Opinion ID: 2062885
Heading Depth: 3
Heading Rank: 1

Heading: Adoption and Approval of the Standard Pollution-Exclusion Clause.

Text: The background events that led the insurance industry to adopt the standard pollution-exclusion clause are well-documented and relatively uncontroverted. See Nancy Ballard and Peter Manus, Clearing Muddy Waters: Anatomy of the Comprehensive General Liability Pollution Exclusion, 75 Cornell L.Rev. 610, 622-27 (1990); Robert Chesler et al., Patterns of Judicial Interpretation of Insurance Coverage for Hazardous Waste Site Liability, 18 Rutgers L.J. 9, 31-38 (1986); Richard Hunter, The Pollution Exclusion in the Comprehensive General Liability Insurance Policy, 1986 U. of Ill.L.Rev. 897, 903-06; Thomas Reiter et al., The Pollution Exclusion Under Ohio Law: Staying the Course, 59 U.Cin.L.Rev. 1165, 1187-1203 (1991); E. Joshua Rosenkranz, Note, The Pollution Exclusion Through the Looking Glass, 74 Geo.L.J. 1237, 1241-53 (1986). A number of courts have also reviewed the events leading to the adoption of the pollution-exclusion clause. See New Castle County, supra, 933 F. 2d at 1196-98; Broadwell, supra, 218 N.J. Super. at 532-34, 528 A. 2d 76; Just v. Land Reclamation Ltd., 155 Wis. 2d 737, 456 N.W. 2d 570, 573-75 (1990). As both the cases and commentators acknowledge, CGL policies prior to 1966 afforded liability coverage for bodily injury and property damage caused by accident, the term accident being undefined in the standard policy. Courts generally construed the term accident to encompass ongoing events that inflicted injury over an extended period provided that the injury was unexpected and unintended from the insured's standpoint. See, e.g., Anchor Casualty Co. v. McCaleb, 178 F. 2d 322 (5th Cir.1949) (imposing coverage for damage to adjacent properties from oil flow over two-day period); Employers Ins. Co. v. Rives, 264 Ala. 310, 87 So. 2d 653 (1955) (holding property damage from gradual leakage of gasoline into well covered as accident), on remand, 38 Ala.App. 411, 87 So. 2d 646, cert. denied, 264 Ala. 696, 87 So. 2d 658 (1956); McGroarty v. Great Am. Ins. Co., 36 N.Y. 2d 358, 368 N.Y.S. 2d 172, 329 N.E. 2d 172 (1975) (imposing liability for damage caused by excavation and construction on adjacent property over several months); Ballard & Manus, supra, 75 Cornell L.Rev. at 623-24; Reiter et al., supra, 59 U.Cin.L.Rev. at 1187-88; Rosenkranz, supra, 74 Geo.L.J. at 1241-46. In 1966 the insurance industry revised its standard-form CGL policy to afford coverage based on an occurrence, which the policy defined as an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage that was neither expected nor intended from the standpoint of the insured. Ballard & Manus, supra, 75 Cornell L.Rev. at 624; Reiter et al., supra, 59 U.Cin.L.Rev. at 1190. (The 1973 version of the standard CGL policy promulgated by the ISO re-defined occurrence as an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured. Robert Tyler, Jr. and Todd Wilcox, Pollution Exclusion Clauses: Problems in Interpretation and Application Under the Comprehensive General Liability Policy, 17 Idaho L.Rev. 497, 499 (1981)). The 1966 revision of the CGL policy was generally understood to cover pollution liability that arose from gradual losses, Rosenkranz, supra, 74 Geo.L.J. at 1247, and was acknowledged as having been intended to broaden coverage    by avoiding an implication that there was no coverage for a continuing condition as distinguished from a sudden event. Robert Keeton, Basic Text on Insurance Law, § 5.4c, at 300 (1971). Those courts that have attempted to trace the events leading to adoption of the pollution-exclusion clause confirm the uniform understanding of the broadened coverage afforded under the 1966 revision of the CGL policy. See, e.g., New Castle County, supra, 933 F. 2d at 1197 (The standard, occurrence-based policy thus covered property damage resulting from gradual pollution. So long as the ultimate loss was neither expected nor intended, courts generally extended coverage to all pollution-related damage, even if it arose from the intentional discharge of pollutants.); United States Fidelity & Guar. Co. v. Specialty Coatings Co., 180 Ill. App. 3d 378, 129 Ill.Dec. 306, 312, 535 N.E. 2d 1071, 1077 (Ct.) (Prior to the insertion of the pollution-exclusion in the 1970s, `occurrence-based' coverage embraced not only the usual accident, but also exposure to conditions which continued for an unmeasured period of time.), appeal denied, 127 Ill. 2d 643, 136 Ill.Dec. 609, 545 N.E. 2d 133 (1989); see also Chesler et al., supra, 18 Rutgers L.J. at 31 ([T]he inclusion of `injurious exposure to conditions' as part of the definition of accident indicated that injury resulting from a continuing process