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USDC, Eastern District of Washington, Enforces the Pollution Exclusion in Favor of Insurer

Apr 19, 2022

Recently, Judge Bastian for the United States District Court, Eastern District of Washington, issued an opinion in favor of Country Mutual Insurance Company, holding that the pollution exclusion in two Country Mutual policies issued in Washington and Idaho, precluded liability coverage. 

At issue was whether the Country Mutual commercial general liability policies provided coverage for injuries sustained when an unlabeled, pressurized vessel containing poisonous chlorine gas, exploded as a result of being loaded into a shear for recycling. The subject insurance policies both had standard pollution exclusions stating that coverage does not apply to, among other things, bodily injury or property damage arising out of the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants,” (1) “[a]t or from any premises, site, or location which is or was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste,” and/or (2) “[w]hich are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for” any insured or an individual or organization the insured may be legally responsible. 

The Court held that the loss was excluded by the pollution exclusion.  The court explained that this was not a case where the initial peril was unrelated to the handling of disposal of pollutants and waste. Nor was it disputed that the injuries resulted from the release of pollutants “at a location” used by the insureds “or others for the handling, storage disposal, processing or treatment of waste.” The initial event was an agreement to recycle (or dispose of) the pressurized cylinder containing chlorine gas. It did not incidentally lead to the polluting harm, but rather involved pollutants and their disposal at the outset. Coverage does not apply to the initial act, notwithstanding whether the insureds knew or did not know of the cylinder’s contents. 

The insureds argued that the “efficient proximate cause” rule should result in coverage because it was the alleged negligence of the insured in failing to inspect the scrap metal and/or in failing to label the chlorine container, that was the “efficient cause” of the injuries sustained when the container exploded.  The Court acknowledged that Washington utilizes the rule of “efficient proximate cause” to provide coverage “where a covered peril sets in motion a casual chain[,] the last link of which is an uncovered peril.” (internal citations omitted). However, the alleged injuries arose from the agreement to transport and process a “pollutant” as waste—that is, chlorine gas within a metal container intended for recycling. Because a pollutant was “released” at Pacific Steel, a location which “was at any time used by or for any insured or others for the handling, storage, disposal, processing or treatment of waste,” and separately, because the pollutant-containing waste was “transported, handled, stored, treated, disposed of, or processed as waste” for an insured, even if the initial peril in this matter was the negligent identification of a metal cylinder for recycling or disposal, this still fit within the “pollution exclusion” and was therefore an uncovered peril.  

Due to the foregoing, the Court concluded that the Country Mutual insurance policies did not provide liability or property damage coverage for any personal injury claims for damages arising out of the incident, and that Country Mutual had no further duty to defend the insureds under the terms and provisions of the insurance policies. 

The Court also addressed the insureds’ arguments that Country Mutual had waived its right to assert defenses to coverage. The insureds argued that Country Mutual’s reservation of rights letter provided with respect to the Washington policy was inadequate because it was addressed to the named insured only, and was not addressed to or address each insured’s individual status as insured.  The insureds argued that the reservation of rights letter provided for the Idaho policy was defective for the same reason, and because it referenced the wrong policy number. 

The Court found neither argument persuasive. The Court noted that the first reservation of rights letter was addressed to the named insured, and in that letter Country Mutual expressly agreed to provide a defense subject to a reservation of rights to it “along with related individuals and entities named as defendants” in the relevant lawsuits, which included each of the insureds as defendants.  The Court held that the letters were sufficiently detailed because they informed the parties of the specific policy defenses Country Mutual sought to assert. Therefore, Country Mutual did not waive its defenses to coverage. 

Although the opinion, rendered by a federal district court, is not binding or controlling on Washington courts, it should nevertheless provide some persuasive value for insurers seeking to enforce the pollution exclusion in similar circumstances.