I wrote here about Performance Transp., Inc. v. General Star Indemnity Co., 419 F.Supp. 3d 199 (D. Mass. 2019), a case in which the United States District Court for the District of Massachusetts held that a total pollution exclusion excluded coverage despite a grant of coverage in a separate endorsement.
The United States Court of Appeals for the First Circuit has overturned that case, holding that the endorsement was ambiguous as to whether the pollution exclusion applied to it. 983 F.3d 20 (2020).
The plaintiff, PTI, transports petroleum products. On February 19, 2019, a tanker truck owned by PTI overturned in New York. It spilled 4,300 gallons of fuel onto the roadway and into a nearby reservoir. PTI and the New York State Department of Environmental Conservation undertook remediation work. The cost for the work exceeded the coverage limit on PTI’s primary insurance policy.
PTI sought additional coverage from its umbrella carrier, General Star Indemnity Company. The umbrella policy included a standard total pollution exclusion. It also contained an endorsement, Endorsement 13, labelled “special hazards and fluids limitation endorsement.” Endorsement 13 provided:
This policy does not apply to ultimate net loss or costs from any event arising out of, contributed by or relating to any Special Hazard described in this endorsement and resulting from the ownership, maintenance or use of any auto. Special Hazards: A. Radiation Hazard[;] B. Underground Hazard[;] C. Drilling Fluids Unloading Hazard[.] However, this exclusion does not apply to an event arising out of the unloading of drilling fluids from an auto covered by this policy and covered by the controlling underlying insurance for the total limits of the underlying insurance, if the unloading of drilling fluids resulted directly from any of the following:
- 1. Heat, smoke or fumes from a hostile fire;
- 2. Upset or overturn of such auto;
- 3. A collision between such auto being used in your business and another object; or
- 4. A short term drilling fluid event, provided that coverage under this item
- 4: a. Will be available to bodily injury or property damage, but not damage to real property or to a body of water or to any other natural resource; and
- b. Will not be available unless written notice of the short term drilling fluid event is given to us or the controlling underlying insurance company as soon as practicable, but no more than thirty (30) days after the shipment of the drilling fluids was entrusted to your care.
If any other limit, such as a sublimit, is specified in the underlying insurance, then paragraphs 1. and 2. above will not apply unless that limit is specified in the SCHEDULE OF UNDERLYING INSURANCE.
(Bold added.)
General Star disclaimed coverage on the basis of the total pollution exclusion. PTI argued that even if the pollution exclusion applied there was coverage under the Special Hazards Endorsement which was not excluded by the pollution exclusion. The United States Court of Appeals for the First Circuit agreed, on the ground that the Special Hazards endorsement was ambiguous as to whether the pollution exclusion applied to it.
The court noted, first, that the endorsement provides that “coverage under this item 4: . . . will be available to bodily injury or property damage, but not damage to real property or to a body of water or to any other natural resources.” PTI argued that the clause qualifies as a coverage guarantee if the circumstances apply. General Star argued that the endorsement does not provide coverage if an exclusion elsewhere in the policy excludes coverage. The court noted that an in-between interpretation is that the language creates a limited coverage guarantee applicable only to item 4. (That seems to be an adoption of PTI’s argument, not an in-between interpretation.)
Second, the endorsement is titled a “limitation” but later refers to itself as an exclusion.
Third, unlike other exclusions in the policy, the endorsement itself did not provide that it did not create coverage for injury or damage otherwise excluded.
Fourth, there was substantial overlap between the total pollution exclusion and other policy terms. The total pollution exclusion had standard language disclaiming coverage for any request, demand, or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants. It defines pollution as including any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalies, chemicals and waste. But the policy contained specific exclusions for cleanup costs that appear to come within that definition. Therefore, the court held, it could not rely on the total pollution exclusion to resolve the ambiguity in the text of the special hazards endorsement.
The court concluded that since the policy was ambiguous, the endorsement must be construed in favor on the insured as a separate grant of coverage to which the pollution exclusion did not apply.
The main takeaway from this case is that insurance policies have to be read as a whole. The basic procedure in determining whether a loss is covered is to look at the grant of coverage in the policy, then any exclusions to the coverage, then exceptions to the exclusions. But, as in this case, it is often not clear whether a policy clause is a grant of coverage, an exclusion, or an exception. Here, the court held that at least arguably the Special Hazards and Fluids Endorsement was a separate grant of coverage for the drilling fluids unloading hazard. That matters because then (again, arguably) exclusions that apply to the main grant of coverage do not apply to the endorsement.
The court may have overstated the maxim that ambiguous clauses in an insurance policy are interpreted against the insurer. There is an exception to that rule if the policy was negotiated on a more equal footing between the insurer and a business (as opposed to a consumer). Here, the court referenced negotiations of the policy terms.
This umbrella policy is a little unusual because most umbrella policies are “follow form” policies: if there is coverage under the primary policy there is coverage under the umbrella policy. This policy clearly stated that it would include additional terms not in the primary policy – such as the absolute pollution exclusion. That is something that a policyholder purchasing an umbrella policy should watch out for.
Massachusetts Lawyers Weekly quotes me in an article about the case.
Nina Kallen
Attorney at Law
Nina Kallen is a Massachusetts attorney with over 25 years of experience and is the founder of the Insurance Coverage Massachusetts law blog. She specializes in insurance coverage and bad faith cases. She also drafts briefs for other attorneys in all areas of civil litigation. Connect with her on LinkedIn or through her blog via the links below:
