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Vol. 6, Iss. 8
October 11, 2017

Pollution Exclusion: Have The Reports Of Its Death Been Greatly Exaggerated?

Earlier this year the pollution exclusion in Washington was shaken to its core. [No pun intended. Well, actually, pun intended.] As I’ve reported, as well as others, in April, the Washington Supreme Court held in Xia v. ProBuilders Specialty Insurance Company that, despite carbon monoxide being a pollutant, the pollution exclusion did not apply to injuries caused by exposure to it. The court reached this conclusion based on the so-called “efficient proximate cause” rule. The court determined that the efficient proximate cause of the injuries was the negligent installation of a hot water heater. Because that was a covered occurrence, that set in motion a causal chain, that led to discharging toxic levels of carbon monoxide, being an excluded peril, the pollution exclusion was not applicable. In August, despite some strong amicus support from insurer groups, the court denied the insurer’s motion for reconsideration.

No other court – not even Washington – had addressed the pollution exclusion in this manner. The decision caused a lot of dropped jaws. It is easy to imagine that Xia is the start of a reduction in the scope of the pollution exclusion in Washington. Yet, in the first post-Xia pollution exclusion decision – The Dolsen Companies v. Bedivere Ins. Co., No. 16-3141 (E.D. Wash. Sept. 11, 2017) -- the court distinguished it and held that the pollution exclusion applied.

To be sure, Dolsen is not a repudiation of Xia. The Washington federal court certainly didn’t have that ability. Nonetheless, Dolsen is not without some value to insurers, as it provides a roadmap for them to steer around the decision in certain circumstances.

Dolsen involved the potential availability of coverage under these circumstances. I’ll borrow the court’s explanation to save time to get to the moral of the story. “Plaintiffs, the Dolsen Companies, Cow Palace, and Three D Properties, operated (and still operate) a concentrated animal farm operation. As a byproduct of Plaintiffs’ operation, Plaintiffs had to process millions of gallons of liquid manure. Plaintiffs stored the manure in holding ponds and spread it on their crops as fertilizer. Unfortunately, the holding ponds leaked—allowing the seepage of over 1.6 million gallons of untreated manure into the groundwater annually. Further, the Plaintiffs put far too much manure on the land—a state investigator documented that manure applied to frozen fields was at least 12 inches deep. As a result, the manure soaked the soil and entered the ground water table, contaminating the local water.”

Certain environmental groups filed suit against Dolsen alleging that it over-applied manure and allowed the holding ponds to leak, causing significant environmental contamination of the soil and groundwater. The groups alleged violations of federal law -- Resource Conservation and Recovery Act, Emergency Planning and Community Right-to-Know Act and CERCLA.

Dolsen sought coverage from various insurers, all of which denied based on the absolute pollution exclusions contained in their policies. The litigation settled and Dolsen filed a declaratory judgment and breach of contract action seeking coverage for their (not specified) losses.

The court spent the first half of the decision analyzing why the manure was a pollutant, as well as acting as a pollutant, in contaminating the water. So, if the court had stopped there, it would have been game over – the pollution exclusion serving to preclude coverage for Dolsen’s losses. But the court didn’t say so long, farewell, auf wiedersehen, goodbye just yet. Instead it turned to Xia and analyzed whether the new Washington Supreme Court decision compelled a different result. It did not.

The court distinguished Xia on this basis: “The distinguishing feature between these two lines of cases is the relation between the initial act and the pollutant causing harm—viz., whether the initial peril was the polluting act (i.e., whether the incident involved pollutants in the first place) or whether the initial peril was some other act that incidentally led to a polluting harm. Although subtle, this framework is workable and leads to a clear result in this case: the initial act was intimately tied to the pollutant and thus the initial peril was the polluting act.” (emphasis added).

As the court saw it: “[T]he initial act giving rise to the peril was an excluded harm and there is no other covered occurrence that otherwise led to the harm. In the instant case, there are two sources of contamination: the over-application of manure directly to the land and the inadvertent seepage of the manure from the holding ponds.”

Dolsen tried to make the situation look like Xia, in what the court called a two-step pivot to coverage via the efficient cause rule. However, the court was not convinced that negligent construction of the holding ponds was enough to bring the case within Xia: “It was the inadequate storage of the manure that caused the seepage—and the negligent construction is necessarily intertwined with the storage. This very occurrence is explicitly excluded by the terms of the policy, which excludes from coverage the seepage of pollutants stored or processed as waste. There is no other occurrence beside the act intimately tied with the storing of manure—the polluting event.”

Thus, while the Dolsen court distinguished Xia, the decision is not, as I said, a repudiation of Xia. One gets the sense that Xia may have brought back coverage if the negligent construction of the holding pools, which was necessarily intertwined with the storage, had not been specifically excluded from coverage.

What’s more, the court threw out a hypothetical where Xia may have applied: “Had the manure been released due to an accident not related to the actual use/storage of the pollutant - e.g., accidentally driving a tractor into the barrier of the pond — the efficient cause rule may have applied. But this is not the case. The application and the storage of the manure was the triggering event, and the insurance policy specifically contemplates the exclusion of these occurrences.”

Xia is here to stay in Washington. But Dolsen provides insurers with some guidance on how it may be avoided.


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