INSURANCE POLLUTION EXCLUSION APPLIED TO WATER SUPPLY CONTAMINATION

Certain residents sued their village and village officials seeking damages for alleged contamination of water furnished by the municipal water system. The village continued to use for many years a well contaminated by perc, a dry cleaning solvent, which had migrated into the soil and ground water. The state also sued the village to compel remediation.

The insurer for the village sued in federal court for a declaration that the insurer had no duty to defend the suits against the village or to indemnify the village if the residents and the state should prevail in their suits.

The insurance policies at issue were public entity general liability policies issued to municipalities. They contained a pollution exclusion of the same kind found in commercial general liability policies. The pollution exclusion excluded from coverage bodily injuries, property damage and personal injuries arising from the discharge and dispersal of pollutants and also excluded expenses arising from orders to clean up or respond to the effects of pollution.

THe federal Seventh Court of Appeals affirmed the District Court holding that the pollution exclusion applied to relieve the insurers from any responsibility for the suits by the residents and the state against the village. The Court stated: "There is no doubt that perc is a 'contaminant' within the meaning of the policies; and the tort plaintiffs are complaining about its 'dispersal' by the Village from the contaminated well to their homes via the system of water mains that connects the well to the homes."

THe Court explained that a prime rationale for the pollution exclusion relates to the impossibility of adjusting insurance premiums for the greater risk of loss potential from high risk insurance customers. Thus, the exclusion forces high risk potential polluters to self identify by buying pollution coverage. (Scottsdale Indemnity Co. and National Casualty Co. v. Village of Crestwood, US Ct App, 7th Cir., Nos. 11-2385, 11-2556,11-2583, March 12, 2012)

The lesson of this decision for a water utility, of course, is twofold: first, read and understand the utility's general liability policy, including the pollution exclusion; and second, purchase a pollution coverage rider sufficient to cover potential contamination issues.

DOES EPA HAVE JURISDICTION OVER YOUR BIRDBATH?

With the media frenzy during the recent Supreme Court oral argument in the "Obamacare" case, an important Supreme Court decision issued also in March largely was ignored.

A couple owned a 2/3 acre residential lot in Idaho, near a lake but separated from it by several lots containing permanent structures. To prepare their lot for construction of a house, they caused a portion of the lot to be filled with dirt and rock.

Months later, the couple received a compliance order from EPA. The order found that the lot contained wetlands adjacent to the lake, that the lake is a "navigable water," that the couple discharged fill material into wetlands on the site, and that they caused fill material to enter into waters of the United States and thereby discharged pollutants from a point source-a violation of the federal Clean Water Act. The compliance order demanded restoration of the lot.

The Clean Water Act provides for a civil penalty of up to $37,500 per day of violation. If a party fails to comply with a compliance order, the penalty increases to up to a total of $75,000 per day of non-compliance.

The couple believed that their lot is not subject to the Clean Water Act. However, their request for a hearing before EPA was denied. Accordingly, the couple filed suit in federal District Court for judicial review under the federal Administrative Procedure Act claiming that the compliance order was arbitrary and capricious and denied due process. The District Court dismissed the complaint and the Court of Appeals affirmed, concluding that the Clean Water Act precludes judicial review of EPA compliance orders. The Supreme Court then agreed to hear the case.

Before the Supreme Court, EPA argued that there can be no judicial review of its compliance orders. The Supreme Court unanimously disagreed, holding that the compliance order in this case is a final agency action for which there is no adequate remedy other than review under the Administrative Procedure Act, and the Clean Water Act does not preclude such review.
Justice Scalia wrote:"there is no reason to think that the Clean Water Act was uniquely designed to enable the strong-arming of
regulated parties into 'voluntary compliance' without the opportunity for judicial review-even judicial review of the question whether the regulated party is within EPA's jurisdiction."

In a concurring opinion, Justice Alito was blunt: "The position taken in this case by the Federal Government-a position that the Court now squarely rejects-would have put the property rights of ordinary Americans entirely at the mercy of Environmental Protection Agency (EPA) employees."

The appeal before the Supreme Court involved only the right to judicial review of an agency order, not the shadowy question whether the couple's lot in fact is a jurisdictional wetland. That question presumably will be addressed by the remand to the lower courts and ultimately may wind up in the Supreme Court again. However, the Court's decision allowing judicial review of the compliance order suggests its response to regulatory orders and mandates imposed without due process protections. (Sackett v. Environmental Protection Agency, Supreme Court No. 10-1062, March 21, 2012)

So. could EPA have jurisdiction over your birdbath? The question may not be just for the birds.

