The Scope of Absolute and Total Pollution Exclusions

An issue currently in the forefront of this debate involves whether absolute and total pollution exclusions bar coverage for personal injuries arising from toxic fumes released during the insured's normal business operations. This article focuses on three relevant decisions recently issued by the highest courts in Washington, Maryland, and New Jersey. These cases are noteworthy because the analyses used to determine the applicability of the pollution exclusion vary significantly. One court applied the exclusion as written to bar coverage, another held that the exclusion did not apply based on a theory akin to 'regulatory estoppel,' and the third found the exclusion ambiguous as applied to the type of toxic fumes in question. These divergent analyses and rulings reflect the continuing judiciary divide concerning whether to apply pollution exclusions as written.

Quadrant Corp. v. American States Ins. Co.

In Quadrant Corp. v. American States Ins. Co., 154 Wash.2d 165, 110 P.3d 733 (2005), the Washington high court construed an absolute pollution exclusion as written and held that it applied to preclude coverage for alleged bodily injury and property damage caused by the inhalation of toxic fumes released during the application of waterproofing sealant. The relevant facts and the Quadrant court's analysis are summarized below.

The sealant in question was applied to the surface of a deck, which was adjacent to an apartment unit. The tenant of the apartment unit sued the owners of the apartment and the entity that applied the sealant alleging that she sustained bodily injury and property damage due to toxic fumes that emanated from a chemical contained in the sealant and migrated into her apartment unit. Id. at 168, 110 P.3d at 735.

The apartment building owners had obtained liability coverage for accidents that occurred at the building and also were additional insureds under the insurance policy purchased by the company that applied the waterproofing sealant. Id. at 169, 110 P.3d 736. The insured owners, but not the company which applied the sealant, sued its carriers after they each denied coverage for the tenant's tort claim based on the pollution exclusions contained in the policies. Id.

The trial court granted summary judgment in favor of the insurers, and the intermediate appellate court affirmed. On appeal to the Washington Supreme Court, the insureds argued that, based on the court's prior decision in Kent Farms, Inc. v. Zurich Insurance Company, 140 Wash.2d 396, 998 P.2d 292 (2000), the absolute pollution exclusion applied only to 'traditional environmental' pollution and, on this theory, did not apply to toxic sealant fumes. The insureds also argued that interpreting the pollution exclusions without an 'environmental' restriction would render their insurance policies illusory.

The high court began its analysis by noting that while there is a split in authority outside of Washington, 'a majority of … courts has concluded that absolute pollution exclusions unambiguously exclude coverage for damages caused by the release of toxic fumes.' Quadrant, at 173, 110 P.3d at 738 (citations omitted).

The high court reaffirmed the general rule of construction that if policy language is clear and unambiguous, courts must enforce the language as written and not resort to extrinsic 'intent' evidence. Id. at 172, 110 P.3d 737. Agreeing with the intermediate appellate court, the high court held that the pollution exclusion applied to bar coverage, finding that '[b]ecause the tenant in this case was injured by fumes emanating from water proofing material that was being used as intended, the air in her apartment was 'polluted.” Id. at 179, 110 P.3d 741. According to the Quadrant court, the sealant fumes in question fell 'unambiguously' within the definition of 'pollutant,' as evidenced in part by the fact that the primary chemical in the sealant was listed as a toxic substance in the insured's material safety data sheet and under the Federal Clean Air Act. Id. at 180-181, 110 P.3d 741-42.

The Quadrant court rejected the insureds' argument that its prior decision in Kent Farms established a bright-line rule that absolute pollution exclusions apply only to traditional environmental pollution. In Kent Farms, a fuel deliveryman who was servicing a fuel tank was injured when the tank's shutoff valve malfunctioned and diesel fuel began to spill. Kent Farms, at 397-98, 998 P.2d 293. When the deliveryman attempted to re-attach the valve, he was doused with fuel, some of which he ingested. Id. at 398, 998 P.2d 293. The deliveryman sued the farm and, after the farm's insurance company denied the claim based on an absolute pollution exclusion, the farm sued its insurer seeking to recover defense and indemnity costs associated with the underlying suit.

