The South Carolina Court of Appeals recently held that a state-run insurance company owed no defense to a county public service district for offensive odors emanating from a sewage valve based on the policy’s pollution exclusion. The decision in S.C. Ins. Reserve Fund v. E. Richland Cty. Pub. Serv., No. 5393, 2016 S.C. App. LEXIS 32 (S.C. Ct. App. Mar. 23, 2016) is significant for insurers since it rejects the notion that odors must be regulated or harmful to be considered pollutants, and instead, following several other jurisdictions, applies the plain language interpretation in finding that foul odors – comprised of irritating and offensive gases – are encompassed by the pollution exclusion.
The facts are straightforward. In 2010, East Richland resident Coley Brown (“Brown”) filed a complaint against the East Richland County Public Service District (“District”) for inverse condemnation, trespass, and negligence in connection with the District’s installation of a sewage force main and air relief valve on Brown’s street that released offensive odors on Brown’s property multiple times per day. The stench ultimately caused Brown to leave the property, and he was unable to find a buyer. The District tendered the complaint to the state-run South Carolina Insurance Reserve Fund (“Fund”), which denied coverage.
The Fund initiated a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify the District in the Brown matter. The Fund denied coverage based on the pollution exclusion, which barred coverage for personal injury or property damage “arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritant, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental[.]” The Fund also denied coverage based on its position that the damages alleged by Brown did not qualify as “property damage” caused by an “occurrence.”
During trial, the District’s executive director and former maintenance superintendent testified that the sewage odor was the result of naturally occurring hydrogen sulfide and methane, that the District was not required by the Department of Health and Environmental Control to control these gases, and that in response to odor complaints, the District employed several novel corrective measures to mask or eliminate the odors.
The trial court found that the policy’s pollution exclusion barred coverage for the inverse condemnation claim. As to the negligence and trespass claims, the court determined that the pollution exclusion’s reference to gases and fumes encompassed the offensive odors delineated in Brown’s complaint. The court also found that the discharge of offensive odors were a part of the District’s ordinary operations such that the pollution exclusion’s “sudden and accidental” exception was inapplicable. Finally, the court found that there was no ambiguity between the policy’s definition of “occurrence” and the pollution exclusion. Consequently, the court determined that the Fund owed no duty to defend or indemnify the District.
On appeal, the District first argued that the pollution exclusion was void because it conflicted with provisions of the South Carolina Tort Claims Act (“Act”), which required the Fund to provide coverage for all risks for which immunity has been waived under the Act. Further, the District argued that because its decision to purchase insurance from the Fund precluded it from purchasing additional insurance from other sources, it was improperly exposed to liability for any excluded risks.
The Appellate Court rejected these arguments, finding that neither the Act nor the Act’s insurance provision expressly stated whether a pollution exclusion was a proper addition to a tort liability policy issued through the Fund. Moreover, because other state regulations mentioned pollution exclusions for general liability policies, the Appellate Court found that the inclusion of such pollution exclusions is strong evidence that the legislature did not intend to preclude the use of such exclusions in policies issued under the Act. Accordingly, the Appellate Court held that the pollution exclusion at issue was valid.
The District next argued that the pollution exclusion was inapplicable because it did not mention offensive odors or explain why such odors should be considered pollution when they are not harmful and not regulated. The Appellate Court rejected these arguments, finding the pollution exclusion applicable because the odors at issue could properly be classified as “fumes” or “gases,” both of which were listed in the exclusion. Giving these words their plain and ordinary dictionary meaning, the Appellate Court found that the word “gas” is defined as “a substance that can be used to produce poisonous, asphyxiating, or irritant atmosphere” and “fume” is defined as “a smoke, vapor, or gas esp[ecially] when irritating or offensive.” Although the District argued that the odors must be harmful in some way to be considered pollutants, the Appellate Court declined to impose such a limitation on the plain language of the policy, finding that the fact that the odors were comprised of irritating and offensive gases satisfied the ordinary meaning of the pollution exclusion’s terminology. The Appellate Court also noted that its decision comported with several other jurisdictions holding that foul odors (e.g., compost facility, animal rendering plant, pig farm manure, and treatment plant) are encompassed by such pollution exclusions.
The District lastly argued that even if the pollution exclusion applied, the exception to the exclusion created coverage because the circumstances surrounding the release of the odors were unique and unexpected. The Appellate Court dismissed this argument, holding that the release of the odors were not accidental and unexpected. Based on the testimony, the Appellate Court found that the District’s knowledge that the pumps would turn on occasionally was sufficient to demonstrate that the releasing of the odors was not only expected, but a necessary, routine and expected function of the system.