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The insurance industry's expansive interpretation of the absolute pollution exclusion threatens to eliminate products-completed operations coverage for products with potentially hazardous or toxic characteristics.
Since at least 1986, virtually all standard form commercial general liability policies have been written with the absolute pollution exclusion. This exclusion was developed by the insurance industry as a forceful response to the pro-policyholder judicial interpretations of the "sudden and accidental" pollution exclusion that was common in comprehensive general liability policies from the early 1970s.
The absolute pollution exclusion has been invoked by the insurance industry to bar coverage for claims involving both gradual and abrupt environmental contamination.
Policyholders can protect themselves by being aware that some insurers are trying to use the absolute pollution exclusion to eliminate products-completed operations coverage under standard form CGL policies for products that have potentially hazardous or toxic characteristics.
Standard form CGL policies generally have a products-completed operations coverage part separate from other coverage parts in the policy and for which a separate premium is charged. The typical definition of the products-completed operations hazard includes all bodily injury and property damage occurring away from premises you own or rent and arising out of "your product."
The typical definition of your product reads: any goods or products, other than real property, that are manufactured, sold, handled, distributed or disposed of by you.
However, the typical preprinted absolute pollution exclusion states: This insurance does not apply to bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.
The exclusion defines a pollutant as: any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
How can the products-completed operations coverage part and the absolute pollution exclusion be reconciled in the case of policyholders that manufacture, distribute or sell products with potentially hazardous or toxic characteristics?
It could be argued that a product with such characteristics by definition is an "irritant or contaminant."
Indeed, as some courts have observed, virtually every product could be characterized as an irritant or contaminant in some form or fashion, especially if used or handled improperly. It also could be argued that when a product with potentially hazardous characteristics causes bodily injury or property damage, it most likely is the result of a "discharge, dispersal, seepage, migration, release or escape."
The fact that products with potentially hazardous or toxic characteristics can be construed to fall within the language of the absolute pollution exclusion has emboldened the insurance industry to argue that the exclusion bars coverage for all such products.
Thus, insurers have persuaded courts to bar coverage for liability arising from such widely used items as cleaning agents, aerosol sprays, and construction adhesives and glues. As a result, policyholders have little assurance that their insurers will agree to cover a liability-producing event involving any of these products, at least not without significant resistance.
Some insurers have gone a step further in attempting to eradicate coverage for products with potentially hazardous or toxic characteristics. Recently, an insurer refused to defend its policyholder in an underlying lawsuit in which it was alleged that the policyholder's products are among the possible causes of Gulf War Syndrome. The insurer took the position that coverage was barred because the policyholder's products fell within the terms of the absolute pollution exclusion in its CGL policy.
The basis for the insurer's denial was clause (e) of the exclusion, which is not usually found in the standard absolute pollution exclusion: Coverage is excluded to the extent that any such bodily injury or property damage is included in the products-completed operations hazard.
It is clear that clause (e) is intended to take away the coverage provided by the products-completed operations coverage part, at least for products with potentially hazardous or toxic characteristics.
There were two problems, however, with the insurer's position in the Gulf War Syndrome case, leading to its early resolution.
First, the policyholder had an uninterrupted history of purchasing products-completed operations coverage for which it had paid substantial separate annual premiums. Second, the insurer's internal documents demonstrated it had failed to explain to the policyholder that coverage for liability arising out of its products henceforth would be barred by clause (e) of the exclusion.
If the policyholder paid a separate premium for products-completed operations coverage, it should not have been denied coverage for liability arising out of its products on the basis of the absolute pollution exclusion.
If the insurer intended the language of clause (e) of the absolute pollution exclusion to override-and in fact eliminate-products-completed operations coverage for products with potentially hazardous or toxic characteristics, the insurer had the obligation to inform the policyholder, in advance, of the effect on its coverage and should not have charged a premium for that coverage.
Most insurers do not want to draw their policyholders' attention to significant gaps in coverage, particularly if no products claims have been presented that conceivably could be denied on the basis of the absolute pollution exclusion. For the same reason, it is doubtful that many insurers would choose to face the issue head-on by inserting a provision like the clause quoted above in their policies and risking questions from their policyholders about whether products coverage has been eliminated.
But policyholders should not conclude that their products coverage is safe as long as their policies do not contain a provision like clause (e) in the Gulf War Syndrome case. Recent cases demonstrate that insurers will continue to argue that, even without such a clause, the absolute pollution exclusion bars coverage for products with potentially hazardous or toxic characteristics.
There are practical steps, however, that corporate policyholders can take to ensure they are not unwittingly left without coverage for their products:
Review your CGL policy to determine whether it contains both products-completed operations coverage and the absolute pollution exclusion.
If the policy contains an absolute pollution exclusion, determine whether the exclusion contradicts the products-completed operations coverage by including a provision similar to clause (e) quoted above.
If the absolute pollution exclusion in your policy does contradict the products-completed operations coverage, check to see whether you are paying premiums for that coverage. The premium should be less than before the exclusion became effective.
If your insurer proposes any changes in an existing absolute pollution exclusion at a future renewal, clarify the effect the changes will have on your products-completed operations coverage, and negotiate an appropriate premium for the reduced coverage.
By following these steps, you will be in a better position to deal with future liability arising out of products with potentially hazardous or toxic characteristics. You also will be able, if your insurer denies coverage, to insist upon getting the coverage you thought you purchased.