The Kent Farms court framed the issue as whether the deliveryman's alleged injury was caused by a 'pollutant acting as a pollutant.' Id. at 402, 998 P.2d 296. Applying this test, the court held that the pollution exclusion did not bar coverage because the deliveryman alleged that his injuries arose from a defect in the shutoff valve, not the toxic nature of the fuel. The court opined:

The claimant was not polluted by diesel fuel. It struck him; it engulfed him; it choked him. It did not pollute him. Most importantly, the fuel was not acting as a 'pollutant' when it struck him any more than it would have been acting as a 'pollutant' if it had been in a barrel that rolled over him, or if it had been lying quietly on the steps waiting to trip him. Id. at 401, 998 P.2d 295 (emphasis added).

Because the Kent Farms court found that it was, at best, ambiguous as to whether the pollution exclusion applied to the underlying claim, the court looked beyond the 'four-corners' of the policies and relied on extrinsic information to determine 'the purpose and scope of the exclusion.' Id. at 399, 998 P.2d 294. Quoting a few select statements made by other courts, the court concluded that the initial purpose of the absolute pollution exclusion was to apply to 'those situations in which injury was caused by environmental damage.' Id. at 401, 998 P.2d 292 (emphasis in the original). As a result, the Kent Farms court held that the insured reasonably believed that injuries arising from faulty equipment would be covered and beyond the scope of the exclusion based on the court's finding that the underlying injury was not caused by the toxic nature of the fuel. Id. at 402, 998 P.2d 295.

Noting that an absolute pollution exclusion 'can be ambiguous with regards to the facts of one case but not another,' the Quadrant court distinguished Kent Farms because the underlying injury in Quadrant arose from the toxic/polluting nature of the sealant fumes, whereas in Kent Farms the toxic substance was not central, only incidental, to the underlying injury. Quadrant, at 181, 110 P.3d 742. Because the Quadrant court found that the absolute pollution exclusion unambiguously applied to the toxic sealant fumes, it flatly rejected the argument (adopted by the dissent) that extrinsic evidence was admissible to determine the historical purpose of the absolute pollution exclusion. The majority opined:

The dissent … asserts that an average purchaser of a general liability policy would not understand that the pollution exclusion would apply in these circumstances. But this analysis ignores the plain language of the pollution exclusions, which apply to ”bodily injury' or 'property damage' arising out of the actual … dispersal, seepage, migration, release or escape of pollutants' including 'fumes' … Id. at 181 n.9, 110 P.3d 742 (emphasis in the original).

Finally, the Quadrant court addressed the insureds' argument that applying the absolute pollution exclusion to toxic fumes (ie, nontraditional pollution) would result in the exclusion barring all 'occurrences' otherwise covered under the insurance policies in question. The court noted that Kent Farms, a decision where an absolute pollution exclusion was not applied even though the occurrence involved alleged injury due to an irritant and/or contaminant (ie, diesel fuel), illustrated the fallacy of the argument. Id. at 185, 110 P.3d 744. The Quadrant court further explained that its ruling would not preclude coverage for other types of occurrences:

We conclude that because the pollution exclusion does not preclude coverage for many accidents that could occur on the building owners' property, the exclusion does not render the insurance contracts illusory. For example, slip and fall injuries would clearly fall outside of the pollution exclusion. Therefore, the covered 'occur-rences' and excluded incidents are not mutually exclusive, and the exclusion does not render the insurance contracts illusory. Id. at 186, 110 P.3d 744.

The Quadrant court suggested in dicta that it might have agreed with the 'illusory coverage' argument had the company that applied the sealant raised it. Citing the concurring opinion issued by the intermediate appellate court, the high court noted that enforcing the pollution exclusion as written against the sealing company might 'exclude from coverage virtually all claims arising out of [that company's] business activities.' Id. at 185, 110 P.3d 744.

Nav-Its, Inc. v. Selective Ins. Co. of America

In Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110, 869 A.2d 920 (2005), the New Jersey high court addressed precisely the same question addressed in Quadrant ' whether a total pollution exclusion applies to bodily injuries arising from exposure to toxic paint and sealant fumes. Nav-Its was decided 21 days before Quadrant. The Quadrant opinion does not mention Nav-Its. In contrast to the 'plain meaning' rule of construction applied in Quadrant, the Nav-Its court did not make any attempt to construe the pollution exclusion. Instead, the court held that the insurer was precluded from asserting the pollution exclusion as a defense to coverage based on a 'regulatory estoppel' theory.

