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WILMINGTON, Del.-The Delaware Supreme Court, one of the first state supreme courts that will directly interpret the London market's sudden pollution exclusion, will review a lower court's finding that the exclusion bars gradual pollution coverage.

Chancery Court Vice Chancellor Myron T. Steele on Dec. 24, 1996, refused to alter his Aug. 23, 1995, summary judgment that the London market exclusion, known as NMA 1685, unambiguously bars coverage for E.I. du Pont de Nemours & Co. of Wilmington, Del. His earlier order also rejected the chemical company's argument that U.S. insurers misled regulators about the intent of the insurers' sudden and accidental pollution exclusion.

The Delaware Supreme Court, which had asked Vice Chancellor Steele to review his earlier Superior Court decision in light of an amicus brief the state filed, has asked both sides in the case to submit supplemental briefs.

Attorneys disagree over how much coverage is at stake in liability policies containing the NMA 1685 exclusion, but they agree the amount is substantial.

Twenty state supreme courts have interpreted the sudden and accidental pollution exclusion that U.S. insurers included in comprehensive general liability policies for about 15 years until 1986. Eleven of those courts ruled either that the exclusion does not bar coverage for gradual pollution, or that insurers fooled regulators into approving the exclusion by suggesting the insurers intended to cover gradual pollution.

Some of the 20 cases involved London market umbrella or excess policies that contained the NMA 1685 sudden, unintended and unexpected pollution exclusion. In those cases, the courts often lumped the London policies in with the U.S. policies without directly ruling on the London exclusion.

But, in siding with policyholders, the Washington Supreme Court in 1994 ruled that a U.S. insurer's pollution exclusion that essentially duplicated the NMA 1685 exclusion was ambiguous.

And, in interpreting the policyholder victory on the regulatory deception issue in a New Jersey Supreme Court case, the 3rd U.S. Circuit Court of Appeals in June 1996 ruled that the state court's finding also applied to the London market's exclusion. The 3rd Circuit noted that London markets did nothing to clear up regulators' misconceptions about the exclusion.

In September 1996, the Delaware Supreme Court asked Vice Chancellor Steele to review his 1995 decision in light of the state's brief and other submissions filed with the state's highest court. Litigation in Delaware proceeds directly to the state's Supreme Court from trial courts.

In his latest ruling, Vice Chancellor Steele refused to link the regulatory histories of the U.S. and London pollution exclusions, noting that the London market submitted NMA 1685 for regulatory approval only in Kentucky and Illinois. The judge said that DuPont bargained for that language in its policies.

Vice Chancellor Steele said the state also suggested that his earlier opinion could lead to heavier tax burdens on state residents if policyholders could not bear the full cost of pollution cleanups.

"It is not for the court to rewrite the parties' insurance agreements in order to redistribute financial responsibility under the pretense of promoting an alternative social contract," the judge wrote.

E.I. du Pont de Nemours & Co. vs. Admiral Insurance Co. et al., Delaware Superior Court; No. 89C-AU-99.