HOPPING DOWN THE EASTER BUNNY TRIAL

Two men, a grade school administrator and his friend, were driving around western New York during the Easter school break. One morning, they stopped for breakfast at a local cafe in a small town. There, they saw a young girl dressed in her Easter finery.

The men decided to treat the girl by getting their Easter bunny mask from their van. So, one of the men retrieved the mask, put the bunny head on and waved at the girl through a front window of the cafe. Then, he removed the mask, put it back in the van and resumed his breakfast in the cafe.

The rabbit head was a full size, 1 1/2 to 2 foot high paper-mache mask which covered a person's entire head. It had pipe-cleaner whiskers, large eyelets and enormous pink ears.

Shortly, a local bank employee called the sheriff's office to report that a customer had come into the bank with her granddaughter and said that they had just seen the Easter bunny outside the bank. The bank employee also told the sheriff that another person came into the bank saying that a man had got out of a van wearing a rabbit head and had looked into the bank's windows.

Believing the two men were bank robbers, a sheriff's officer then issued an all points bulletin (APB) to pick up and hold the two men, with a warning that they were armed and dangerous. In response to the APB, the two men were arrested at gunpoint by state police in a nearby town, hand cuffed and transported back to the sheriff's office.

After being held and questioned for almost 3 hours, the men were released, and no charges were filed. It seems that, as the men traveled into each county, they would stop and take a photo of one of them wearing the rabbit head next to the county road sign. They also had a seven foot stuffed dog in the van for the same purpose.

Subsequently, the men filed a civil rights action in federal court claiming that they were arrested without probable cause, in violation of their constitutional rights. The court found that there had been no probable cause for their arrest. (Wagner v. County of Cattaraugus, 866 F. Supp. 709, W.D.N.Y. 1994)


So, if you see the Easter bunny waving at your window, it may not be a hare raising experience after all. But if it were, the Easter bunny may well find a hare in legal soup.

DEALING WITH NITRATES IN DRINKING WATER SOURCES

In the United States, strict limits have been adopted on the permissible level of nitrates in finished water provided by public water supplies. These limits were developed particularly out of concern for infants who may be vulnerable to higher nitrate levels in drinking water.

Nitrates in ground water and surface water tend to be associated with agricultural areas where chemical fertilizers and animal manure appear to be the primary cause.

In March, 2012 the University of California at Davis released a study which allegedly found that nitrate contamination of ground water is pervasive in certain agricultural communities, where some wells have exceeded the standard. According to the study, nitrate leaching from agricultural land has caused 96% of current ground water contamination.

Nitrate impacts on surface waters such as rivers can occur from storm water farm run-off and from farm drain tiles, particularly in significant Spring rain events.

To deal with elevated nitrate levels in source waters, utilities may face complex challenges and resulting costs...costs that will have to be recovered from their customers. Installing effective treatment facilities particularly may be expensive for smaller water systems. Seeking alternative ground water supplies may not be feasible if nitrates have spread in an aquifer.

One midwest water utility which uses river water as its source of supply found that nitrate levels in the river exceeded the standard primarily only during Spring rain periods. So, it acquired an nearby empty gravel quarry to store river water during low nitrate periods, which then is blended with higher nitrate Spring river water to achieve compliance with the standard.

The same midwest utility also became proactive to work with the farm community to educate as to the impacts of over-fertilization of crop land. Through such an organizing effort, farmers began to understand not only such impacts but also the potential savings from reducing the types or quantities of fertilizer applications.

Along the same lines, a California trade group representing fertilizer manufacturers and retailers has stated that the California Department of Food and Agriculture has developed "best management practices" to mitigate nitrate contribution from fertilizer by optimizing fertilizer usage, matching nutrient supply with crop requirements to minimize nutrient losses. Such practices now may include split application of fertilizer based soil and plant testing and use of sensors for more precise nitrogen management.

So, it appears that parties concerned with both potential causes and effects of nitrate levels in drinking water sources are trying to deal with the issue.

CRUISING DOWN THE ALIMENTARY CANAL

Ater reading the story, I did not know if I had entered the twilight zone or if I had become a passenger with Captain Kirk on the Starship Enterprise.

The story told of a new project in England to develop a stand alone device within a house that will turn human waste into drinking water and hydrogen energy to generate electricity. If the development is successful, researchers believe the device could be useful in both developing and developed countries. Indeed, one researcher is quoted as saying: "In the future, we may see homes in the UK generating their own clean water, energy and fertilizer simply by doing what comes naturally to us all once or twice day."