Nav-Its involved a construction contractor that purchased liability insurance to cover work performed at a shopping center. The contractor hired a subcontractor to perform painting and sealant work. An individual who leased office space in the shopping center sued the contractor alleging that he sustained various injuries due to exposure to toxic fumes released during the subcontractor's work. The contractor's insurer denied coverage based on the total pollution exclusion. The contractor/insured then sued its insurer in New Jersey state court seeking a declaration that the insurer was obligated to defend and indemnify it in connection with the toxic fumes personal injury suit.

The trial court granted summary judgment in favor of the insured, holding that the total pollution exclusion applied only to traditional environmental claims. The intermediate appellate court reversed, finding that total pollution exclusions are not necessarily limited to traditional environmental damage. Noting that the intermediate appellate court had issued conflicting decisions concerning the scope of total pollution exclusions, the New Jersey Supreme Court took the case to address 'the central issue [of] whether [it] should limit the applicability of the pollution exclusion clause to traditional environmental pollution claims.' Id. at 118, 869 A.2d 933.

The New Jersey high court did not analyze the words contained in the pollution exclusion, or whether those words applied to the alleged release of the toxic fumes in question, or what the insured or insurer understood and/or intended with respect to the exclusion at the time the relevant policy was issued. The omission of this analysis may be explained, in part, by the fact that under New Jersey law insurance policies are considered contracts of 'adhesion' and are generally construed strictly against insurance carriers. See Id. at 118-119, 869 A.2d 933-34. The court focused solely on whether the insurer was estopped from asserting the pollution exclusion as a coverage defense due to statements made in 1985 by insurance industry members to New Jersey insurance regulators regarding the scope of the absolute pollution exclusion. The information cited by the high court consisted of 1) an insurance article quoting testimony apparently provided to New Jersey insurance regulators more than 20 years ago by two individuals employed in the insurance industry to the effect that the absolute pollution exclusion would apply to some but not all types of 'operations,' and 2) a law review article written by a law professor opining that a primary purpose of the absolute pollution exclusion was to address the expansion of liability for the remediation of hazardous waste under CERCLA. Id. at 122, 869 A.2d 936.

Based on the above-referenced information, the New Jersey high court concluded that the insurance industry intended the absolute pollution exclusion to address only traditional environmental pollution, which the court defined as 'environmental catastrophe related to intentional environmental pollution.' Id. at 869 A.2d 929 (citation omitted). As a result, the Nav-Its court rejected the insurer's application of the total pollution exclusion to toxic fumes 'as overly broad, unfair, and contrary to the objectively reasonable expectations of the New Jersey and other state regulatory authorities that were presented with an opportunity to disapprove the clause.' Id. at 123-124, 869 A.2d 937.

Clendenin Brothers, Inc. v. U.S. Fire Insurance Co.

In Clendenin Brothers, Inc. v. U.S. Fire Insurance Co., 889 A.2d 387 (Md. 2006), the Maryland high court held that the pollution exclusion was ambiguous, finding that a 'reasonably prudent person' might or might not think that the exclusion applied to the toxic fumes in question. Clendenin is the first reported decision issued by a state high court that directly addresses whether a total pollution exclusion applies to preclude coverage for injuries caused by toxic manganese welding fumes. The issue was certified to the Maryland Court of Appeals (Maryland's high court) by a Maryland federal district court. In connection with the certified question, the federal district court provided the following description of the underlying tort claims: 'The plaintiffs in the underlying suits are individuals who allege that proper use of the Insureds' welding products produced harmful localized fumes containing manganese which caused bodily injury and neurological damage.' Id. at 389.

The Clendenin court first addressed whether the pollution exclusion unambiguously applied to manganese welding fumes. To make this determination, the court noted the general rule under Maryland law that 'a term of a contract is ambiguous if, to a reasonably prudent person, the term is susceptible to more than one meaning.' Id. at 393 (citation omitted). Analyzing the issue under this rubric, the court found that a reasonably prudent person could conclude that the term 'pollutant' encompasses manganese welding fumes. In making this finding, the Clendenin court relied on a decision issued by the U.S. Court of Appeals for the Fourth Circuit in National Electric Manufacturers Assoc. (NEMA) v. Gulf Underwriters Ins. Co., 162 F3d 821 (4th Cir. 1998) ' a case that also involved the application of an absolute pollution exclusion in the context of manganese welding fumes. The Clendenin court summarized NEMA as follows:

In NEMA, the only state or federal court case to date addressing this particular issue, the Fourth Circuit, applying the law of the District of Columbia, concluded that it 'need look no further than the exclusion's plain language to conclude that it explicitly applies to underlying actions.' Specifically, the court concluded that because 'the exclusion defines 'pollutant' to include any 'solid, gaseous, or thermal irritant, or contaminant,' including 'fumes,” the insurer had no duty to defend against 'welder claims arising from the release of a gaseous pollutant, specifically, 'fumes,' particulates and gases containing manganese. Id. at 394 (citation and quotations omitted).