was covered under the policy.); Reiter et al., supra, 59 U.Cin.L.Rev. at 1191 (Indeed, gradual pollution was a paradigm example of what was a covered `occurrence,' a feature of the CGL policy that the insurance industry aggressively marketed and routinely emphasized.). Foreseeing an impending increase in claims for environmentally-related losses, and cognizant of the broadened coverage for pollution damage provided by the occurrence-based, CGL policy, the insurance industry drafting organizations began in 1970 the process of drafting and securing regulatory approval for the standard pollution-exclusion clause. The insurer's primary concern was that the occurrence-based policies, drafted before large scale industrial pollution attracted wide public attention, seemed tailor-made to extend coverage to most pollution situations. Rosenkranz, supra, 74 Geo.L.J. at 1251. Commentators attribute the insurance industry's increased concern about pollution claims to environmental catastrophes that occurred during the 1960s. Pollution claims burst on the insurance scene following the Torrey Canyon disaster and the Santa Barbara off-shore drilling oil spills in 1969. Hourihan, Insurance Coverage for Environmental Damage Claims, 15 Forum 551, 533 (1980). Other commentators observe that the insurance industry, concerned about public reaction to environmental pollution, desired to clarify and publicize its position that CGL policies did not indemnify knowing polluters. Reiter et al., supra, 59 U.Cin.L.Rev. at 1195-56. Consistent with that objective, the President of INA announced his company's intention to adopt the pollution-exclusion endorsement with these comments: INA will continue to cover pollution which results from an accidental discharge of effluents  the sort of thing that can occur when equipment breaks down. We will no longer insure the company which knowingly dumps its wastes. In our opinion, such repeated actions  especially in violation of specific laws  are not insurable exposures. Moreover, we are inclined to think that any attempt to provide such insurance might well be contrary to public policy. We at INA hope that our anti-pollution exclusion may help encourage many companies to take the first, crucial steps toward improving their manufacturing processes  the steps that will lead eventually to a cleaner, healthier and, we hope, happier life for all. [Charles K. Cox, Liability Insurance in the Era of the Consumer, Address Before the Annual Conference of the American Society of Insurance Management (Apr. 9, 1970), quoted in Robert S. Soderstrom, The Role of Insurance in Environmental Litigation, 11 Forum 762, 767 (1976).] Whatever may have been the industry's motivation, the General Liability Governing Committee of the Insurance Rating Board (IRB) (successor to the National Bureau of Casualty Underwriters) authorized its drafting committee to consider the question and determine the propriety of an exclusion, having in mind that pollutant-caused injuries were envisioned to some extent in the adoption of the current occurrence basis of coverage, and some protection is afforded by way of the definition of this term. [Reiter et al., 59 U.Cin.L.Rev. at 1197 (footnote omitted).] The end-product of the IRB's drafting effort was the standard pollution-exclusion clause, supra at 11, 629 A. 2d at 836, which became known as exclusion f of the standard form CGL policy. According to one member of the drafting committee, the pollution-exclusion clause allowed the underwriters to perform their traditional function as insurers of the unexpected event or happening and yet    [did] not allow an insured to seek protection from his liability insurers if he knowingly pollute[d]. Francis X. Bruton, Historical Liability and Insurance Aspects of Pollution Claims, Proceedings of Insurance, Negligence and Compensation Law Section, ABA, 1971, at 311, quoted in Soderstrom, supra, 11 Forum at 768. Other commentators have expressed similar conclusions about the central purpose of the pollution-exclusion clause. See, e.g., Soderstrom, supra, 11 Forum at 767 (By the use of the pollution-exclusion endorsement    [c]overage for willful, intentional or expected violations was to be excluded.); S. Hollis M. Greenlaw, The CGL Policy to the Pollution Exclusion Clause: Using the Drafting History to Raise the Interpretation Out of the Quagmire, 23 Colum.J.L. & Soc.Probs. 