Eighth Circuit: Condensate Is a Pollutant within the Meaning of the Absolute Pollution Exclusion

The U.S. Court of Appeals for the Eighth Circuit has ruled that an insurer did not have a duty to defend or indemnify an additional insured in connection with a lawsuit brought by a subcontractor’s employee who alleged that he had been injured in an explosion caused by condensate, concluding that the employee’s allegations fell within the policy’s absolute pollution exclusion.

The Case

Hiland, the owner and operator of a natural gas processing facility in Watford City, North Dakota, asked Missouri Basin Well Service to remove water from the facility’s hydrocarbon condensate tanks. The facility produced condensate – a flammable, volatile, and explosive product – as a byproduct of its processing of gas and hydrocarbon products.

In turn, Missouri Basin asked B&B Heavy Haul, LLC, a subcontractor, to haul away the water.

Toward that end, a B&B employee arrived at the facility and positioned his truck in front of one of the condensate tanks. One of the tanks overflowed, the condensate caused an explosion, and the employee was injured. The employee sued Hiland, alleging negligence.

Hiland sought coverage as an additional insured under a commercial general liability insurance policy issued to Missouri Basin, but the insurer denied coverage. Hiland then settled the employee’s claims and filed a declaratory judgment action against the insurer, arguing that it was an additional insured under the policy issued to Missouri Basin and that the insurer had breached the policy by refusing to defend or indemnify it.

The U.S. District Court for the District of North Dakota granted summary judgment in favor of the insurer, concluding that although Hiland was an additional insured under the policy, the nature of the harm fell within the policy’s absolute pollution exclusion.

Hiland appealed to the Eighth Circuit.

The Eighth Circuit’s Decision

The Eighth Circuit, applying North Dakota law, affirmed.

In its decision, the circuit court first ruled that Hiland had waived the argument that the absolute pollution exclusion in the insurance policy was ambiguous.

Then, the Eighth Circuit rejected Hiland’s contention that the district court had erred by concluding that condensate was a pollutant.

The circuit court observed that the employee’s complaint described condensate as “flammable, volatile, and explosive.” Condensate, therefore, was a “contaminant” for purposes of the absolute pollution exclusion because flammable, volatile, and explosive liquid and gas had the ability to “soil, stain, corrupt, or infect the environment” within the exclusion’s meaning.

This conclusion, the circuit court continued, was in accord with the bulk of the case authority holding that “oil, gasoline, and other petroleum products” were “toxic by nature,” and therefore, constituted “a contaminant when released into the environment.”

The circuit court was not persuaded by Hiland’s argument that even if condensate had the inherent properties of a contaminant, it did not fall within the policy’s definition of a contaminant in this case because the condensate had caused harm in a manner other than by contamination. The Eighth Circuit pointed out that the employee’s complaint asserted that Hiland had permitted the condensate tanks to overflow and that overflow of the condensate tanks had “caused ignition, fire, and an explosion” that seriously injured the employee.

The circuit court concluded by observing that the employee’s complaint had not alleged that “the substance causing injury” – the condensate – had “caused harm in a manner other than by” contaminating – that is, by exploding due to its flammable, volatile, and explosive nature.

The case is Hiland Partners GP Holdings, LLC v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 15-3936 (8th Cir. Jan. 31, 2017).