Opinion ID: 749839
Heading Depth: 2
Heading Rank: 3

Heading: Application of the Pollution Exclusion

Text: 13 We next address the insurers' further contention that they were entitled to judgment by reason of the pollution exclusion in the policy. According to Ashland's complaint, Enron and others, wrongfully or negligently, injected B-G mix, a commodity of significantly lesser value, into the crude oil common stream of the Portal Pipeline. Ashland alleged that Enron's actions violated the Portal tariff and resulted in economic damage and property damage to Ashland's refinery. 14 The policy under which Enron claims indemnity from the insurers contains the following limitation on coverage: 15 INDUSTRIES, SEEPAGE, POLLUTION AND CONTAMINATION CLAUSE 16 This insurance does not cover any liability for: 17 (1) Personal Injury or Bodily Injury or loss of, damage to, or loss of use of property directly or indirectly caused by seepage, pollution or contamination, provided always that this Paragraph (1) shall not apply to liability for Personal Injury or Bodily Injury or loss of or physical damage to or destruction of tangible property, or loss of use of such property damaged or destroyed, where such seepage, pollution or contamination is caused by a sudden, unintended and unexpected happening during the period of this insurance. 18 (2) The cost of removing, nullifying or cleaning-up seeping polluting or contaminating substances unless the seepage pollution or contamination is caused by a sudden, unintended and unexpected happening during the period of this insurance. 19 (3) Fines, penalties, punitive or exemplary damages. 20 This Clause shall not extend this Insurance to cover any Liability which would not have been covered under this Insurance had this Clause not been attached. 21 The insurers contend that this clause bars Enron's claim for indemnification because the term contamination is unambiguous under Montana law and, in accordance with its plain meaning, the injection of B-G mix into the pipeline contaminated the oil because it was rendered impure, less valuable and less useful. See Duensing v. Traveler's Cos., 257 Mont. 376, 849 P.2d 203, 206-07 (1993) (in dictum, adopting definition of contamination under the policy at issue as a condition of impurity resulting from mixture or contact with a foreign substance). The district court rejected the insurers' argument and concluded that, although contamination is not defined in the policy, it must be construed within the context of the pollution exclusion. Contamination, the court held, is an environmental term of art and applies only to discharges of pollutants into the environment. Moreover, the court determined that the pollution exclusion is ambiguous and, taking a common sense approach, rejected the insurers' interpretation as being virtually boundless and reaching far beyond the reasonable expectations of the insured, and held that it did not apply to Ashland's claim. We agree. 22 The interpretation of a contract is a matter of law. Augustine v. Simonson, 940 P.2d 116, 118 (Mont.1997). We review a district court's conclusions of law to determine if the court's interpretation or application of the law is correct. Id. 23 The principles governing the interpretation of insurance agreements are well-settled in Montana law. An insurance policy clause is ambiguous when different persons looking at the clause in light of its purpose cannot agree upon its meaning. Leibrand v. National Farmers Union Prop. & Cas. Co., 272 Mont. 1, 898 P.2d 1220, 1223 (1995); Bauer Ranch v. Mountain W. Farm Bur. Mut. Ins., 215 Mont. 153, 695 P.2d 1307, 1309 (1985). The insurers' argument demonstrates the ambiguity convincingly; under their interpretation, the exclusion would be virtually limitless, extending to claims for product liability (for example, a bottle manufactured with impure glass) or for negligence (for example, spoilt food served in a restaurant) that arguably involved an impurity resulting from contact with a foreign substance. 24 Under Montana law, [a]mbiguities in an insurance policy are construed against the insurer and exclusions or words of limitation in a policy must be strictly construed against the insurer. Leibrand, 898 P.2d at 1223. Further, exclusions from coverage will be narrowly and strictly construed because they are contrary to the fundamental protective purpose of an insurance policy. Wellcome v. Home Ins. Co., 257 Mont. 354, 849 P.2d 190, 192 (1993) (citing Farmers Union Mut. Ins. Co. v. Oakland, 251 Mont. 352, 825 P.2d 554, 556 (1992)). If the policy language is ambiguous as applied to the facts of a case, the construction most favorable to the insured should be adopted. Bauer Ranch, 695 P.2d at 1309 (citing Lindell v. Ruthford, 183 Mont. 135, 598 P.2d 616, 618 (1979)). And [i]nterpretation of this clause is naturally controlled by its own context. Oakland, 825 P.2d at 556. 25 Given these principles, we conclude that Montana courts would hold that the pollution exclusion does not bar coverage of the claimed loss. The use of the words seepage, pollution and contamination, together with the specific exclusion of the cost of removing, nullifying or cleaning-up seeping polluting or contaminating substances, sends an unmistakable message to the reasonable reader that the exclusion deals with environmental-type harms. Even if a contrary interpretation could be given to the clause, [t]he objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored.... Transamerica Ins. Co. v. Royle, 202 Mont. 173, 656 P.2d 820, 824 (1983) (quoting Robert E. Keeton, Insurance Rights at Variance with Policy Provisions, 83 Harv. L.Rev. 961, 967 (1970)); see also Wellcome, 849 P.2d at 193 (The reasonable expectations doctrine is in accord with our strong public policy that insurance is intended to serve a fundamental protective purpose; to this extent the doctrine goes hand in hand with our rule of strictly construing policy exclusions.). 26 Our conclusion is reinforced by the decisions of other courts. In Pipefitters Welfare Educ. Fund v. Westchester Fire Ins. Co., 976 F.2d 1037, 1043-44 (7th Cir.1992), the Seventh Circuit reasoned that [w]ithout some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results, and concluded that it did not apply to injuries resulting from everyday activities gone slightly, but not surprisingly, awry. In American States Ins. Co. v. Koloms, 177 Ill.2d 473, 227 Ill.Dec. 149, 158, 687 N.E.2d 72, 81 (1997), the Supreme Court of Illinois, stated that [o]ur review of the history of the pollution exclusion amply demonstrates that the predominate [sic] motivation in drafting an exclusion for pollution-related injuries was the avoidance of the 'enormous expense and exposure resulting from the explosion of environmental litigation,'  and restricted the exclusion's otherwise potentially limitless application to only those hazards traditionally associated with environmental pollution. Id. 227 Ill.Dec. at 156, 687 N.E.2d at 79. See also American States Ins. Co. v. Kiger, 662 N.E.2d 945, 948 (Ind.1996) (Clearly, this [pollution exclusion] clause cannot be read literally as it would negate virtually all coverage.). 27 The judgment is affirmed in part and reversed in part, and the matter remanded for further proceedings consistent with this opinion.