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By:  J. Kent Holland, J.D.

The operator of a dry cleaning business demanded that her CGL carrier defend and indemnity her in connection with an administrative claim by a county government requiring her to determine the extent of pollution and then implement remedial action. Based on the pollution exclusion of the policy, the carrier denied coverage.  The operator sued the carrier, and the court granted the carrier’s motion to dismiss the case.  The court found that the discharge or potential discharge of a dry cleaning chemical resulting in soil and ground water pollution constitutes pollution that is “commonly thought of as environmental pollution” and is excluded pursuant to the pollution exclusion of the policy.

In Teiko Lewis v. Hartford Casualty Insurance Company, ( U.S. District Court, Northern District  of California, No. C05-2969, Jan. 30, 2006), the County of San Mateo issued an administrative claim letter directing Teiko Lewis, the operator of a dry cleaners, to evaluate and implement remedial action related to the discharge or potential discharge of perchoroethylene.  Following receipt of the county’s letter, Lewis tendered the claim to her insurance carrier, Hartford Casualty Insurance Company (hereinafter (“Harford”) to defend and indemnify her against the claim.

The Hartford had issued a series of twelve (12) general liability (GL) policies to Lewis starting in July 1993 and continuing through July 2004.  Each policy contained a pollution exclusion stating insurance would not apply “to bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants.”  The exclusion further provided that coverage would not apply “to any loss, cost or expense arising out of any governmental direction or request that the named insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.”

What was at dispute between Lewis and The Hartford was whether or not the soil and groundwater contamination alleged in the county’s letter constituted what is “commonly thought of as environmental pollution” or “traditional environmental pollution.”  Lewis relied upon a California Supreme Court decision (MacKinnon v. Truck Insurance Exchange, 31 Cal. 4th 635 (2003)) for the proposition that not all pollution is excluded by the pollution exclusion.  The MacKinnon court had determined that the pollution exclusion must be limited to “injuries arising from events commonly through of as pollution, i.e., environmental pollution.”

In this case, Lewis offered two reasons why the contamination is not traditional environmental pollution.   First, she argued that in order for contamination to be “commonly thought of as environmental pollution,” it must be intentional, or must be an inherent byproduct of an industrial process with no outside force contributing to it.  Second, she argued that “environmental pollution” must be catastrophic.   In rejecting both of these arguments, the court found that for something to be “commonly thought of as pollution” it need not be the result of an intentional act nor be an inherent byproduct of an industrial process with no outside force contributing to it.

The court also concluded that “pollution need not rise to the level of catastrophe to be ‘commonly thought of as environmental pollution.’”  With regard to the specific contamination at issue in this case—discharge or potential discharge of perchloroethylene into the soil and groundwater—the court decided it constitutes pollution “commonly thought of as environmental pollution” and is, therefore, excluded from insurance coverage pursuant to the policy’s pollution exclusion.  The Hartford , therefore, owed no duty to defend or indemnify its insured in connection with the administrative claims by the county.

Comment:   It is interesting to see businesses such as the dry cleaning operation involved in this case, relying upon general liability policies instead of purchasing pollution legal liability (PLL) policies specifically designed to cover their pollution risks.   Based on the long history of pollution claims arising out of dry cleaning operations, it seems that prudent risk management would  suggest the wisdom of maintaining a PLL policy for the risk.  These policies are readily available from numerous carriers.

About the author: Kent Holland is a construction lawyer  in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 8, No. 3.