Pollution Exclusion Enforced by Fifth Circuit
A plaintiff sued its insurance company for breach of contract, breach of good faith and fair dealing, and tortious breach of contract due to the company’s failure to pay a claim after its property was damaged by gaseous hydrochloric acid. The insurer’s motion for summary judgment applying the total pollution exclusion was granted and the insured appealed. The Fifth Circuit resolved the dispute in Burroughs Diesel, Incorporated v. The Travelers Indemnity Company Of America, No. 19-60875, United States Court Of Appeals For The Fifth Circuit (July 31, 2020)
On October 14, 2016, over 5,000 gallons of hydrochloric acid leaked from a storage tank in Laurel, Mississippi, on property adjacent to that owned by the plaintiff, Burroughs Diesel, Incorporated (“BDI”). The acid was a liquid, but it quickly created a cloud that traveled across the street and engulfed BDI’s property. According to BDI, this cloud caused extensive damage to its buildings, vehicles, inventory, tools, machines, and equipment. BDI promptly reported the loss to its insurance company, Travelers Indemnity Company of America. Following this report, Travelers adjusters and a professional engineer concluded that the hydrochloric acid did in fact damage BDI’s property. Nonetheless, Travelers denied coverage, relying on pollution exclusion in BDI’s insurance policy.
The district court held that BDI’s alleged damages were “excluded from coverage by the policy’s pollution exclusion,” and that BDI failed to demonstrate that any exception to the pollution exclusion applied.
Summary judgment is appropriate if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. A genuine dispute as to a material fact exists if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.
Mississippi courts considers the interpretation of an insurance policy to be a question of law. BDI bears the burden of proving its right to recover under the policy; Travelers has the burden to prove the applicability of a policy exclusion. The district court concluded that once the insurer proved the applicability of an exclusion, the insured then would have the burden to establish a relevant exception to the exclusion.
The policy required Travelers to “pay for direct physical loss of or damage to Covered Property caused by or resulting from a Covered Cause of Loss.” Excluded from coverage were losses caused by “pollution,” which is described in the policy as “[d]ischarge, dispersal, seepage, migration, release or escape of ‘pollutants.'” Then an exception to the exclusion arises, which says there is coverage if “the discharge, dispersal, seepage, migration, release or escape is itself caused by any of the ‘specified causes of loss.'” Travelers agreed to “pay for the loss or damage caused by such ‘specified causes of loss.'” The “Specified Causes of Loss” include, among many others, “smoke.” Whether “smoke” as a specified cause of loss overcomes the inclusion of “acids” as an excluded pollutant was the only issue presented to the Fifth Circuit.
Travelers agreed that BDI’s property was covered by the policy. “Acids,” at least generally, clearly are excluded pollutants. BDI argues that the cloud that resulted from the release of the hydrochloric acid constituted “smoke,” which is a “specified cause of loss.” The term “smoke” is not defined in the policy. BDI argues that because there is more than one dictionary definition of “smoke,” the term is ambiguous and should be resolved in favor of coverage.
The controlling Mississippi law says policy terms are to be understood by applying the “ordinary and popular meaning” to any undefined terms. Ambiguities exist when a policy can be logically interpreted in two or more ways, where one logical interpretation provides for coverage. According to BDI, when the liquid acid leaked, it “turned into gas particulate upon contact with the ambient heat/humidity and formed a white smoke cloud of [hydrochloric acid] gas particles suspended in water vapor (gas) that traveled across the street.”
Looking for a dictionary definition that would at least create some ambiguity about the meaning of “smoke,” BDI latches onto a secondary one in one dictionary that defines it as “a suspension of particles in a gas.” The Fifth Circuit refused to interpret state law to mean it was enough to locate some definition that fails to focus on smoke resulting from combustion. Instead, by using dictionaries, it sought the ordinary, popular, or logical meaning of “smoke.” It is the first definition in that same dictionary: “the gaseous products of burning materials.”
Because BDI failed to prove that an exception to the policy’s pollution exclusion applies, the district court did not err by granting Travelers’ motion for summary judgment on the issue of breach. Furthermore, because BDI cannot establish the existence of coverage for its claimed damages under the policy, it cannot recover on its claims of bad faith.
Recognizing that although insurance policies cover many causes of loss no insurance policy covers every cause of loss. Pollution exclusions have been litigated over the last few decades and the result has made clear that insurers have no wish to insure against losses caused by pollution. The Fifth Circuit refused to allow BDI to create an ambiguity by finding a minor, off hand definition of “smoke” that did not discuss combustion. The spill of acid did not involve combustion – it simply evaporated and changed naturally from a liquid to a gas. Although smoke is a gas not all gasses are smoke. Since there was no covered cause of loss included injury caused by a gas of hydrochloric acid there was no coverage for the loss.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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