In its recent decision in Colonial Oil Indus. v. Indian Harbor Ins. Co., 2013 U.S. App. LEXIS 12946 (2d Cir. June 25, 2013), the United States Court of Appeals for the Second Circuit, applying New York law, had occasion to consider the scope of coverage afforded under a pollution liability insurance policy.

Indian Harbor insured Colonial Oil under a Pollution and Remediation Legal Liability Policy, insuring pollution conditions on, at, under or migrating from any covered location.  The policy defined “pollution condition” as “[t]he discharge, dispersal, release, seepage, migration, or escape of POLLUTANTS into or upon land, or structures thereupon, the atmosphere, or any watercourse or body of water.” 

At issue in the litigation was Colonial Oil’s right to coverage for having delivered PCB contaminated oil to a customer.  The oil was properly deposited into the customer’s storage tank, as intended.  The presence of PCB in the oil, however, required Colonial Oil to incur costs to decontaminate and clean its customer’s tank and other equipment.  Colonial Oil argued that it was entitled to coverage under its pollution liability for these cleanup costs.  Indian Harbor, denied coverage for these costs on the basis that the policy only insured against releases of pollutants into the environment and that the transfer of oil from a tanker truck to a customer’s tank, as intended, is not a covered discharge, dispersal, release, seepage, migration or escape of a pollutant.  The United States District Court for the Southern District of New York agreed and granted Indian Harbor’s motion to dismiss.

On appeal, the Second Circuit affirmed the lower court’s ruling, observing that under New York law as set forth in numerous decisions, primarily involving interpretation of the pollution exclusion, the terms used in the policy’s definition of “pollution condition” such as discharge, dispersal, etc. are considered terms of art under environmental law relating to disposal or containment of hazardous waste.   These cases, explained the court, make clear that:

… the "reasonable expectations of a businessperson" viewing the contested Policy language would be that it is intended to provide coverage for environmental harm resulting from the disposal or containment of hazardous waste. This case-which merely involves the unwitting introduction and transfer of polluted oil into containers otherwise meant to hold that oil-does not fall within those parameters.

As such, the court agreed that Colonial Oil’s transfer of adulterated oil into its customer’s tank did not create a pollution condition for which Indian Harbor’s policy was triggered.