One of the most critical issues in litigation over coverage for long-tail environmental liabilities is the application of the “qualified pollution exclusion” and in particular the carve-out for pollution that is “sudden and accidental.” A new decision from an Oregon federal court tackled this question: Is “sudden and accidental” to be evaluated from the perspective of the policyholder (who may not have done the polluting, but may still be on the hook merely as purchaser of the property) or from the perspective of the polluter/former occupant of the site, who may be long gone? This court held that it is the perspective of the policyholder that counts. This is a significant win to the many companies that may be facing similar disputes with contaminated sites in Oregon in the near future.
Background on the “Qualified Pollution Exclusion.” Throughout history, most general liability policies had no “pollution” exclusion applicable to property damage. In 1973, an exclusion was inserted to the standard-form “CGL” policy that has come to be known as the “qualified pollution exclusion.” In most forms the exclusion reads as follows:
It is agreed that this policy does not apply to bodily injury or property damage arising out of the discharge, dispersal, release, or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants, or pollutants into or upon land, the atmosphere, or any water of any description no matter where located or how contained, or into any watercourse, drainage, or sewerage system, but this exclusion does not apply if the discharge, dispersal, or escape is sudden and accidental.
Throughout the 1980s in Oregon this exclusion was the subject of some litigation, much of it unfavorable to policyholders; in essence the courts held that the “sudden and accidental” exception to the exclusion had a “temporal” component and that “accidental” applied to the act of polluting (as opposed to the resulting property damage), such that regular and intentional discharge of waste was not subject to the exception. That ended in 1996 with St. Paul Fire & Marine Ins. Co. v. McCormick & Baxter Creosoting Co., 324 Or. 184, 215, 923 P.2d 1200 (1996), in which the Oregon Supreme Court held that the term “sudden” did not necessarily have a temporal component, and in the context of business insurance, the phrase “sudden and accidental” means that the property damage was “unintended and unexpected.”
The New Siltronic Decision. In Oregon, the initial burden of proving coverage is on the insured. Lewis v. Aetna Ins. Co., 264 Or. 314, 316, 505 P.2d 914 (1973). The insurer bears the burden of proof for any exclusions. Stanford v. Am. Guar. Life Ins. Co., 280 Or. 525, 527, 571 P.2d 909 (1977). If an exception to the exclusion may apply (thus restoring coverage), the burden once again falls on the insured. Emp’rs Ins. of Wausau v. Tektronix, Inc., 211 Or. App. 485, 156 P.3d 105 (2007). See also Ass’n of Unit Owners of Nestani v. State Farm Fire & Cas. Co., 670 F. Supp. 2d 1156 (D. Or. 2009).
In the Siltronic case, the parties are headed to a trial on several issues, including whether coverage for the property damage for which Siltronic has been or may be held liable is excluded under the qualified pollution exclusion. Siltronic’s insurers took the position that Siltronic had to prove that the pollution was “unintended and unexpected” from the perspective of the entity that caused the pollution. This could have been very problematic as Siltronic could have been required to produce witnesses from prior operators on its properties.
Siltronic, therefore, pushed back, arguing that under the language of the exclusion the “unintended and unexpected” and “sudden and accidental” issue must be evaluated only from the perspective of Siltronic, the policyholder. Siltronic moved for summary judgment purely on the legal issue of what standard would apply when the case is presented to the jury.
The court, in a brief minute order, held that Siltronic successfully established that the phrase “sudden and accidental” was ambiguous. Therefore, the court construed the ambiguity against Granite State and Wausau (the insurers). As a result, Siltronic will only need to establish that each discharge, dispersal, release, or escape was “sudden and accidental” from its (Siltronic’s) perspective. Presumably it will be a relatively easy task for Siltronic to establish that the contamination caused by operations occurred before it acquired the properties.
This decision is significant well beyond the Siltronic case. At the Portland Harbor Superfund Site, hundreds of potentially responsible parties are waiting to learn what their allocated share of liability will be and what that will mean in terms of their required contribution to remediation of the site. But once that happens, policyholders will be turning to their insurers for funding, precipitating coverage disputes over indemnity some of which will doubtless involve the “qualified pollution exclusion.” This decision should give policyholders and insurers more certainty about what would be required if such disputes went to trial, making pre-trial resolution easier.
** Special thanks to Alena Tipnis, UO Law ’19 and a two-time summer associate with the firm, for her assistance in researching and drafting this blog post.