Pollution Exclusion Unambiguous

After Insurer Proves Exclusion Applies Burden Shifts to Insured to Prove Otherwise

Pollution exclusions have been rewritten over the last few decades until courts now agree that the absolute pollution exclusion is not ambiguous. In Hiland Partners GP Holdings, LLC v. National Union Fire…, United States Court of Appeals, Eighth Circuit — F.3d —-, 2017 WL 405645 (January 31, 2017) the Eighth Circuit was faced with a claim asking it to reverse a trial court decision that the exclusion was ambiguous and did not apply to an injury suit.

FACTS

Hiland Partners GP Holdings, LLC, Hiland Partners, LP, and Hiland Operating, LLC (collectively, Hiland) sued National Union Fire Insurance Company of Pittsburgh, PA (National Union). Hiland alleged that National Union had a duty to defend and indemnify it in connection with a lawsuit arising from an explosion at its natural gas processing facility. The district court granted National Union summary judgment after concluding that an exclusion to the insurance policy barred coverage.

Hiland owns and operates a natural gas processing facility in Watford City, North Dakota. The processing facility receives gas and hydrocarbon products and processes them into byproducts for sale. Hiland entered into a master service contract with Missouri Basin Well Service (Missouri Basin). That contract provided that Missouri Basin would “from time to time, be requested by Hiland … to perform certain work or furnish certain services to Hiland.” The contract also required Missouri Basin to obtain insurance policies which named it as the primary insured and Hiland as an additional insured.

THE POLICY

Missouri Basin also procured a commercial general liability insurance policy through National Union in April 2011, which was effective through April 2012.  The policy required National Union to pay all “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ ” which the policy covered. The policy also required National Union “to defend the insured against any ‘suit’ seeking those damages.”

The policy included an endorsement which excluded coverage for: “(1) ‘Bodily Injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants…”

The endorsement defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The endorsement provided that subparagraphs (1)(a) and (1)(d) do not apply if the pollution “commences during the term of the policy,” the insured discovers the pollution within seven days “after it commences,” and the insured reports the pollution to the insurer within twentyone business days following its discovery.

THE LOSS

In October 2011, Hiland requested that Missouri Basin remove water from its hydrocarbon condensate tanks at its Watford City processing facility. Condensate is one of the marketable byproducts derived from the facility’s processing of gas and hydrocarbon products. It is a flammable, volatile, and explosive product. Missouri Basin asked B&B Heavy Haul, LLC (B&B), a subcontractor, to haul the water. After B&B employee Lenny Chapman arrived at the facility he positioned his truck in front of one of the condensate tanks. Before Chapman began removing the water, one of the tanks overflowed. The condensate then caused an explosion which seriously injured Chapman.

Chapman and his wife filed sued Hiland, alleging negligence and loss of consortium. The Chapmans later settled their claims against Hiland. National Union refused to defend and indemnify Hiland as an additional insured under its insurance policy with Missouri Basin. Hiland then sued for declaratory judgment action against National Union, arguing it was an additional insured under the insurance policy and that National Union had breached the policy by refusing to defend or indemnify it.  The trial court concluded that although Hiland was an additional insured under the policy, the Chapmans’ action fell within the pollution exclusion.

ANALYSIS

Hiland first argued that the pollution exclusion in the National Union insurance policy is ambiguous. National Union argued that Hiland waived any argument that the pollution exclusion was ambiguous because Hiland did not raise any such argument before the district court.

In its memorandum in support of summary judgment, National Union argued that the pollution exclusion in its policy “is clear and unambiguous.” Hiland chose not to contest this point in its response in opposition to summary judgment. Hiland instead argued that hydrocarbon condensate is not a pollutant under the unambiguous terms of the policy. Because Hiland did not directly dispute the ambiguity issue, it is waived.

Regardless, North Dakota has not addressed whether pollution exclusions like the one in this case are ambiguous. However, the “majority of state and federal jurisdictions have held that absolute pollution exclusions are unambiguous as a matter of law.” Church Mut. Ins. Co. v. Clay Ctr. Christian Church, 746 F.3d 375, 380 (8th Cir. 2014

Hiland next argued that the district court erred by concluding that condensate is a pollutant. National Union’s insurance policy excluded from coverage bodily injuries or property damage “arising out of the … discharge, dispersal, seepage, migration, release or escape of pollutants.” The policy defined pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The policy did not define irritant or contaminant, however. North Dakota applies “the plain, ordinary meaning” to an undefined term in an insurance policy so long as the term is not subject to strict technical usage.

According to Chapman’s complaint, condensate is a saleable byproduct that results from the processing of gas and hydrocarbon products. The complaint described condensate as “flammable, volatile, and explosive.” Condensate is therefore a contaminant because flammable, volatile, and explosive liquid and gas has the ability to soil, stain, corrupt, or infect the environment.

The conclusion that condensate is a pollutant is further supported by Noble Energy, Inc. v. Bituminous Cas. Co., 529 F.3d 642 (5th Cir. 2008). In that case Noble Energy contracted with a water hauler “to collect and dispose of Basic Sediment and Water (‘BS&W’) from Noble’s storage tanks” at an oilfield recycling facility. The water hauler was covered by an insurance policy that contained a pollution exclusion that is identical in all relevant parts to the exclusion here. While an employee of the water hauler was unloading the BS&W from a truck, condensate vapors dispersed and caused the truck’s engine to explode. The court concluded that condensate “indisputably [met] the policy’s definition of ‘pollutant’ ” and the explosion “indisputably arose out of the discharge, dispersal, release, or escape of the BS&W and its vapors.” The Eighth Circuit found Noble Energy, Inc. persuasive and indistinguishable from the current action and found that the trial court did not err.

BURDEN OF PROOF

In North Dakota the insurer has the burden to prove the applicability of a policy exclusion.”  The insured, however, carries the burden to prove the applicability of an exception to the exclusion in order to benefit from coverage. National Union met its summary judgment burden by proving the applicability of the pollution exclusion. The district court then properly placed the burden of proving the applicability of an exception to this exclusion on Hiland. Because Hiland did not offer specific facts showing that it reported the pollution to National Union within twentyone days, the district court did not err by concluding that the exception to the exclusion did not apply.

ZALMA OPINION

Insurance companies do not want to cover pollution related injuries for the standard premium charged for a Commercial General Liability insurance policy. For years courts fought over the meaning of pollution exclusions until the insurers wrote the absolute pollution exclusion that left no space to argue ambiguity. Insurers who deal with pollutants, like Highland, should be care about the coverages they acquire and make sure that the exclusion is removed and pay the extra costs.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness 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 49 years in the insurance business.

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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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