233, 246 (1990) (Yet although the language of the pollution-exclusion clause is ambiguous, intra industry statements made contemporaneously with the drafting of the clause and representations made by the industry to various state insurance commissioners    reveal that the industry clearly intended to preclude coverage of the reckless polluter as well as the intentional polluter.). The New York State legislature apparently shared that view of the pollution-exclusion clause's purpose, enacting in 1971 a statute requiring policies issued to commercial or industrial enterprises to include the standard form pollution-exclusion clause, N.Y.Ins.Law § 46(13)-(14) (McKinney 1972), and offering this explanation for its adoption: For example, a polluting corporation might continue to pollute the environment if it could buy protection from potential liability for only the small cost of an annual insurance premium, whereas, it might stop polluting, if it had to risk bearing itself the full penalty for violating the law. [ New York Legis.Ann. 353-54 (1971).] As a New York appellate court explained, The conclusion thus becomes compelling that the pollution exclusion clause, mandated by statute, was intended to apply only to actual polluters. Niagara County v. Utica Mut. Ins. Co., 80 A.D. 2d 415, 439 N.Y.S. 2d 538, 540 (1981). After industry approval, the IRB and the Mutual Insurance Rating Bureau (MIRB) sought state regulatory approval to add the pollution-exclusion clause as an endorsement to standard CGL policies, apparently submitting to most if not all states in which approval was sought a standard explanatory memorandum that read in part as follows: Coverage for pollution or contamination is not provided in most cases under present policies because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence. The above exclusion clarifies this situation so as to avoid any question of intent. Coverage is continued for pollution or contamination caused injuries when the pollution or contamination results from an accident   . [ Reprinted in Ballard and Manus, supra, 75 Cornell L.Rev. at 625-26.] As the record indicates, the identical explanatory memorandum was filed by the IRB with the New Jersey Department of Insurance in May 1970. The Attorney General's amicus brief observes that the industry's submission of the pollution-exclusion clause and its approval by the Department of Insurance were specifically required by New Jersey's statutory provisions regulating rates for insurance coverage, N.J.S.A. 17:29A-1 to -28, although no rate change was sought with respect to the pollution-exclusion clause. We take note of other provisions of the insurance statutes that require approval of commercial-insurance policy provisions in order to prevent the issuance of policy forms that are inequitable or misleading. See N.J.S.A. 17:29AA-11. We assume that most states had in effect comparable regulatory provisions that mandated the submission of the pollution-exclusion clause for state approval. In considering the IRB's explanatory memorandum concerning the effect of the pollution-exclusion clause  which the record suggests was the only explanation offered to New Jersey insurance officials  we accord special significance to the process by which that clause gained approval in New Jersey and other states. Realistically, once the clause gained regulatory approval, it was uniformly adopted as an endorsement to the standard-form CGL policies that were issued to innumerable commercial enterprises and governmental agencies for more than a decade. The abundant case law called to our attention by counsel for all parties may be regarded merely as an illustrative sample of the virtually universal inclusion of the standard clause, or one of its derivatives, in CGL policies issued throughout the United States. Of course, after regulatory approval the specific provisions of the pollution-exclusion clause ordinarily were not negotiable by purchasers of CGL policies. As some commentators observe, the typical commercial insured rarely sees the policy form until after the premium has been paid. Ballard and Manus, supra, 75 Cornell L.Rev. at 621; W. David Slawson, Mass Contracts: Lawful Fraud in California, 48 S.Cal.L.Rev. 1, 12 (1974). Accordingly, to the extent that the pollution-exclusion clause ever was subjected to arms-length evaluation by interests adverse to the insurance industry, that evaluation occurred only when the clause was submitted to and reviewed by state regulatory authorities. In considering the accuracy of the IRB's explanatory memorandum, we note that the insurance companies in this litigation, and in general, assert the position that the pollution-exclusion clause precludes coverage for all pollution damage, whether or not intended, unless the discharge of pollutants was sudden (meaning abrupt) and accidental, or a so-called boom event. That being the industry's understanding of the effect of the pollution-exclusion clause, the first two sentences of the explanatory memorandum to state regulators are, to say the least, paradigms of understatement: Coverage for pollution or contamination