The battle over whether commercial general liability insurance policies cover pollution risks continues after nearly four decades of litigation, introduction of a series of pollution exclusions, and the start of an environmental market designed specifically to address this exposure.

Despite a few notable victories by either insurers or policyholders, significant issues remain, such as how the terms “sudden and accidental” and even “pollution” are defined by most state courts. Pollution cases generally are litigated in state courts because insurance is state regulated, legal experts say.

Moreover, the number of substances that can cause property damage and/or bodily injury—such as lead paint, mold and defective drywall—have increased and that has broadened the range of cases where courts are asked to interpret the definition of “pollution” in CGL policies.

Already, the decisions stemming from traditional environmental pollution cases, such as those involving cleanups of hazardous waste under the 1980 Superfund law, are being dredged up in new litigation over coverage for defective Chinese drywall.

And if the U.S. Supreme Court upholds American Electric Power Co. Inc. et al. vs. State of Connecticut et. al. and allows plaintiffs to file nuisance suits over greenhouse gas emissions, it could trigger another wave of pollution coverage litigation that will make the battles before now seem insignificant by comparison, coverage experts say.

Gerald Oshinsky, a partner at Jenner & Block L.L.P. in Los Angeles and a veteran policyholder attorney in the longstanding coverage dispute, said “the global warming cases are just fancy pollution cases. These cases put my kids through college, and now they're putting my grandkids through private school. The way things are going, they're going to put my great-grandkids through school, too.”

Although the pace of litigation seeking coverage for pollution risks under CGL policies picked up substantially after the passage of Comprehensive Environmental Response, Compensation and Liability Act of 1980, commonly known as Superfund, insurers began carving out pollution risks from CGL coverage using endorsements as early as 1970, said Laura Foggan, a Washington-based partner at Wiley Rein L.L.P. who has represented insurers in coverage battles throughout her 25-year career.

But that first exclusion that the New York-based Insurance Services Office Inc. approved to limit pollution coverage in CGL policies sparked an ongoing debate over the meaning of “sudden and accidental.” A narrow exception to the 1970 standard pollution exclusion preserves the coverage if such discharges are “sudden and accidental.”

“The creative advocates for policyholders managed to get some coverage by giving a nontemporal meaning to the word "sudden,'” Ms. Foggan said.

They did this by comparing it with a provision in 1950s boiler and machinery property policies that defined “sudden” as “unexpected,” said John Nevius, a partner and policyholder attorney at Anderson Kill & Olick P.C. in New York. When the “sudden and accidental” exception to the pollution exclusion started appearing in CGL policies, “it was inconsistent with how it had been used in boiler and machinery property policies,” he said.

Reversing years of pro-insurer rulings, the Oregon Supreme Court in 1996 found the absolute pollution exclusion of 1986 to be ambiguous and granted coverage to the policyholder in St. Paul Fire & Marine Insurance Co. and St. Paul Mercury Insurance Co. Inc. vs. McCormick & Baxter Creosoting Co. et al.

The decision in Oregon conflicted with a precedent-setting 1993 decision by the Florida Supreme Court in Dimmitt Chevrolet Inc. vs. Southeastern Fidelity Insurance Corp. that found the term “sudden” includes a temporal aspect, or time-sensitive element, upholding the exclusion.

The number of state courts that have upheld the 1970 pollution exclusion are equal to the number that have rejected it, putting the insurer vs. policyholder victory tally at 13 apiece, according to Munich Reinsurance Cos.' 2010 “Environmental Coverage Case Law” report, a source cited by most insurance coverage lawyers.

This mixed outcome led to the creation starting in 1986 of the “absolute pollution exclusion,” which barred coverage for all pollution, whether gradual, sudden or accidental. In 1988, ISO introduced an optional “total pollution exclusion” endorsement with the CGL policy that tried to restrict coverage even further.

But these broader exclusions have not been universally adopted by the courts, either. In fact, eight states have upheld the exclusion, nine have rejected it and seven have had conflicting high court decisions, according to Munich Re's report.