Agreeing with the Fourth Circuit's analysis in NEMA, the Clendenin court found 'that a reasonably prudent person could conclude that that the contractually defined term 'pollutant' encompasses manganese fumes.' Id. at 395. Notwithstanding this determination, the Clendenin court found equally plausible that a reasonably prudent person might believe that manganese welding fumes created from the use of welding rods during the normal course of business operations are not a 'pollutant.' Id. The court based its finding on its determination that a toxic fume is not a 'pollutant' for purposes of the pollution exclusion unless the fume and the substance from which the fume originates both fall within the dictionary definition of 'irritant' and/or 'contaminant.' The Clendenin court explained that this interpretation was necessary to limit the scope of pollution exclusions:

Pollutant is defined under the policy as 'any solid, liquid, gaseous, or thermal irritant or contaminant.' This construction indicates that the physical matter, whether solid, liquid, gaseous, or thermal, also must be considered an 'irritant' or 'contaminant.' Moreover, the illustrative terms that follow (ie, 'including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste') logically also must qualify as irritants or contaminants. Interpreting this provision otherwise would render it virtually limitless, which we conclude could not have been the intention of either party. Id.

Although implicitly recognizing that the manganese fumes in question fell within the dictionary definition of the words 'irritant' and 'contaminant,' the Clendenin court found that a reasonably prudent person could consider manganese (ie, the substance from which the fumes originated) not to fall within either definition. Id. at 395. The court noted, apparently on the basis of judicial notice, that 'manganese, in certain concentrations and forms, has positive applications and long has been used in the normal course of business by welders.' Id.

The Clendenin court also took judicial notice of certain extrinsic information, which it found established that the pollution exclusion was intended to apply only to traditional environmental pollution. Interestingly, the information on which the Clendenin court relied did not include any extrinsic evidence relating to the intent or understanding of the policyholder or insurer involved ' ie, the parties who negotiated and operated under the specific insurance policies in question. Rather, the information cited consists of 1) excerpts from other court decisions concluding in summary fashion that the insurance industry initially intended the absolute pollution exclusion to apply primarily to environmental pollution, and 2) a prior decision wherein the court held that the terms 'discharge,' 'dispersal,' 'release,' 'escape,' 'contaminant,' and 'pollutant' are terms of art in environmental law.

Based on this information, the Clendenin court concluded 'that the current construction of the total pollution exclusion clause drafted by the Insurer was not intended to bar coverage where Insureds' alleged liability may be caused by non-environmental localized workplace fumes.' Id. at 399.

The Clendenin court concluded its opinion by stating: 'We expect that our decision notwithstanding, interpretation of the scope of the pollution exclusion clauses likely will continue to be ardently litigated throughout state and federal courts.' Id. at 399.

This statement appears prescient considering the divergent rulings and fundamentally different types of analyses applied by the Clendenin, Quadrant, and Nav-Its courts. Unless and until courts consistently apply absolute and total pollution exclusions as written, policyholders and insurers will continue to be subject to inconsistent results concerning the scope and application of these exclusions ' a situation not beneficial to either constituency.

March D. Coleman is of counsel at Steptoe & Johnson LLP. He practices in the commercial litigation department with a concentration on counseling and litigating complex insurance coverage matters for insurance companies involving toxic tort/products liability, environmental, and professional malpractice claims.

Insurance carriers and policyholders continue to engage in an ongoing debate with respect to the meaning and application of 'absolute' or 'total' pollution exclusions ' clauses that are contained in most general liability insurance policies sold since 1986. Absolute and total pollution exclusions generally preclude coverage for bodily injury or property damage 'arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants,' and define 'pollutant' to mean 'any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.'

The absolute pollution exclusion was introduced in the mid 1980s to replace the 'qualified' pollution exclusion, which ex-cluded coverage for claims 'arising out of the discharge, dispersal, release or escape … [of] irritants, contaminants or pollutants into or upon the land, the atmosphere or any water course or body of water but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.' The total pollution exclusion was introduced in the late 1980s and differs from the absolute pollution exclusion only in that it removes coverage for releases from products and for certain off-site releases of pollutants.