is not provided in most cases under present policies because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence. The above exclusion clarifies this situation so as to avoid any question of intent. The first sentence is simply untrue. As discussed, supra at 32-33, 629 A. 2d at 849-850, the 1966 version of the CGL policy covered property damage from gradual pollution and imposed no restriction on the suddenness of the pollutant discharge. We repeat the Third Circuit's observation in New Castle, supra: The standard, occurrence-based policy thus covered property damage resulting from gradual pollution. So long as the ultimate loss was neither expected nor intended, courts generally extended coverage to all pollution-related damage, even if it arose from the intentional discharge of pollutants. [933 F. 2d at 1197.] For that matter, the appendix filed by the Attorney General contains the MIRB's Explanatory Memorandum of Changes submitted to the New Jersey Department of Banking & Insurance in support of the 1966 revision of the CGL policy. That memorandum stated: Coverage has been broadened to an occurrence basis which is defined in the jacket. The definition reinforces the intent that the injury be fortuitous from the insured's standpoint and by the addition of coverage for injurious exposure to conditions eliminates the connotation of suddenness previously intended as respects coverage on an accident basis. [Emphasis added.] In the context of the generally-recognized broad coverage afforded by the pre-existing occurrence policies for property damage caused by pollution, the industry's statement that such coverage is not provided in most cases under present policies is not only astonishing but inaccurate and misleading as well. As is widely acknowledged, even by commentators sympathetic to the insurers' position, the industry's primary concern in 1970 was that the occurrence-based policies seemed tailor made to extend coverage to most pollution situations. Rosenkranz, supra, 74 Geo. L.J. at 1251. See supra at 33-35, 629 A. 2d at 849-850. The second sentence is even more misleading than the first. It states that [t]he above exclusion clarifies this situation so as to avoid any question of intent, undoubtedly referring back to the immediately preceding clause that reads because the damages can be said to be expected or intended and thus are excluded by the definition of occurrence. Undeniably, the pollution-exclusion clause does avoid any question of intent because the clause excludes all coverage for unintentional pollution damage except for that caused by sudden and accidental discharges. But to characterize so monumental a reduction in coverage as one that clarifies this situation simply is indefensible. Stated accurately, the pollution-exclusion clause, as construed today by the industry, eliminates all coverage for unintended pollution-caused damage that the occurrence-based policy had provided, except for the unusual boom-event type case in which the discharge of the pollutants was both sudden  meaning abrupt  and accidental. To describe a reduction in coverage of that magnitude as a clarification not only is misleading, but comes perilously close to deception. Moreover, had the industry acknowledged the true scope of the proposed reduction in coverage, regulators would have been obligated to consider imposing a correlative reduction in rates. The succeeding sentence of the explanatory memorandum continued to camouflage the literal effect of the pollution-exclusion clause: Coverage is continued for pollution or contamination caused injuries when the pollution or contamination results from an accident   . In asserting that coverage for pollution-caused injuries is continued, the statement does not alert regulators to the critical change effected by the clause: under the occurrence-based policy, coverage was afforded if the property damage was accidental; under the pollution-exclusion clause, even if the property damage is accidental, no coverage is afforded unless the discharge of pollutants is both sudden and accidental. The memorandum utterly obscures that distinction, and the conclusion is virtually inescapable that the memorandum's lack of clarity was deliberate. Supplemental explanations submitted by the IRB to state regulatory agencies were similarly lacking in candor. As noted by a Georgia federal court, the IRB informed the Georgia Insurance Department by letter of June 10, 1970, that the impact of the [pollution exclusion clause] on the vast majority of risks would be no change. It is rather a situation of clarification   . Coverage for expected or intended pollution and contamination is not now present as it is excluded by the definition of occurrence. Coverage for accidental mishaps