Facts Rule Coverage – Pollution Exclusion Effective

Insurers do not want to cover pollution under a basic automobile insurance policy. In their generosity they take on the liability of their insureds if, as a result of a collision or upset of an insured vehicle, some pollution occurs. That does not, however give coverage for every incident of pollution related to a vehicle.

The plaintiffs, Frank Izdebski, doing business as the sole proprietor of United Energy Oil Company (United), and National Equity Properties, Inc. (National), appealed summary judgments entered against them in their consolidated cases seeking a declaration that United’s policy with Hanover Insurance Company (insurer) covered damage from an oil spill. In Izdebski v. Hanover Ins. Group, Inc., Slip Copy, 2014 Mass. App. Unpub. LEXIS 814 (Mass.App.Ct.), [enhanced version available to lexis.com subscribers], the Massachusetts Court of Appeal resolved the dispute.

BACKGROUND

Izdebski delivered 1,000 gallons of heating oil from his oil truck to a commercial building owned by National in New Bedford. The oil was transferred from the truck to the oil storage tank by a pump. In the process of the transfer, Izdebski overfilled the oil storage tank, and oil seeped out through a vent pipe from the oil storage tank onto the ground behind the building.

At the time of the spill, United’s oil truck was covered under a business auto insurance policy issued by the insurer, Hanover, whose claims adjuster determined that its responsibility for damage caused by the spill was limited to the $5,000 required by the Massachusetts mandatory endorsement, and otherwise was foreclosed under the pollution exclusion clause in the policy. The insurer issued a check to United for $5,000.

United filed a complaint seeking a declaratory judgment, alleging that the policy provided liability coverage of one million dollars and that it was entitled to recover for the clean-up of the oil spill and property damage payment to National. National also filed an amended complaint for declaratory judgment and other relief against the insurer. The insurer counterclaimed for declaratory judgment, asserting that any coverage was limited to the $5,000 that had already been paid; the insurer later moved for summary judgment in both cases, arguing that the policy contained an exclusion for pollution damage such as the oil spill and that none of the exceptions to that exclusion applied.

The judge allowed the insurer’s motions for summary judgment on the basis of the pollution exclusion clause. The policy’s pollution exclusion clause (paragraph 11) provides that coverage does not extend to any property damage: “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’: ¶ “a. That are, or that are contained in any property that is: ¶ (1) Being transported or towed by, handled, or handled for movement into, onto or from, the covered ‘auto’; ¶ (2) Otherwise in the course of transit by or on behalf of the ‘insured’; or ¶ (3) Being stored, disposed of treated or processed in or upon the covered ‘auto’; ¶ … [or] ¶ “c. After the ‘pollutants’ or any property in which the ‘pollutants’ are contained are moved from the covered ‘auto’ to the place where they are finally delivered, disposed of or abandoned by the ‘insured.’”

DISCUSSION

Language in an insurance policy must be given its ordinary meaning and construed in the sense that the insured will reasonably understand to be the scope of his coverage. Exclusionary clauses must be strictly construed against the insurer so as not to defeat any intended coverage or diminish the protection purchased by the insured.

It is undisputed that United’s truck is the covered “auto” under the policy and that the heating oil is a pollutant. It is also agreed that the spilled oil did not leak from the truck or from the pump attached to the truck while the oil was being transferred into National’s oil storage tank during delivery.

The Massachusetts court of appeal agreed with the motion judge that the polluting accident in this case comes under paragraph (a) of the pollution exclusion, because the spill happened as the polluting oil was being delivered by the pump from the tank to its intended destination. The oil was therefore, being “handled for movement … from, the covered “auto.” The plaintiffs’ argument that paragraph (a) does not apply because the oil had reached its final destination—or that the oil that was displaced was the oil already in the tank before Izdebski began to fill it ignores that the expression “arising out of,” both in coverage and exclusionary clauses, must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law. The phrase “arising out of” must be read expansively and has a broad meaning analogous to “but for” causation.

Paragraph 11c. Of the Pollution Exclusion

Paragraph (c) of the pollution exclusion provides that the policy will not cover “‘property damage’ arising out of the actual … discharge, … release or escape of ‘pollutants’” once they have been “finally delivered.” This paragraph applies because the oil spill occurred after the oil had been moved from the covered auto to the place [National's oil storage tank] where it was finally delivered by United. In fact, the plaintiffs concede that the oil spilled had been finally delivered by the insured to the customer and the release of oil occurred after delivery. They therefore agree that this exclusion may be applicable to the release of pollutants in this case.

However, the plaintiffs also argue that the exception to the paragraph (c) exclusion applies here. That exception provides that the exclusion does not apply: “to ‘accidents’ that occur away from premises owned by or rented to an insured with respect to pollutants not in or upon a covered auto if: “(1) The ‘pollutants’ or any property in which the ‘pollutants’ are contained are upset, overturned or damage[d] as a result of the maintenance or use of a covered ‘auto’; and ¶ (2) The discharge, dispersal, seepage, migration, release or escape of the ‘pollutants’ is caused directly by such upset, overturn, or damage.’” (Emphases deleted)

It follows that a fair reading of the exception is that it is intended to provide coverage for an accidental oil spill in the event that United’s truck, the covered auto, is “upset, overturned or damaged” while away from United’s premises. Here, National’s property damage occurred as a result of oil seeping out of its oil tank vent pipe after the oil, or the “pollutant,” was delivered into National’s storage tank. It was not caused by oil “upset” or “overturned” or even “damaged” by the maintenance or use of United’s delivery truck. It was caused because the tank was overfilled. The plaintiffs’ argument that the oil in National’s storage tank was “upset” by the pumping in of new oil from United’s truck strains the wording and would force the court to rewrite a policy previously agreed to by the insured and Hannover.

CONCLUSION

The appellate court ordered the trial court, therefore, to modify its judgment to include a declaration that the business auto insurance policy issued by Hanover to United does not provide coverage to United or National for the property damage claims from the oil spill that occurred from Izdebski’s delivery beyond the $5,000 required by the Massachusetts mandatory endorsement.

ZALMA OPINION

Insurance policy wording must be interpreted to provide the coverages that the words of the policy indicate was the intent of the parties. In this case it was clear that Hanover only agreed to insure pollution that resulted from an overturn, collision or other accidental damage to the coverage “auto,” the oil tanker, that was the insured auto. Since the facts were agreed that there was no damage to the tanker and the only cause of damage was the fact that Izdebski overfilled the storage tank, the pollution exclusion applied and the exceptions did not. Izdebski was entitled only to the $5,000 mandatory coverage and would have to pay out of his pocket for any costs in excess as a result of negligent acts for which his insurer did not agree to indemnify him.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2014, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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