Thirty years ago, recognizing that comprehensive general liability (CGL) insurance policies were “tailor made” to provide coverage for most pollution-related injuries, insurers added an exclusion to CGL policies in an attempt to avoid coverage for such claims.1
Depending on how the pollution exclusion is read, its breadth may effectively render the insurance coverage under CGL policies illusory. In 1997, the Illinois Supreme Court first construed the standard pollution exclusion and found that its reach is limited to “traditional environmental contamination.” However, the Illinois Supreme Court left the question of what constitutes “traditional environmental contamination” to future courts for determination on a case-specific basis.
The 20 years since the Illinois Supreme Court first addressed the pollution exclusion have yielded a host of different conclusions as to what constitutes “traditional environmental contamination.” In the most recent foray into this subject, Country Mutual Insurance Company v. Bible Pork, Inc., an Illinois appellate court2, construing the pollution exclusion, posed a question that may open the door to a significant expansion of the defense obligation owed by insurers under CGL policies in the context of environmental claims. The court suggested that the question, whether permitted emissions may constitute traditional environmental pollution that is excluded, raises an ambiguity in the exclusion and offers an additional weapon to the enterprise risk management arsenal of policyholders seeking coverage for the expense associated with defending against environmental claims.
Injunctive relief may constitute ‘damages’
Bible Pork also discusses another issue insurers frequently invoke as a basis to deny insurance coverage for environmental claims. Bible Pork addresses whether a lawsuit seeking injunctive relief may constitute a claim for “damages” for the purposes of the insurer’s duty to defend. Many environmental claims are tied to governmental demands for the remediation of sites owned by the policyholder.
For example, a policyholder may receive a notice from a governmental agency identifying it as a potentially responsible party (PRP) in connection with environmental conditions found at a site owned by it. The notice from the governmental entity will commonly demand action by the landowner as opposed to making what may traditionally be labeled a claim for “damages.” Under such circumstances, the insurer is likely to assert that the government’s notice is not a claim encompassed by the CGL policy because there is no claim for damages and deny coverage. But Bible Pork offers two approaches to supporting a claim for a defense in response to the notice.
Bible Pork arose from a policyholder’s tender of the defense of a lawsuit by adjacent property owners seeking to enjoin the use of a property as a hog factory. The property owners filed suit seeking a declaration that the proposed use would constitute public and private nuisances interfering with the use and enjoyment of their properties. In addition to the declaration, the complaints sought “such other relief as deemed appropriate.” The Bible Pork court found that the use of the phrase “such other relief as deemed appropriate” in the complaint’s prayer for relief had the potential to make the claim by the property owners into a claim for money damages.
But the Bible Pork decision also supports a claim for defense coverage in response to pre-suit PRP demands from governmental entities to policyholders. Specifically, the court noted that an order requiring remediation is, in effect, a claim for money damages because the insured is required to expend funds to accomplish the remediation. The court found that “damages,” as referred to in a CGL policy, “covers money one must expend to remedy an injury for which he or she is responsible, whether such expenditure is compelled by a court of law or by way of compensatory damages or by a court of equity by way of compliance with a mandatory injunction.”
Consequently, a demand from a governmental entity for action by a policyholder, including for environmental testing and investigation, inherently bears the risk of expense and, as such, is “damages” even if it is not expressly a demand for a sum certain.
Evading the pollution exclusion in CGL policies
A finding that a claim for remediation is potentially within the coverage of a CGL policy as a claim for “damages” does not end the inquiry. However, it shifts the burden from the policyholder showing that its claim is potentially within the coverage of the policy to the insurer to establish that it actually within an exclusion to coverage. The Bible Pork court foundthat the wastes and nuisances associated with the operation of a hog confinement facility do not qualify as “traditional environmental pollution” and so were not excluded from coverage.Bible Pork also offers a path to coverage well beyond the question of whether the nuisances associated with the operation of a hog confinement operation are “traditional environmental pollution.”
Alluding to the ambiguity caused by the breadth of the standard CGL policy’s pollution exclusion, Bible Pork went a step further in a direction that arguably provides coverage even in circumstances involving “traditional environmental pollution.” Specifically, the court noted that since the policyholder had obtained permits from the applicable regulatory agencies for the proposed use, and the emissions at issue were those addressed in the permits, it was unclear whether permitted emissions constitute “traditional environmental pollution.” Consequently, the court found that the pollution exclusion did not apply to “permitted” emissions.
The insured in Bible Pork successfully defended against the lawsuit that sought to enjoin its proposed use of its property. The cost of the litigation was substantial. Insurance coverage for defense of claims related to its proposed use to the property was an issue that should have been addressed as part of the entity’s enterprise risk management. The policyholder chose not to purchase insurance coverage specific to “pollution” claims. But as a consequence of the policyholder’s prompt tender of the claim and its aggressive response to the insurer’s denial of the claim, the policyholder was able to harvest the value of its CGL policy to fund its defense.