is continued [except for the risks described in the filing]. [ Claussen v. Aetna Casualty & Sur. Co., 676 F. Supp. 1571, 1573 (S.D.Ga. 1987) (quoting letter from R. Stanley Smith, Manager of the Insurance Rating Board, to the Georgia Insurance Department, June 10, 1970), question certified by 865 F. 2d 1217 (11th Cir.), certified question answered by 259 Ga. 333, 380 S.E. 2d 686, answer to certified question conformed to 888 F. 2d 747 (11th Cir.1989), on remand, 754 F. Supp. 1576 (S.D.Ga. 1990).] That letter prompted the Court to observe: The Court does not wish to condone the conduct of the insurance industry that plaintiff has exposed. The statements made by the Insurance Rating Board to the Georgia Insurance Department, if not fraudulent, certainly were not straightforward. The Rating Board down played the substantial effect the pollution exclusion clause would have on existing coverage in an effort to obtain approval for the clause's insertion into insurance policies. [ Ibid. ] Similarly, in the course of regulatory proceedings before the West Virginia Commissioner of Insurance, the MIRB submitted a supplemental memorandum to explain the purpose of the exclusion: This endorsement is actually a clarification of the original intent, in that the definition of occurrence excludes damages that can be said to be expected or intended. George Pendygraft et al., Who Pays for Environmental Damage: Recent Developments in CERCLA Liability and Insurance Coverage Litigation, 21 Ind.L.Rev. 117, 154 (1988). In reliance on the industry's submissions, the West Virginia Insurance Commissioner approved the pollution-exclusion in a written order that stated in part: The said companies and rating organizations have represented to the Insurance Commissioner, orally and in writing, that the proposed exclusions    are merely clarifications of existing coverage as defined and limited in the definitions of the term occurrence, contained in the respective policies to which said exclusions would be attached; (2) To the extent that said exclusions are mere clarifications of existing coverages, the Insurance Commissioner finds that there is no objection to the approval of such exclusions[.] [ Reprinted in Joy Technologies v. Liberty Mut. Ins. Co., [187 W. Va. 742], 421 S.E. 2d 493, 499 (1992).] Insurance departments in at least two other states expressed concern over the industry's submission of the pollution-exclusion clause. In June 1970, the Kansas Commissioner of Insurance addressed several questions to the IRB. One question reflected the Commissioner's assumption that the current definition of occurrence provided coverage for property damage caused by pollution. He wrote: It appears that the General-Automobile Liability policy now provides coverage for contamination and pollution. Please confirm. The IRB's response to the Commissioner's inquiry was inaccurate and misleading. It tracked the language of the explanatory memorandum submitted to state regulators, and did not attempt to explain or to disclose the full intended impact of the pollution-exclusion clause: It is our opinion that coverage for pollution or contamination is not provided under the present General-Automobile Liability policy because the damages can be said to be expected or intended, and thus are excluded by the definition of occurrence. It should be noted that the proposed endorsements will definitely clarify the situation. The Insurance Commissioner of Puerto Rico apparently disapproved the pollution-exclusion clause when it initially was filed, prompting a supplemental letter from the IRB to the Commissioner. The IRB's letter sheds no light whatsoever on the restriction of coverage that the industry intended to achieve through the pollution-exclusion clause: We certainly appreciate that where an insured acts in violation of the law, the policy does not provide coverage for the consequences of such acts. The exclusion is not aimed at taking care of such a situation. Rather, it is designed to clarify the policy as respects other situations where questions of intent might arise. Such questions usually arise when, with respect to a particular situation, the policy does not clearly spell out what is and is not covered in terms clearly understood by the insured or his representative. Relying solely upon the policy definition of occurrence which requires that the act causing damage must not be expected nor intended by the insured, might well cause dispute as to whether in fact the act was unexpected or unintended particularly in a fact situation involving a continuous course of action. This kind of situation is often very costly to both insureds and companies since many of them are brought into court to be resolved. All too often, the courts have been