IMPAIRED PROPERTY AND POLLUTION EXCLUSIONS

1. INTRODUCTION 1
2. "IMPAIRED PROPERTY" EXCLUSION 1
1. Background 1
2. Case Law Interpretation of Exclusion (m) 2
1. Texas Cases 2
2. Alert Centre , Milgard Mfg ., and American Int'l Surplus Lines 3
3. Additional Cases Outside of Texas 5
4. Conclusion 9
3. SO-CALLED "ABSOLUTE" OR "TOTAL" POLLUTION EXCLUSIONS 10
1. Pollution Coverage in the CGL Policy 10
2. The 1970 "Qualified" Pollution Exclusion 11
3. Introduction of the So-Called "Absolute" Pollution Exclusion 12
4. So-Called "Total" Pollution Exclusions 16
5. Interpretation by the Courts 17
6. Cases Applying Texas Law 19
1. Other Texas Cases Not Applying A Pollution Exclusion to Bar Coverage 22
2. Other Texas Cases Applying A Pollution Exclusion to Bar Coverage 22
7. Conclusion 24

Almost every business, including owners and contractors, maintains comprehensive or commercial general liability (CGL) insurance providing indemnity for, and defense against, third-party claims arising out of routine business operations. Since 1966, the standard-form CGL policy insures against liability for third-party "property damage" or "bodily injury" caused by an "occurrence," and not otherwise excluded by the policy. It also requires the insurer to defend the policyholder in the event of a third-party "suit."

This paper addresses two significant but distinct exclusions found in the standard-form CGL policy. Section II examines exclusion (m), generally referred to as the "impaired property" exclusion. This exclusion is one of several business risk exclusions included in the policy and has received little attention by Texas courts. Section III explores the various types of pollution exclusions that insurers have included in CGL policies since the early 1970's, usually as exclusion (f). This discussion focuses primarily on so-called "absolute" or "total" pollution exclusions typically included in CGL policies since the mid-1980's.

So-called "absolute" or "total" pollution exclusions may not be as "absolute" or "total" as insurers want their policyholders, and the courts, to believe. But, because of the many and varied versions utilized by insurers, a policyholder should closely examine the actual wording of an exclusion to attempt to determine whether the insurance provided by its CGL policy is real or illusory with respect to the policyholder's major risks of loss.

Regardless of the form utilized, insurers should be held to their word to Texas insurance regulators that they would not abuse the use of such exclusions by denying claims for injuries resulting from traditional workplace accidents and other non-environmental-related pollution. Courts, in construing these exclusions, should take a common-sense approach to what constitutes "pollution." After all, taken literally, almost all injuries could be construed to result from a "contaminant" or "irritant," and therefore, a "pollutant" as typically defined by the exclusions. If courts allow insurers to continue to abuse the use of the exclusions, the Texas Insurance Commissioner should take the steps necessary to restore some sanity to the application of the exclusions.

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