In an increasing number of cases, the decisions now turn on how the applicable pollution exclusion defines the term “pollution.” The absolute and total pollution exclusions define “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

“If you have courts that apply the exclusion only to traditional environmental pollution, then the question becomes, "What is traditional environmental pollution?' If a court concludes that the pollution exclusion applies across the board to all hazardous substances, then the litigation ends. If not, then the litigation continues,” said Randy J. Maniloff, a partner at White & Williams L.L.P. in Philadelphia who represents policyholders.

“Sometimes they take what's called the "we'll-know-it-when-we-see-it' approach,” Mr. Maniloff said.

He cited a case tried in federal court, Pipefitters Welfare Educational Fund vs. Westchester Fire Insurance Co., in which the 7th U.S. Circuit Court of Appeals examined potentially universal application of the absolute pollution exclusion. The 1993 case involved the spill of 80 gallons of PCB-laden oil from a transformer that Pipefitters, an employee benefits fund, had sold to a scrap metal dealer. The dealer cut the transformer open, causing the PCBs to spill onto the premises.

“Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope, and lead to some absurd results,” the appeals court wrote. “Reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the spilled contents of a bottle of Drano, and for bodily injury caused by an allergic reaction to chlorine in a public pool. Although Drano and chlorine are both irritants or contaminants that cause, under certain conditions, bodily injury or property damage, one would not ordinarily characterize these events as pollution.”

By contrast, in New Salida Ditch Co. vs. United Fire & Casualty, the 10th U.S. Circuit Court of Appeals ruled in October that dirt, rock and soil could be considered pollution when it is dumped into a waterway. It cited the U.S. Clean Water Act, which treats any material placed in a waterway that adversely affects water quality as a pollutant.

These divergent opinions demonstrate that, at least in these pollution coverage cases, “courts are looking not to whether or not a particular substance is a pollutant, but to whether it is pollution in the allegations of the underlying complaint,” said William Stewart, a partner in the national insurance coverage group of Nelson Levine de Luca & Horst L.L.C. in Blue Bell, Pa.

Decades of litigation have resulted in one major change: Environmental insurance coverage designed specifically to cover this kind of liability (see related story).

As far as the more recent cases involving Chinese drywall, the courts will have to decide whether gases emitted by the faulty drywall, which smell like sulfur and cause metal to corrode, is a discharge within the scope of the pollution exclusion, said Seth Lamden, a partner at Howrey L.L.P. in Chicago who represents policyholders in insurance coverage litigation.

So far, policyholders have been successful in Louisiana, which has found the exclusion does not apply because it was intended to address traditional contamination events, he said.

A similar argument could be made in the sole insurance coverage case to stem from a suit over global warming: AES Corp. vs. Steadfast Insurance Co., which is slated to be heard by the Virginia Supreme Court early this year, he said.

Arlington, Va.-based AES is among 24 oil, energy and utility companies tangled in a public nuisance suit brought by the Native Village of Kivalina, a governing body of an Inupiat Eskimo village in Alaska, over alleged damage to the village caused by global warming. Steadfast has argued that it has no duty to defend or indemnify AES because global warming damage alleged in the underlying suit, Native Village of Kivalina vs. Exxon Mobil Corp., was not caused by an accident, which is needed to trigger liability coverage for AES. Also at issue is Steadfast's application of the pollution exclusion and whether the court rules that greenhouse gases are “pollutants.”

As long as U.S. courts remain split on the pollution exclusion's applicability, litigation over whether the CGL policy covers environmental risks will continue, coverage experts say.

The other reason these cases won't go away is because “there's so much money involved,” said Mr. Oshinsky. “It's never cheap to clean up, and injury claims are often large.”

Under Superfund, only $1.6 billion was budgeted to be spent by the federal government, with the remaining “hundreds of billions of dollars” being picked up by polluters and their insurers.

“I think litigation over the pre-1986 CGL policies will continue for a fair amount of time,” said John Beauchamp, product line head of environmental at Beazley P.L.C. in Philadelphia. “There are always going to be disputes as far as interpretation and intent of the commercial general liability policy. You could have a policyholder attorney saying one thing and the coverage lawyer saying another.”

“As the insurers have more success in getting judgments throughout the country stating the total pollution exclusion is not ambiguous, that is going to continue to drive demand for stand-alone environmental insurance or in getting CGL carriers to address the exposure in the CGL form,” Mr. Beauchamp said.