Despite the passage of time and extensive litigation on the subject, courts continue to be divided with respect to the scope of absolute and total pollution exclusions. Some courts apply pollution exclusions as written to injuries that arise from the 'release' of an 'irritant' or 'contaminant.' Others, however, limit their application to 'classic environmental' pollution, which these courts define to mean releases of hazardous waste into the natural environment.

An issue currently in the forefront of this debate involves whether absolute and total pollution exclusions bar coverage for personal injuries arising from toxic fumes released during the insured's normal business operations. This article focuses on three relevant decisions recently issued by the highest courts in Washington, Maryland, and New Jersey. These cases are noteworthy because the analyses used to determine the applicability of the pollution exclusion vary significantly. One court applied the exclusion as written to bar coverage, another held that the exclusion did not apply based on a theory akin to 'regulatory estoppel,' and the third found the exclusion ambiguous as applied to the type of toxic fumes in question. These divergent analyses and rulings reflect the continuing judiciary divide concerning whether to apply pollution exclusions as written.

Quadrant Corp. v. American States Ins. Co.

In Quadrant Corp. v. American States Ins. Co. , 154 Wash.2d 165, 110 P.3d 733 (2005), the Washington high court construed an absolute pollution exclusion as written and held that it applied to preclude coverage for alleged bodily injury and property damage caused by the inhalation of toxic fumes released during the application of waterproofing sealant. The relevant facts and the Quadrant court's analysis are summarized below.

The sealant in question was applied to the surface of a deck, which was adjacent to an apartment unit. The tenant of the apartment unit sued the owners of the apartment and the entity that applied the sealant alleging that she sustained bodily injury and property damage due to toxic fumes that emanated from a chemical contained in the sealant and migrated into her apartment unit. Id. at 168, 110 P.3d at 735.

The apartment building owners had obtained liability coverage for accidents that occurred at the building and also were additional insureds under the insurance policy purchased by the company that applied the waterproofing sealant. Id. at 169, 110 P.3d 736. The insured owners, but not the company which applied the sealant, sued its carriers after they each denied coverage for the tenant's tort claim based on the pollution exclusions contained in the policies. Id.

The trial court granted summary judgment in favor of the insurers, and the intermediate appellate court affirmed. On appeal to the Washington Supreme Court, the insureds argued that, based on the court's prior decision in Kent Farms, Inc. v. Zurich Insurance Company , 140 Wash.2d 396, 998 P.2d 292 (2000), the absolute pollution exclusion applied only to 'traditional environmental' pollution and, on this theory, did not apply to toxic sealant fumes. The insureds also argued that interpreting the pollution exclusions without an 'environmental' restriction would render their insurance policies illusory.

The high court began its analysis by noting that while there is a split in authority outside of Washington, 'a majority of … courts has concluded that absolute pollution exclusions unambiguously exclude coverage for damages caused by the release of toxic fumes.' Quadrant, at 173, 110 P.3d at 738 (citations omitted).

The high court reaffirmed the general rule of construction that if policy language is clear and unambiguous, courts must enforce the language as written and not resort to extrinsic 'intent' evidence. Id. at 172, 110 P.3d 737. Agreeing with the intermediate appellate court, the high court held that the pollution exclusion applied to bar coverage, finding that '[b]ecause the tenant in this case was injured by fumes emanating from water proofing material that was being used as intended, the air in her apartment was 'polluted.” Id. at 179, 110 P.3d 741. According to the Quadrant court, the sealant fumes in question fell 'unambiguously' within the definition of 'pollutant,' as evidenced in part by the fact that the primary chemical in the sealant was listed as a toxic substance in the insured's material safety data sheet and under the Federal Clean Air Act. Id. at 180-181, 110 P.3d 741-42.

The Quadrant court rejected the insureds' argument that its prior decision in Kent Farms established a bright-line rule that absolute pollution exclusions apply only to traditional environmental pollution. In Kent Farms, a fuel deliveryman who was servicing a fuel tank was injured when the tank's shutoff valve malfunctioned and diesel fuel began to spill. Kent Farms, at 397-98, 998 P.2d 293. When the deliveryman attempted to re-attach the valve, he was doused with fuel, some of which he ingested. Id. at 398, 998 P.2d 293. The deliveryman sued the farm and, after the farm's insurance company denied the claim based on an absolute pollution exclusion, the farm sued its insurer seeking to recover defense and indemnity costs associated with the underlying suit.

