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ALBANY, N.Y.-Policyholders need not be the actual polluters of a property for the absolute pollution exclusion to bar coverage of cleanup claims, according to New York's highest court.

The Dec. 18 decision, which reverses a lower court ruling, is a major victory for insurance companies in a highly commercial state, said insurer attorney Thomas W. Brunner of Wiley, Rein & Fielding, in Washington.

In another municipal pollution case, the Court of Appeals rejected an insurer's effort to deny a defense, sending the case to a lower court for trial, but indicated a broad interpretation of what is considered pollution for purposes of the absolute exclusion, Mr. Brunner said.

The court's ruling in Town of Harrison vs. National Union Fire Insurance Co. of Pittsburgh, Pa., is a more overt victory for insurers.

"The language of the pollution exclusions does not require that the insured be the actual polluter in order for the exclusion to apply. Therefore, defendant insurers properly relied on the unambiguous pollution exclusion to deny coverage to the insureds," the court ruled.

The town of Harrison, N.Y., was sued by the owners of residential property next to the town's landfill. The property owners alleged that the municipality had negligently failed to prevent and abate the illegal disposal of waste on their land in the 1980s by a contractor working in the contiguous landfill.

The property owners sought damages from Harrison for personal injury, property damage and environmental cleanup costs, court papers show.

Harrison ultimately settled with the claimants in 1993 for an undisclosed amount and sought more than $2.5 million in indemnification and expenses under its liability policies, which its insurers denied, citing the absolute pollution exclusion.

Harrison was covered by a public officials and employees liability policy written by National Union Fire Insurance Co. of Pittsburgh, Pa., a unit of American International Group Inc., and a general liability policy written by North River Insurance Co., a unit of Crum & Forster Corp.

Harrison argued that the town was due coverage because it was not responsible for the illegal dumping and that any alleged negligence did not involve conduct that caused pollution.

The trial court ruled in favor of the insurers, but an appellate court overturned the decision in favor of Harrison, ruling that the absolute pollution exclusion could not be invoked because the town was not responsible for the underlying acts of pollution (BI, Oct. 2, 1995).

The New York Court of Appeals' decision to deny coverage is important to insurers because it resolves a split among New York courts over whether the absolute pollution exclusion is limited to cases involving intentional industrial pollution, according to Mr. Brunner.

The case "conclusively establishes that the exclusion contains no such limitation," he said.

The decision contains too strict an interpretation of the absolute pollution exclusion, said John H. Kazanjian, attorney with Anderson Kill & Olick in New York, who represented Harrison.

"It's a decision that is unique to its facts and demonstrates that the New York court is more willing to look at the language of the exclusion itself rather than to other evidence that would suggest that the exclusion should not be broadly applied," he said.

In another municipal pollution case before New York's top court last month, The Incorporated Village of Cedarhurst vs. Hanover Insurance Co., a majority of the court ruled that the insurer was obliged to defend the municipality from 1994 claims alleging damages from the backup of a city sewer system. The high court then returned the case to a lower court.

But the court's decision in the Cedarhurst case did offer insurers some comfort in its implicitly broad definition of pollution, according to Mr. Brunner.

The lower court judge in the case had ruled that the pollution exclusion did not apply because raw sewage was not a pollutant and that the insurer had a duty to defend (BI, Oct. 2, 1995).

But the majority of the New York Court of Appeals held that: "Since any risk of liability faced by the Village allegedly arose from the floodlike nature of the discharge rather than its 'polluting' character, the insurer is obligated to defend, but a trial is necessary before any determination on the issue of indemnification can be made."

The damage was not necessarily caused by the "irritating or contaminating nature of the sewage," the court said.

Thus, the state's top court implicitly recognized that many substances could be determined to be pollutants depending on the circumstances of a claim, according to Mr. Brunner.

Town of Harrison et al., vs. National Union Fire Insurance Co. of Pittsburgh, Pa., and North River Insurance Co., New York Court of Appeals; No. 246.

The Incorporated Village of Cedarhurst vs. Hanover Insurance Co., New York Court of Appeals; No. 247, 248.