deciding such questions in favor of insureds, while strongly criticizing companies for not clearly spelling out intent in the policy. The courts are insisting that policies should clearly set forth intent. When, in the courts opinion, the policy does not, companies usually end up paying out large sums of money for damages resulting from situations wherein no coverage was ever intended and for which no premium was ever charged. Under such circumstances, we strongly believe that it is both necessary and desirable to clarify as many situations as possible so as to avoid any question of intent. This is precisely what our Contamination or Pollution Exclusion is designed to do. As noted, the response to the Insurance Commissioner of Puerto Rico contains no disclosure about how the specific wording of the pollution-exclusion clause would operate to reduce substantially coverage that previously had been provided for pollution occurring over a sustained period. The conclusion is inescapable that the IRB intentionally avoided any discussion that would illuminate the magnitude of the intended restriction in coverage. Because of the regulatory history leading to approval by the various state regulatory authorities, a number of State Attorneys General, including the New Jersey Attorney General in the amicus brief filed with this Court, have urged that the pollution-exclusion clause be interpreted in a manner consistent with the industry's representations to regulatory authorities in 1970. See, e.g., Brief of Amici Curiae State of Delaware and Commonwealth of Pennsylvania, New Castle County, supra, 933 F. 2d 1162; Brief of Amicus Curiae Insurance Commissioner of West Virginia, Liberty Mut. Ins. Co. v. Triangle Indus., Inc., 182 W. Va. 580, 390 S.E. 2d 562 (1990); Memorandum of Amicus Curiae State of Indiana, in Support of Plaintiff's Motion for Partial Summary Judgment, Ulrich Chem., Inc. v. American States Ins. Co., 1990 WL 484974 (Ind.Cir.Ct. 1990) (No. 73C 01-8901-CP 016). Although the interests of states in insurance-coverage litigation are generally consistent with the interests of insureds, the assertion by several State Attorneys General of estoppel-type arguments, based on a generalized recognition that the industry's presentation of the pollution-exclusion clause to regulators was misleading, strongly suggests that the issue warrants careful and comprehensive consideration. Responding to assertions that the IRB's representations to state regulators concerning the effect of the pollution-exclusion clause were misleading, amicus curiae Aetna Casualty & Surety Co. (Aetna) argues that regulatory history should not be confused with drafting history. Referring to an affidavit submitted in the New Castle litigation by one of the drafters of the pollution-exclusion clause, Aetna contends that the intent of the drafters of the clause was to restrict pollution coverage to the classical accident or boom event, and to exclude coverage for gradual pollution. That argument was addressed directly in deposition testimony by Richard E. Stewart, Superintendent of the New York State Department of Insurance from January 1967 to December 1970 and President of the National Association of Insurance Commissioners, 1970-71 (testifying in J.T. Baker, Inc. v. Aetna Casualty & Surety Co., No. CV-4794-SSB (D.N.J. 1990)): [T]he drafting documents, the internal documents, speak of sudden in its temporal sense, and as accomplishing a serious cutback in coverage. Granted. I am not questioning the accuracy of anything in Mr. Bruton's affidavit as to what was going on. The filings with the states are completely inconsistent with that. And    do not disclose it, do not develop it, and in fact affirmatively maintain that we're just dealing with a clarification of the occurrence definition. Now, to me, and I think to other insurance people, what goes in a state filing is of much greater probative power than what is in an internal and unreleased series of memoranda. And since the  the internal communications, the drafting history documents that use temporal were not communicated outside the company bureau world, either to insureds and brokers, but only the filing documents and something like the Aetna bulletins to the field were communicated, but the filing documents are the ones that really matter, and they to me, in terms of what [a] company should be held to, contain the version of this ambiguous term which the industry should be held to. It's as simple as that, and I think it's a very straightforward answer   . [Deposition Testimony of Richard Stewart, quoted in Robert Sayler, The Emperor's Newest Clothes, Revisionism and Retreat: The Insurer's Last Word on the Pollution Exclusion, 5 Mealey's Litig. Reps., Insurance at 27, 46 (1991).]