The Massachusetts Supreme Judicial Court recently held that an absolute pollution exclusion in a general liability contract excluded coverage for a home heating oil leak caused by an installer of home heating equipment. Thomas McGregor v. Allamerica Ins. Co., No. SJC-09735 (Mass. July 10, 2007).

Factual and Procedural Background

Thomas McGregor (McGregor) operated a heating and air conditioning company. In December 1994, McGregor installed a new oil burner and heating system in the home of Peter and Susan Staecker. In February 2001, the Staeckers discovered a leak in the oil supply line, causing the fuel oil in a supply tank to drain into the ground. The Massachusetts Department of Environmental Protection issued a notice of responsibility to the Staeckers and required them to assess and remediate the contamination.

The Staeckers filed an action against McGregor, alleging that McGregor negligently failed to replace the supply line that resulted in the oil leak. As a consequence, the Staeckers allege that McGregor should be liable for the remediation costs. McGregor notified its commercial general liability insurer, Allamerica Insurance Co. (Allamerica), of the Staeckers’ action and requested a defense and indemnity. Allamerica disclaimed coverage based on a “total pollution exclusion.”

McGregor filed a declaratory judgment action against Allamerica, and the parties filed cross motions for summary judgment. A lower court judge granted McGregor’s motion for summary judgment and held that the spilled oil was not a “pollutant,” as that word was used in the liability contract’s pollution exclusion.

The Massachusetts Supreme Judicial Court granted direct appellate review and reversed the lower court.

Holding

In a unanimous decision, the Massachusetts Supreme Judicial Court held that the pollution exclusion barred coverage for the fuel oil leak. The relevant part of the exclusion precluded coverage for injury or damage “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants . . .” and for “any loss, cost, or expense arising out of any: a) Request, demand, order or statutory or regulatory requirement 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’ . . .” “Pollutant” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

The Court disagreed with the lower’s court conclusion that spilled oil was not a pollutant. The Court reasoned that “a policyholder reading [the] policy could reasonably expect that oil leaking into the ground constitutes a pollutant within the meaning of the policy.” Because the Staeckers allege “just such a circumstance,” the Court held that the Stackers’ action “unambiguously fit within the pollution exclusion . . .” The Court also stated that “[a] reasonable insured would expect that oil that the Staeckers were required to clean up pursuant to an order from the [Massachusetts Department of Environmental Protection] under the [Massachusetts Oil and Hazardous Material Release Prevention and Response Act] is a pollutant.”

McGregor argued that under Atlantic Mutual Insurance Co., 413 Mass. 90 (1992) (holding that carbon monoxide from a restaurant was not a pollutant), and Western Alliance Insurance Co. v. Gill, 426 Mass. 115 (1997) (holding that lead paint in a residential rental unit was not a pollutant), the application of a pollution exclusion was limited to improper handling of hazardous waste or other pollution in an “industrial setting.” The Court rejected that argument. The Court explained that those cases “rested primarily on the observation that the harm at issue was not caused by the kind of release that an ordinary insured would understand as pollution.” Spilled oil, in contrast, “is a classic example of pollution . . .,” and the fact that the spill occurred at a residence, rather than an industrial site, “does not automatically alter the classification of spilled oil as a pollutant.”

The Court also rejected McGregor’s argument that enforcing the pollution exclusion would “effectively eviscerate” McGregor’s insurance because “any mishap in his business is likely to include a discharge of oil, soot or smoke.” The Court reasoned that the exclusion only applies to harms “arising out of” a discharge of pollutants, but the exclusion would not apply to those accidents where “oil or soot is incidentally discharged in the course of an otherwise covered event.” The Court also reasoned that not all mishaps in McGregor’s business will involve oil or other pollutants. The Court explained that “[c]osts associated with spilled oil are no less excluded by pollution exclusions merely because the insured regularly works with oil as part of his ordinary business activities. That the pollution exclusion limits the value of the policy is no reason to depart from the plain meaning of the exclusion.”

Implications

This decision confirms that, under Massachusetts law, home heating oil is a pollutant. It establishes that a pollution exclusion is not limited to an industrial setting and may apply in the residential context or to any other “classic example of pollution.” It also establishes that a pollution exclusion will apply to those insureds that regularly work with oil or another pollutant in their daily business.