damage so far removed from the presence of the pollutant so as to make the application of the absolute pollution exclusion unreasonable?”
Is the Substance a “Pollutant?” And was There a “Release?” – Effects of the Pollutant and Release Requirements 
Courts are often charged with reviewing and comparing the facts of a pollution-related loss with policy language to determine the availability of coverage. Problems exist because of distinct differences among the jurisdictions. Some courts narrowly define the pollution exclusion in favor of the insured; while others tend to take a broader view of the policy terms to the benefit of the insurance carrier.
For example, some states specifically define “pollutant” to universally include solvents and cleaners. But other states have ruled that solvents and cleaners are NOT pollutants based on the facts of particular cases.
Such a wide spectrum of jurisdictional rulings makes generalizing the application of the pollution exclusion, at best, extremely difficult and impossible at worst. Local rulings must be studied to properly apply the policy language.
Regardless of the jurisdiction and its application of the pollution exclusion, all courts try to answer two questions:

1. Is the substance a pollutant; and
2. Was there a release, discharge, etc. as that jurisdiction defines it?

“Pollutant”
Courts may not always define a particular substance as a pollutant. Whether a substance is, in fact, a pollutant hinges on the jurisdiction and the facts of the case. Six fact-based “tests” are applied to decipher a particular substance’s classification as a pollutant in a particular situation:

1. What is the nature of the injury-causing substance?
2. What is the typical usage of the substance? Does the insured typically use the substance as part of its business or operation or is it necessary for the operation?
3. Quantity of the discharge.
4. Was the substance being used as it was intended to be used?
5. Is the substance one that is generally viewed as a “pollutant?”
6. Are there any other factors relevant to the case at hand?

From these six questions the court decides whether a particular substance is a pollutant or not. Coverage remains intact (subject to any other exclusions or condition) if the substance is not classed as a “pollutant.” But being classed as a “pollutant” does not automatically negate coverage; the “pollutant” must still be a causal connection between the presence of the pollutant and the injury or damage for the exclusion to apply.
Release, Escape, Etc.
Defining escape, release, etc. is, once again, jurisdictionally-based. Some narrowly define release or escape as a “term of art” taken from environmental pollution laws and limit the meaning to escape or release from a location as per the laws. Others broadly define these terms to mean escape or release from a particular system.
If there is no escape, release, etc., the pollution exclusion does not apply. Understanding local case law regarding these definitions is required. But again, the pollution must be the cause-in-fact of the injury or damage for the exclusion to be legitimately applied.
More Information Coming
Remember the “absolute pollution exclusion” is not absolute as there are five self-limiting factors and eight exceptions. Anytime a carrier asserts the pollution exclusion, always look for the true cause-in-fact of the loss. The mere presence of a “pollutant” is not (or should not be) sufficient to trigger the use of the exclusion.