BEWARE OF THE POLLUTION EXCLUSION

Last year, I discussed a federal court's application in the Scottsdale case of the "pollution exclusion" to deny insurance coverage to a water utility of alleged claims that it furnished water containing a contaminant. ("Insurance Pollution Exclusion Applied To Water Supply Contamination", April 23, 2012)

In February of this year, an Illinois state appeals court reached the same conclusion regarding the same municipal-owned water utility.
The village sought insurance company defense or indemnity of suits alleging that it had knowingly and routinely mixed polluted water into its distributed water. The appeals court affirmed the trial court's decision that all such claims fell within the absolute pollution exclusion provisions of the insurance policies involved and, therefore, the insurance companies had no responsibility for the claims. (Village of Crestwood v. Ironshore Specialty Insurance Company, 2013 IL App (1st) 120112 February 22, 2013)

The village argued that the pollution exclusion was developed in the insurance industry to deal with "traditional environmental pollution" which could have significant impacts on land, water and air, with substantial resulting costs. It asserted that the alleged water contamination by it did not fall within traditional pollution excluded from insurance coverage by prior court decisions.

The Illinois court rejected the village's argument. It stated that the cases "make clear that the Village's knowing contamination of the Crestwood water supply with chemical-laden groundwater and subsequent distribution of that contaminated combination is a textbook example of 'traditional environmental pollution.' It is undisputed that the chemicals in the Crestwood water supply were contaminants or pollutants as those terms were used in the insurance policies at issue. The policies define 'pollutants' as 'any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste material.'" The court stated that the pollution exclusion "is unqualified and absolute and entirely precludes coverage for bodily injuries or property damage."

In passing, the court distinguished two out of state decisions relied on by the village that appear to suggest that coliform bacteria and giardia parasites in water are not "pollutants" within the scope of a pollution exclusion. I would find it difficult to assert that bacteria and substances such as giardia and cryptosporidium are not "pollutants".

Apart from the usual insurable risks, water utilities have two unique risks. First, they furnish a product--water That water must be in compliance with the Safe Drinking water Act provisions. But it also may contain unregulated constituents that could be subject to alleged claims. Further the water may have to meet certain pressure and volume requirements, the failure to attain may also result in claims. Second, water utilities can impact adjoining properties if, for example, there is a chlorine leak.

The resulting conclusion from these cases is that an diligent water utility will assure that any pollution exclusion is deleted from its insurance coverage and that it obtains product liability insurance coverage sufficient to protect against estimated liability risks.