The Kent Farms court framed the issue as whether the deliveryman's alleged injury was caused by a 'pollutant acting as a pollutant.' Id. at 402, 998 P.2d 296. Applying this test, the court held that the pollution exclusion did not bar coverage because the deliveryman alleged that his injuries arose from a defect in the shutoff valve, not the toxic nature of the fuel. The court opined:

The claimant was not polluted by diesel fuel. It struck him; it engulfed him; it choked him. It did not pollute him. Most importantly, the fuel was not acting as a 'pollutant' when it struck him any more than it would have been acting as a 'pollutant' if it had been in a barrel that rolled over him, or if it had been lying quietly on the steps waiting to trip him. Id. at 401, 998 P.2d 295 (emphasis added).

Because the Kent Farms court found that it was, at best, ambiguous as to whether the pollution exclusion applied to the underlying claim, the court looked beyond the 'four-corners' of the policies and relied on extrinsic information to determine 'the purpose and scope of the exclusion.' Id. at 399, 998 P.2d 294. Quoting a few select statements made by other courts, the court concluded that the initial purpose of the absolute pollution exclusion was to apply to 'those situations in which injury was caused by environmental damage.' Id. at 401, 998 P.2d 292 (emphasis in the original). As a result, the Kent Farms court held that the insured reasonably believed that injuries arising from faulty equipment would be covered and beyond the scope of the exclusion based on the court's finding that the underlying injury was not caused by the toxic nature of the fuel. Id. at 402, 998 P.2d 295.

Noting that an absolute pollution exclusion 'can be ambiguous with regards to the facts of one case but not another,' the Quadrant court distinguished Kent Farms because the underlying injury in Quadrant arose from the toxic/polluting nature of the sealant fumes, whereas in Kent Farms the toxic substance was not central, only incidental, to the underlying injury. Quadrant, at 181, 110 P.3d 742. Because the Quadrant court found that the absolute pollution exclusion unambiguously applied to the toxic sealant fumes, it flatly rejected the argument (adopted by the dissent) that extrinsic evidence was admissible to determine the historical purpose of the absolute pollution exclusion. The majority opined:

The dissent … asserts that an average purchaser of a general liability policy would not understand that the pollution exclusion would apply in these circumstances. But this analysis ignores the plain language of the pollution exclusions, which apply to ”bodily injury' or 'property damage' arising out of the actual … dispersal, seepage, migration, release or escape of pollutants' including 'fumes' … Id. at 181 n.9, 110 P.3d 742 (emphasis in the original).

Finally, the Quadrant court addressed the insureds' argument that applying the absolute pollution exclusion to toxic fumes (ie, nontraditional pollution) would result in the exclusion barring all 'occurrences' otherwise covered under the insurance policies in question. The court noted that Kent Farms, a decision where an absolute pollution exclusion was not applied even though the occurrence involved alleged injury due to an irritant and/or contaminant (ie, diesel fuel), illustrated the fallacy of the argument. Id. at 185, 110 P.3d 744. The Quadrant court further explained that its ruling would not preclude coverage for other types of occurrences:

We conclude that because the pollution exclusion does not preclude coverage for many accidents that could occur on the building owners' property, the exclusion does not render the insurance contracts illusory. For example, slip and fall injuries would clearly fall outside of the pollution exclusion. Therefore, the covered 'occur-rences' and excluded incidents are not mutually exclusive, and the exclusion does not render the insurance contracts illusory. Id. at 186, 110 P.3d 744.

The Quadrant court suggested in dicta that it might have agreed with the 'illusory coverage' argument had the company that applied the sealant raised it. Citing the concurring opinion issued by the intermediate appellate court, the high court noted that enforcing the pollution exclusion as written against the sealing company might 'exclude from coverage virtually all claims arising out of [that company's] business activities.' Id. at 185, 110 P.3d 744.

