Judge Thomas Rice of the United States District Court for the Eastern District of Washingon issued a ruling earlier this month that is important for agricultural producers to be aware of when purchasing liability insurance policies. Specifically, Judge Rice held that when a Washington dairy was sued for contaminating drinking water with manure, its insurance company was justified in denying coverage based upon absolute pollution exclusion clauses in the dairy’s policies.
Long-time readers of this blog may remember the underlying case involved in this insurance coverage dispute. The Cow Palace Dairy is located in Washington state. In 2013, two non-profit environmental groups filed suit against a number of dairies in Washington, including Cow Palace alleging that the dairies’ handling of manure contaminated groundwater. Specifically, allegations lodged at Cow Palace were that holding ponds resulted in seepage of manure into the underground aquifer and that the amount of manure applied to fields as fertilizer was excessive, causing seepage into the ground. Plaintiffs brought claims against the dairies under the federal Resource Conservation Recovery Act (RCRA), the Emergency Planning and Community Right to Know Act (EPCRA), and the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). [Read background and settlement in this prior blog post.]
When faced with the litigation regarding groundwater contamination, Cow Palace submitted a tender of defense and indemnity to its insurers. But the insurance companies denied coverage and did not provide Cow Palace a defense. Their rationale for denying the duty to defend and indemnify under the policy was that Cow Palace’s insurance policies each contained “absolute pollution exclusion” clauses that excluded the claimed loss from coverage. Specifically, the clauses provide that coverage is excluded for liability arising from “discharge, dispersal, seepage, migration, release or escape of pollutants at or from the premises and at or from any site or location used for the handling, storage, disposal, processing, or treatment of waste.”
Eventually, the plaintiffs and the dairies settled the underlying lawsuit, resulting in extensive expenses for Cow Palace. Cow Palace, in turn, filed this lawsuit against its insurance companies seeking a declaration from the Court that the insurers had a duty to defend and indemnify Cow Palace in the groundwater contamination litigation.
Facing competing summary judgment motions, the Court sided with the insurance companies and held there was no duty to defend or indemnify Cow Palace in the underlying litigation. [Read Opinion here.]
Duty to Indemnify
Initially, the Court turned to the duty to indemnify and addressed two issues: (1) did the absolute pollution exclusion clause exclude the losses from coverage; and (2) was there another covered occurrence that was an “efficient cause” of the polluting event, which would require coverage.
1. The absolute pollution exclusion does apply.
Under Washington law, an absolute pollution exclusion excludes losses arising from a pollutant, acting as a pollutant, from coverage. The opinion explained that absolute pollution exclusions clauses arose out of the desire of insurance companies to mitigate losses related to contaminated land and water resulting in massive liability for cleanup under environmental regulations. The Court reviewed numerous prior cases where absolute pollution clauses were found to apply, including situations involving toxic fumes from a sewage plant, hazardous sealant fumes, and carbon monoxide causing poisoning.
Under the Cow Palance policies, a “pollutant” is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, shoot, fumes, acids, alkalis, chemicals, and waste.” The Court held that based on this definition, “manure clearly falls under the definition of a pollutant as waste.” The Court rejected the dairy’s argument that had the insurer wanted to exclude manure, it should have included “animal waste” or “agricultural waste” in the definition of “pollutant,” finding that the inclusion of “waste” encompassed both agricultural and animal waste products. Further, the court held that manure was clearly a potential “contaminant” as included in the definition, stating that “although manure may make great fertilizer, there is no disputing that it is a contaminant if it makes its way into the drinking water.” Finally, the court dismantled the dairy’s argument that a reasonable person buying an agricultural insurance policy would not consider manure stored in tanks or applied to fields to be a pollutant, explaining that the issue is whether manure when entering drinking water is a contaminant. That, the Court reasoned, must be answered in the affirmative and the manure was clearly acting as a pollutant in this instance. Thus, the absolute pollution exclusion clause excluded coverage for the loss.
2. There was no covered peril to serve as an efficient proximate cause.
Under Washington law, if there are two or more perils that combine to cause a loss, and one of those perils is covered by the insurance policy and the other not, coverage may be required if the covered peril is the predominant (or “efficient”) cause of loss. For example, in a case where the court found that carbon monoxide was excluded under the absolute pollution exclusion language, it nevertheless found coverage under the policy because the leak of carbon monoxide was caused by the negligent installation of a water heater, which was a covered peril. This, however, was not the situation here, the Court held. The Court found that the initial acts giving rise to the peril in this case–over application of manure and inadvertent seepage from holding ponds–were excluded by the absolute pollutant exclusion clause itself. Thus, there was no duty to indemnify in this case.
Duty to Defend
Next, the Court addressed whether the insurer had a duty to defend. This duty is broader than the duty to indemnify under Washington law and requires the insurer to defend the insured if there is the potential for liability under the policy. Washington utilizes the “eight corners rule” where an insurer is required to look at the insurance policy and the legal complaint and, if there is any reasonable interpretation of the facts that could require coverage, the duty to defend arises. Here, the Court agreed with the insures that when looking at the Complaint in the underlying case and Cow Palace’s policies, that non-coverage was clear. Thus, the duty to defend did not exist.
1. This case is a stark reminder of why it is critically important to carefully read and review liability insurance policies. If agricultural operators were asked whether manure contamination would be covered under a farm liability policy, most would assume it was. Taking the time to really understand what coverage a policy offers and what types of claims are excluded is critical to protecting one’s operation.
2. This is the second case in since 2014 to hold that where manure pollution of groundwater by a dairy was at issue, a pollution exclusion clause allowed the insurer to deny coverage. You may remember this prior post from 2015 when the Washington Supreme Court decided this issue in favor of the insurer in Wilson Mutual Insurance Co. v. Falk. Similarly, cases in Iowa and New York have reached the same result as well. Although none of these cases would be binding precedent in Texas, given the number of states adopting this approach, it could well be persuasive to a Texas court looking at this issue.
3. Finally, there is a very real-world result in this case for Cow Palace. They are now saddled with not only the settlement costs, but also paying their attorney’s fees out of pocket as they had no insurance coverage to apply to this situation.