One can speculate that there may be several issues to be resolved. For example, how will the system work in the event that occupants of a house suffer from constipation? Will the residents thirst for water or sit in the dark, much as when a windmill stops churning without wind? Will dog walkers eagerly scoop and run home to throw collections into the hopper? Will water, wastewater and electric utilities close their doors for want of users?

I am still trying to get used to the new types of toilets dictated by the federal government that flush like an erupting volcano. I wonder if the federal government also will exert jurisdiction over these new devices and their source material. Regardless, maybe those ancient alchemists had the right idea after all...only the wrong stuff.

ON WISCONSIN...OFF DISINFECTION

As discussed in a prior post, one of the most important advances in public water supply was implementation of treatment with chlorination. Adopted by utilities in early 20th century, disinfection of water ended typhoid fever as a serious concern in this country. (See "Safe Drinking Water: A Beginning", Water Lawg, January 12, 2010)

So, I was surprised to learn recently that some 60 communities in Wisconsin allegedly do not disinfect their public water supply, whether by chlorination or by any alternative methodology. Apparently, the state legislature repealed any disinfection requirement, asserting that it was an unnecessary financial and administrative burden.

Pursuant to the federal Safe Drinking Water Act, USEPA has adopted Maximum Contaminant Levels (MCLs) and Maximum Contaminant Level Goals (MCLGs) for several categories of microorganisms. Public Water Supplies must comply with MCLs for all water delivered to users. USEPA states that "there is convincing evidence that addition of a disinfectant is necessary for control of microbial contaminants." (See water.epa.gov/drink/contaminants/index.cfm)

In apparent contrast to Wisconsin, Illinois regulations require disinfection treatment with chlorine or other protocol approved by the Illinois Environmental Protection Agency. Illinois also requires chlorination before finished water enters the distribution system sufficient to maintain a specified chlorine residual in the distribution mains.

Bacteria and viruses can enter a public water supply from either surface water supplies or ground water wells. They also can enter through defects in mains or even as a result of unprotected back flows. Regardless whether disinfection is a regulatory requirement, a public water supply still must comply with MCLs for bacteria, viruses and other contaminants. A utility electing to not provide disinfection treatment may also want assure that it has adequate insurance coverage.

WHO OWNS WATER?

A recent decision of the Texas Supreme Court is thought provoking. In that state, withdrawal of ground water is subject to permitting regulation by an Aquifer Authority. Certain landowners applied for a permit to withdraw from wells a quantity of ground water to be used for irrigation purposes. The Authority denied a permit based upon historic use, and the landowners went to court.

On appeal from lower courts, the Supreme Court first reviewed the law regarding ownership of oil and gas in place under a landowner's property:

"in our state the landowner is regarded as having absolute title in severalty to the oil and gas in place beneath his land. The only qualification of that rule of ownership is that it must be considered in connection with the law of capture and is subject to police regulations. The oil and gas beneath the soil are considered a part of the realty. Each owner of land owns separately, distinctly and exclusively all the oil and gas under his land and is accorded the usual remedies against trespassers who appropriate the minerals or destroy their market value."

The Court then held that the law regarding ownership of oil and gas "states the common law regarding the ownership of ground water in place."

Having determined that the landowners own the ground water below their land, the Court then addressed the question whether denial of the requested permit to withdraw that water was a violation of the Texas constitution. The Court decided that landowners have a constitutionally compensable interest in groundwater in place. "We decide in this case whether land ownership includes an interest in ground water in place that cannot be taken for public use without compensation guaranteed by article I, section 17 (a) of the Texas Constitution. We hold that it does."

The Authority asserted "that if its ground water regulation can result in a compensable taking, the consequences will be nothing short of disastrous." It expressed concern that the financial burden of taking claims could make regulation impossible. The Court responded: "We cannot know, of course, the extent to which the Authority's fears will yet materialize, but the burden of the Taking Clause on government is no reason to excuse its applicability." (Edwards Aquifer Authority and the State of Texas v. Burrell Day and Joel McDaniel, Texas Supreme Court, No. 08-0964, 2012)

One should bear in mind that some states may not accept the notion that ground water in place is owned by the land owner. Instead, some states may have adopted the concept that a land owner simply has reasonable use of such ground water, again subject to regulation. Also, another court might decide that denial of a permit would be arbitrary or contrary to the manifest weight of the evidence, without reaching a constitutional issue. When a regulation may violate a constitutional right can be a complicated issue and will be discussed more generally in a future post.