Insurance Contract Interpreted as Written

Pollution Exclusion Is Conspicuous, Plain and Clear

Insurance lawsuits abound like then ten plagues Moses imposed on Egypt. Insurers spend hundreds of hours and millions of dollars to write their policies in a way that they only take on the risks of loss they intend to take on and clearly, conspicuously, plainly and clearly exclude those risks it does not wish to take on.

In RLI Insurance Company v. City Of Visalia, 1:17-cv-01205-LJO-EPG, United States District Court For The Eastern District Of California (March 19, 2018) the District Court, after complaining about the failure of Congress to fully staff the court, spent many pages to resolve the dispute because, to paraphrase Benjamin Franklin, the court did not have the time to write a brief opinion.


After being asked to defend the city of Vislia for a pollution claim RLI filed a motion for judgment on the pleadings and Visalia filed an opposition and RLI filed a reply (“Reply”).

The issue presented is whether a policy exclusion contained in the RLI insurance policy precludes insurance coverage in an underlying litigation brought against Visalia as a matter of law.


RLI issued Policy No. R20040U, an umbrella liability insurance policy, to Visalia for the policy period March 8, 1978-1979 (“RLI Policy” or the “Policy”). The Policy was attached to RLI’s Complaint and to the Amended Answer. The Policy provides that RLI will indemnify Visalia for sums it is obligated to pay by reason of liability “for damages, direct or consequential and expenses, all as more fully defined by the term ‘ultimate net loss’ on account of: (i) Personal injuries, including death at any time resulting therefrom, (ii) Property Damage, (iii) Advertising liability, caused by or arising out of each occurrence happening anywhere in the world.”  The RLI Policy contains certain Policy exclusions. The Policy exclusion at issue provides:

The policy shall not apply:

(f) as respects all operations,

(1) to the discharge, dispersal, release or escape of smoke, vapors, soot, acids, alkalis, toxic chemicals, solids, liquids or gases, waste materials, or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water unless such discharge, dispersal, release or escape is sudden and accidental.

(2) for the cost of removing, nullifying or cleaning up substances described in (1) above.

Visalia claims that it is entitled to insurance coverage under RLI’s Policy for an underlying lawsuit where Visalia was sued, Mission Linen Supply v. City of Visalia, Case No. 1:15-cv-00672-AWI-EPG, filed in the U.S. District Court Eastern District of California (the “Mission Linen Action” or “Underlying Action”). Mission Linen Supply (“Mission Linen”), a corporation that operated a commercial laundry facility, including dry cleaning, sued Visalia in relation to environmental contamination at and around property Mission Linen owned. Mission Linen was identified by the Department of Toxic Substance Control (“DTSC”) as a responsible party for contamination in soil and ground water at and around its property by chlorinated solvents, primarily tetrachloroethylene also known as perchloroethylene (“PCE”).  The Mission Linen Action alleges that Visalia is liable for the environmental contamination (at least in part) due to Visalia’s failure to maintain and repair its sewer system while accepting PCE for transport via the City’s sewers. More specifically, the Underlying Action alleges that the holes, cracks, and leaks in Visalia’s sewer system and its failure to maintain and operate its sewers caused or contributed to the release of PCE resulting in the contamination of soil and groundwater at or around the Plaintiff’s property since at least 1978. The Mission Linen Action correspondingly seeks damages pursuant to CERCLA for “all response costs incurred, and to be incurred by [Mission Linen], in response to the alleged release of PCE and other hazardous substances, in and around the Plaintiffs Property, and the environment…”


RLI argues that the Policy’s exclusions under section f(2) precludes insurance coverage for the Mission Linen Action as a matter of law.

Principles of Contract Interpretation

Interpretation of a contract is a purely legal question which is susceptible to a motion for judgment on the pleadings. Under California law, insurance policies are also contracts which can be interpreted as a matter of law, including the resolution of any ambiguity. Interpretation of an insurance policy is a question of law and follows the general rules of contract interpretation.

The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the mutual intention of the parties which should be inferred solely from the written provisions of the contract if possible. If contract language is considered ambiguous it is resolved by interpreting the ambiguous provisions in the sense the promisor (i.e., the insurer) believed the promisee understood them at the time of formation. If application of this rule does not eliminate the ambiguity, ambiguous language is construed against the party who caused the uncertainty to exist, i.e. the insurer in insurance contracts.

To be effective, an “exclusionary clause must be ‘conspicuous, plain and clear.'” Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 273 (1966) However, “[i]t must be kept in mind that an insurer is free to select the character of the risk it will assume” and an insurer “has the right to limit the coverage of a policy issued by it and when it has done so, the plain language of the limitation must be respected.” Fresno Econ. Imp. Used Cars, Inc. v. United States Fid. & Guar. Co., 76 Cal. App. 3d 272, 280 (1977) (quoting Continental Cas. Co. v. Phoenix Constr. Co. 46 Cal. 2d 423, 432 (1956)).

The Scope of Section f(2)

In order to ascertain the scope of section f(2)’s exclusion, the Court first considered the language of the Policy. The Court found that the plain language in the policy exclusion is clear and explicit. A court cannot and should not do violence to the plain terms of an insurance contract by artificially creating ambiguity where none exists. In situations in which reasonable interpretation favors the insurer and any other would be strained and tenuous, no compulsion exists to torture or twist the language of the contract.

Visalia clearly did not contract for insurance of cleanup costs for environmental contamination liability with RLI. The insurer has the right to limit the coverage of a policy issued by it and when it has done so, the plain language of the limitation must be respected. The Court must respect the limitations to coverage that the parties contracted for as demonstrated by the written instrument which manifests the parties’ mutual intention.

The Duty to Defend

It is a well-accepted rule that the carrier must defend a suit which potentially seeks damages within the coverage of the policy. To be entitled to a defense, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential.

The insurer is not required to defend an action against the insured when the complaint in that action shows on its face that the injury complained of is not only not covered by, but is excluded from the policy.

The Injury Alleged In the Mission Linen Falls Squarely Within The Policy Exclusion

The RLI Policy explicitly excludes from coverage the cost of removal, nullification, and cleaning up environmental contamination. Therefore, there can be no doubt that RLI had no duty to defend insofar as plaintiff in the Underlying Action sought damages for the cost of removing, nullifying or cleaning up contaminating substances.

The Policy exclusion applies when the complaint itself makes no factual allegations which suggest any injury besides seeking contribution for CERCLA response costs that Mission Linen has incurred or will incur.


The court made it a point, in the first two paragraphs of the opinion that the parties and counsel are encouraged by the court to contact the offices of United States Senators Feinstein and Harris to address this Court’s inability to accommodate the parties and this action, regardless of the fact that the opinion resulted in a final judgment.  Noting that Civil trials set before Chief Judge O’Neill trail until he becomes available and are subject to suspension mid-trial to accommodate criminal matters. Regardless of its lack of time and resources the court reached a lengthy, fair, reasonable and clear opinion.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

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 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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