Policyholders with pollution-related liabilities in Pennsylvania scored another win in January, in the ongoing litigation battle with insurance companies that argue for the broadest possible interpretation of the "pollution exclusions" in their policies. In an important decision issued January 22, 2012, Chief Magistrate Judge Lisa Pupo Lenihan of the United States District Court for the Western District of Pennsylvania, ruled that TIG Insurance Company (formerly Transamerica) owed a defense to its policyholders, Wiseman Oil Company, Inc. and its owners, for claims brought by the United States under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), relating to environmental contamination from the historic operations of an industrial/commercial waste-treatment/reprocessing facility.

Magistrate Judge Lenihan’s Report and Recommendations concludes that an insurance company’s duty to defend exists unless the insurance company can prove, from allegations within the four corners of the complaint, that there is no chance of coverage existing. By contrast, the policyholder is permitted to introduce extrinsic evidence to demonstrate the potential for coverage, even if it does not appear on the face of the complaint. On the question of whether the insurance company owed a duty to defend to the plaintiffs in the underlying CERCLA lawsuit, the court did not find it necessary to rule definitively concerning the pollution exclusion. This was because even under the insurance company’s interpretation of the clause, a fair reading of the government’s complaint did not "expressly rule out" the possibility of insurance coverage.

The insurance policy at issue in the case was a comprehensive general liability form containing the standard form 1970 pollution exclusion. The clause states that it excludes "bodily injury or property damage arising out of the discharge, dispersal, release or escape of . . . toxic chemicals, liquids or gases, waste materials or other . . . contaminants or pollutants into or upon land . . ., but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental."

Focusing on the words "sudden and accidental" in the exception to the exclusion, the insurance company argued that it should be granted summary judgment because there were no allegations in the United States’ CERCLA complaint of a release of pollutant that was both quick and unexpected. However, like other policyholders facing similar arguments nationwide, the plaintiffs pointed out that the word "sudden" does not necessarily mean "quick" in historic insurance parlance, but rather "unexpected." The plaintiffs also argued that the insurance industry falsely represented to state insurance regulators, when the exclusion was being reviewed in 1970, that it would not be interpreted to reduce coverage that was already available for "unexpected and unintended" pollution-related liabilities. The court also noted that in its briefs, TIG had misrepresented the state of Pennsylvania law concerning the interpretation of "sudden" in the pollution exclusion, because Pennsylvania law on this issue was at best "unsettled" following the Pennsylvania Supreme Court’s landmark decision, Sunbeam Corp. v. Liberty Mutual Insurance Co.

Magistrate Judge Lenihan noted two ways in which the Sunbeam case signaled a significant change in Pennsylvania law concerning environmental insurance coverage claims. First, the Supreme Court confirmed the viability of a claim of "regulatory estoppel" in Pennsylvania as an independent cause of action. The regulatory estoppel concept is based on the dual meaning of the word "sudden," which can be interpreted as meaning "unexpected" or "quick," and on evidence that members of the insurance industry obtained regulatory approval of the pollution exclusion, in part based on statements that the exclusion would not apply to liabilities created by pollution that the policyholder neither expected nor intended, and that it would not reduce coverage. Only after securing approval for their new exclusion did insurers begin asserting that the word "sudden" in the pollution exclusion meant that all gradual (but accidental) pollution was excluded.

When the Pennsylvania Supreme Court was presented with evidence of these representations, the court stated that: "having represented to the insurance department, a regulatory agency, that the new language in the 1970 policies— ‘sudden and accidental’—did not involve a significant decrease in coverage from the prior language, the insurance industry will not be heard to assert the opposite position when claims are made by the insured policyholders." Accordingly, the court permitted claims to go forward that the insurance industry should be estopped from employing its pollution exclusion to exclude liabilities that were unexpected and unintended, even if they occurred gradually over a long period of time. In a 2008 decision (of a case on which the authors of this article worked), the Eastern District Court of Pennsylvania defined the elements of a regulatory estoppel claim: the policyholder must simply show that the insurers "made a statement to a regulatory agency" and afterwards "took a position opposite to the one presented to the regulatory agency."

The second important change in Pennsylvania law signaled by Sunbeam, and repeated in Wiseman Oil, is that the Supreme Court ruled that industry custom or trade usage is always relevant and admissible in construing commercial contracts and does not depend on any obvious ambiguity in the contract. Because evidence of industry usage and trade custom should have been considered, including evidence of the insurance industry’s memoranda interpreting the exclusion, the Supreme Court ruled that it was an error for the trial court to dismiss the complaint based on mere resort to the "common meaning" of the words "sudden and accidental" and the lower court’s opinion that those words were unambiguous.

Turning to the duty to defend, which is broader than the duty to indemnify, the court found it unnecessary to resolve the issues of regulatory estoppel and trade usage at that stage of the case. Because the duty to defend must be determined by whether the complaint contains allegations that have the potential to fall within coverage, it was enough to observe that the CERCLA complaint did not rule out the possibility that pollution releases at the Wiseman Oil property might have resulted from "sudden" and "accidental" events. Although the court acknowledged that the CERCLA complaint alleged pollution occurring over many years, and did not allege any specific pollution-release events, this did not preclude the possibility of the kind of quick-pollution event that the insurer believed was required.

The Wisemen Oil decision is only the most recent evidence that corporate policyholders with liabilities in Pennsylvania can present successful insurance claims for unexpected and unintended pollution. Because this form of the pollution exclusion was standard in virtually all of the liability insurance policies sold from 1970 through 1986, this decision demonstrates that insurance relief exists for the massive defense costs incurred by many corporate policyholders facing environmental liabilities under CERCLA or toxic tort claims.