The Alabama Supreme Court recently agreed with a policyholder, Southern Natural Gas Company ("Sonat"), that releases of contaminants causing property damage at several compressor stations along a continuous natural gas pipeline constituted a single "occurrence" under Sonat's standard-form commercial general liability policies.

Sonat discovered in the 1980s that releases of contaminants from its natural gas pipeline stretching from Texas to Georgia were causing environmental damage. Specifically, Pydraul, a lubricating oil containing polychlorinated biphenyls, or PCBs, was used and released at all 38 compressor stations along the pipeline. PCB contamination was discovered at 13 of the stations as a result of these releases. Mercury was also discovered to have been released from metering stations along the pipeline. Sonat took remedial action at the contaminated sites.

Certain Underwriters at Lloyd's, London ("Lloyd's") issued umbrella and excess general liability policies to Sonat from 1949 to 1987. Most of the policies contained standard "occurrence" language, defining "occurrence" as "[a]n accident or a happening, event or a continuous or repeated exposure to conditions which results unexpectedly and unintentionally as applied to the Assured seeking indemnity hereunder, in . . .property damage . . .during the policy period," and stating that "[a]ll such exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed one occurrence." The Lloyd's policies further limited coverage to those amounts Sonat was "legally obligated" to pay "as damages" and excluded coverage to property "owned by" Sonat.

In 1991 Sonat notified Lloyd's of PCB and mercury contamination along its pipeline. Lloyd's denied coverage. In 2001 Sonat filed a coverage action in Alabama state court. In order to minimize the effect of multiple self-insured retentions across the years of coverage at issue, Sonat argued at trial that a single "occurrence" caused the environmental damage at representative sites chosen by the parties. The trial jury agreed with Sonat.

Lloyd's appealed, arguing in part that the trial court should have entered summary for Lloyd's on the definition of "occurrence" in the policies. Specifically, Lloyd's argued, the compressor stations were contaminated in different ways by virtue of different acts or omissions, which resulted in multiple different occurrences.

In a 72-page decision, the Alabama Supreme Court disagreed with Lloyd's, holding that Lloyd's had failed to demonstrate more than one occurrence as a matter of law. The Court first discussed the law of Alabama (and other states) holding that all damage arising from a single cause constitutes a single occurrence, unless there is a "separate, intervening cause" that "can break the chain of causation." Applying this principle to the facts at issue, the Court noted that:

Sonat had cleanup areas at each site where Pydraul (and the PCBs in that lubricant) had contaminated the groundwater; that contamination was caused by the use of Pydraul through a unitary pipeline, and the manner of operating each compressor station was the same. . . . [W]e cannot say that there was a separate intervening cause.

Although PCBs were found at different places in different compressor stations, the court held, Alabama cases recognize that "one occurrence may have multiple and disparate impacts on individuals and that injuries may extend over time." Thus the Court was not persuaded by Lloyd's arguments and upheld the jury's findings regarding a single occurrence.

The Court also rejected Lloyd's other challenges on appeal. The first challenge was that cleanup costs associated with contaminated soil and groundwater under Sonat's property were excluded by the so-called "owned property exclusion." Citing the majority position nationwide, the Supreme Court held that "on-site soil cleanup is not barred by an owned-property exclusion where there is a threat that the contaminants in the soil on the insured's property will migrate to groundwater or to the property of others."

Lloyd's second challenge was that the cleanup costs incurred by Sonat were incurred voluntarily as the result of a business decision, and therefore were not covered "damages" under its policies. The Court disagreed, noting that the cleanup obligations were compelled by federal law and a consent decree with the Mississippi Department of Environmental Quality. In any event, the court held, "we will not limit . . .damages to those arising out of a suit, claim, or action by a third party."

To read the decision in Certain Underwriters at Lloyd's of London v. Southern Natural Gas Co., click here.

Why it matters: As this case demonstrates, the number of "occurrences" at issue in a particular loss often has a profound impact on the amount of coverage available for the loss. Where one or more high deductibles are at issue, as in this case, a single-occurrence position may favor the policyholder. Conversely, where a policyholder needs multiple years of coverage to fully cover a loss, a multiple-occurrence position may be more favorable. In either case, numerous courts have held that standard-form occurrence language should be construed in a manner that maximizes coverage. That said, determining the number of occurrences at issue tends to be a highly fact-intensive inquiry, as it was in this case. In order to maximize coverage for a loss where more than one occurrence may be at issue, policyholders would be well advised to undertake a careful analysis of the number of occurrences at issue prior to submitting a claim. At the very least, this analysis should consider the applicable policy limits and deductibles, the salient facts supporting one or more occurrences, and the case law regarding number of occurrences in the relevant jurisdiction(s).