Nav-Its, Inc. v. Selective Ins. Co. of America

In Nav-Its , Inc. v. Selective Ins. Co. of America, 183 N.J. 110, 869 A.2d 920 (2005), the New Jersey high court addressed precisely the same question addressed in Quadrant ' whether a total pollution exclusion applies to bodily injuries arising from exposure to toxic paint and sealant fumes. Nav-Its was decided 21 days before Quadrant. The Quadrant opinion does not mention Nav-Its. In contrast to the 'plain meaning' rule of construction applied in Quadrant, the Nav-Its court did not make any attempt to construe the pollution exclusion. Instead, the court held that the insurer was precluded from asserting the pollution exclusion as a defense to coverage based on a 'regulatory estoppel' theory.

Nav-Its involved a construction contractor that purchased liability insurance to cover work performed at a shopping center. The contractor hired a subcontractor to perform painting and sealant work. An individual who leased office space in the shopping center sued the contractor alleging that he sustained various injuries due to exposure to toxic fumes released during the subcontractor's work. The contractor's insurer denied coverage based on the total pollution exclusion. The contractor/insured then sued its insurer in New Jersey state court seeking a declaration that the insurer was obligated to defend and indemnify it in connection with the toxic fumes personal injury suit.

The trial court granted summary judgment in favor of the insured, holding that the total pollution exclusion applied only to traditional environmental claims. The intermediate appellate court reversed, finding that total pollution exclusions are not necessarily limited to traditional environmental damage. Noting that the intermediate appellate court had issued conflicting decisions concerning the scope of total pollution exclusions, the New Jersey Supreme Court took the case to address 'the central issue [of] whether [it] should limit the applicability of the pollution exclusion clause to traditional environmental pollution claims.' Id. at 118, 869 A.2d 933.

The New Jersey high court did not analyze the words contained in the pollution exclusion, or whether those words applied to the alleged release of the toxic fumes in question, or what the insured or insurer understood and/or intended with respect to the exclusion at the time the relevant policy was issued. The omission of this analysis may be explained, in part, by the fact that under New Jersey law insurance policies are considered contracts of 'adhesion' and are generally construed strictly against insurance carriers. See Id. at 118-119, 869 A.2d 933-34. The court focused solely on whether the insurer was estopped from asserting the pollution exclusion as a coverage defense due to statements made in 1985 by insurance industry members to New Jersey insurance regulators regarding the scope of the absolute pollution exclusion. The information cited by the high court consisted of 1) an insurance article quoting testimony apparently provided to New Jersey insurance regulators more than 20 years ago by two individuals employed in the insurance industry to the effect that the absolute pollution exclusion would apply to some but not all types of 'operations,' and 2) a law review article written by a law professor opining that a primary purpose of the absolute pollution exclusion was to address the expansion of liability for the remediation of hazardous waste under CERCLA. Id. at 122, 869 A.2d 936.

Based on the above-referenced information, the New Jersey high court concluded that the insurance industry intended the absolute pollution exclusion to address only traditional environmental pollution, which the court defined as 'environmental catastrophe related to intentional environmental pollution.' Id. at 869 A.2d 929 (citation omitted). As a result, the Nav-Its court rejected the insurer's application of the total pollution exclusion to toxic fumes 'as overly broad, unfair, and contrary to the objectively reasonable expectations of the New Jersey and other state regulatory authorities that were presented with an opportunity to disapprove the clause.' Id. at 123-124, 869 A.2d 937.

Clendenin Brothers, Inc. v. U.S. Fire Insurance Co.

In Clendenin Brothers, Inc. v. U.S. Fire Insurance Co. , 889 A.2d 387 (Md. 2006), the Maryland high court held that the pollution exclusion was ambiguous, finding that a 'reasonably prudent person' might or might not think that the exclusion applied to the toxic fumes in question. Clendenin is the first reported decision issued by a state high court that directly addresses whether a total pollution exclusion applies to preclude coverage for injuries caused by toxic manganese welding fumes. The issue was certified to the Maryland Court of Appeals (Maryland's high court) by a Maryland federal district court. In connection with the certified question, the federal district court provided the following description of the underlying tort claims: 'The plaintiffs in the underlying suits are individuals who allege that proper use of the Insureds' welding products produced harmful localized fumes containing manganese which caused bodily injury and neurological damage.' Id. at 389.

