Hunton Insurance Recovery Blog

A Louisiana court recently denied an excess insurer’s bid for summary judgment, finding that the insurer’s interpretation of a pollution exclusion would lead to “absurd results.”

Central Crude, Inc., a crude oil transporter company, experienced an oil pipeline leak, allegedly causing damage to property belonging to Columbia Gas Transmission Company. Columbia Gas sued Central Crude seeking compensatory damages and injunctive relief to compel remediation of the site. Central Crude sought coverage under a CGL primary insurance policy issued by Liberty Mutual. The insurer initially agreed to cover Central Crude’s “reasonable and necessary costs” relating to the incident, but later refused to defend or indemnify Central Crude for any costs incurred from the incident. As a result, Central Crude brought suit against Liberty Mutual and its excess insurer, Great American, to enforce coverage.

Great American moved for summary judgment arguing coverage was excluded by the excess policy’s pollution exclusion, which precludes coverage for injury “arising out of a discharge of pollutants.”  Central Crude responded arguing that the exclusion’s applicability was invalidated or at least rendered ambiguous by the Following Form Endorsements, which reflect an intent to mirror the coverage afforded under the primary Liberty Mutual policy, and because coverage appears to be specifically authorized through the Premises Operations Liability Endorsement.

According to the Liberty Mutual policy, coverage is afforded for property damage and cleanup costs arising from a “discharge, release, or escape of pollutants, at any premises owned or occupied by [Central Crude] or on which [Central Crude] is performing operations.” Central Crude argued, therefore, that Great American’s motion should be denied because the terms of the followed primary policy rendered the “Pollution Exclusion a nullity.”

The court acknowledged that oil spills may qualify as “pollution” under similar exclusions and that the Fifth Circuit has rejected the argument that following form clauses might nullify explicit exclusions elsewhere within the policy. Nevertheless, the court rejected Great American’s argument. Relying on Louisiana’s general rules of contract interpretation—under which ambiguities in an insurance policy permit interpretation of the parties’ intent and must be construed against the insurer and in favor of coverage—the court stated: “The coverage offered under the Premises Operations Liability Endorsement and CGL policy, however, seem tailor-made for Central Crude’s risks and alleged losses. Given Central Crude’s line of business—the transport of oil—it could yield absurd results to interpret the endorsement in a way that gave it any independent effect while simultaneously barring any coverage for oil spills under the Pollution Exclusion.” According to the court, Great American’s reading would require a finding that Central Crude purchased an excess policy that provided no coverage for one of the major risks of its line of business, which was covered under the primary policy. Accordingly, the court denied Great American’s motion.

The Central Crude decision makes clear that courts may invalidate or find ambiguous a policy exclusion that contradicts the grant of coverage and could render the promised coverage illusory. Accordingly, policyholders should challenge any insurer’s efforts to invoke an exclusion that may render an insurance policy illusory or lead to a result that is contrary to the intended scope of coverage. The holding highlights the importance of engaging experienced coverage counsel to assist in reading insurance policies thoroughly and not merely accepting an insurer’s narrow interpretations or coverage denials.