The Clendenin court first addressed whether the pollution exclusion unambiguously applied to manganese welding fumes. To make this determination, the court noted the general rule under Maryland law that 'a term of a contract is ambiguous if, to a reasonably prudent person, the term is susceptible to more than one meaning.' Id. at 393 (citation omitted). Analyzing the issue under this rubric, the court found that a reasonably prudent person could conclude that the term 'pollutant' encompasses manganese welding fumes. In making this finding, the Clendenin court relied on a decision issued by the U.S. Court of Appeals for the Fourth Circuit in National Electric Manufacturers Assoc. (NEMA) v. Gulf Underwriters Ins. Co. , 162 F3d 821 (4th Cir. 1998) ' a case that also involved the application of an absolute pollution exclusion in the context of manganese welding fumes. The Clendenin court summarized NEMA as follows:

In NEMA, the only state or federal court case to date addressing this particular issue, the Fourth Circuit, applying the law of the District of Columbia, concluded that it 'need look no further than the exclusion's plain language to conclude that it explicitly applies to underlying actions.' Specifically, the court concluded that because 'the exclusion defines 'pollutant' to include any 'solid, gaseous, or thermal irritant, or contaminant,' including 'fumes,” the insurer had no duty to defend against 'welder claims arising from the release of a gaseous pollutant, specifically, 'fumes,' particulates and gases containing manganese. Id. at 394 (citation and quotations omitted).

Agreeing with the Fourth Circuit's analysis in NEMA, the Clendenin court found 'that a reasonably prudent person could conclude that that the contractually defined term 'pollutant' encompasses manganese fumes.' Id. at 395. Notwithstanding this determination, the Clendenin court found equally plausible that a reasonably prudent person might believe that manganese welding fumes created from the use of welding rods during the normal course of business operations are not a 'pollutant.' Id. The court based its finding on its determination that a toxic fume is not a 'pollutant' for purposes of the pollution exclusion unless the fume and the substance from which the fume originates both fall within the dictionary definition of 'irritant' and/or 'contaminant.' The Clendenin court explained that this interpretation was necessary to limit the scope of pollution exclusions:

Pollutant is defined under the policy as 'any solid, liquid, gaseous, or thermal irritant or contaminant.' This construction indicates that the physical matter, whether solid, liquid, gaseous, or thermal, also must be considered an 'irritant' or 'contaminant.' Moreover, the illustrative terms that follow (ie, 'including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste') logically also must qualify as irritants or contaminants. Interpreting this provision otherwise would render it virtually limitless, which we conclude could not have been the intention of either party. Id.

Although implicitly recognizing that the manganese fumes in question fell within the dictionary definition of the words 'irritant' and 'contaminant,' the Clendenin court found that a reasonably prudent person could consider manganese (ie, the substance from which the fumes originated) not to fall within either definition. Id. at 395. The court noted, apparently on the basis of judicial notice, that 'manganese, in certain concentrations and forms, has positive applications and long has been used in the normal course of business by welders.' Id.

The Clendenin court also took judicial notice of certain extrinsic information, which it found established that the pollution exclusion was intended to apply only to traditional environmental pollution. Interestingly, the information on which the Clendenin court relied did not include any extrinsic evidence relating to the intent or understanding of the policyholder or insurer involved ' ie, the parties who negotiated and operated under the specific insurance policies in question. Rather, the information cited consists of 1) excerpts from other court decisions concluding in summary fashion that the insurance industry initially intended the absolute pollution exclusion to apply primarily to environmental pollution, and 2) a prior decision wherein the court held that the terms 'discharge,' 'dispersal,' 'release,' 'escape,' 'contaminant,' and 'pollutant' are terms of art in environmental law.

Based on this information, the Clendenin court concluded 'that the current construction of the total pollution exclusion clause drafted by the Insurer was not intended to bar coverage where Insureds' alleged liability may be caused by non-environmental localized workplace fumes.' Id. at 399.

The Clendenin court concluded its opinion by stating: 'We expect that our decision notwithstanding, interpretation of the scope of the pollution exclusion clauses likely will continue to be ardently litigated throughout state and federal courts.' Id. at 399.

This statement appears prescient considering the divergent rulings and fundamentally different types of analyses applied by the Clendenin, Quadrant, and Nav-Its courts. Unless and until courts consistently apply absolute and total pollution exclusions as written, policyholders and insurers will continue to be subject to inconsistent results concerning the scope and application of these exclusions ' a situation not beneficial to either constituency.

March D. Coleman is of counsel at Steptoe & Johnson LLP. He practices in the commercial litigation department with a concentration on counseling and litigating complex insurance coverage matters for insurance companies involving toxic tort/products liability, environmental, and professional malpractice claims.