Pollution Exclusions Barred Coverage for Environmental Contamination at Former Fertilizer Manufacturing Facility, Fourth Circuit Holds

May 31, 2013 | Insurance Coverage

The U.S. Court of Appeals for the Fourth Circuit has ruled, for an insurer represented by Mike Kotula of Rivkin Radler, that “qualified” pollution exclusions and “absolute” pollution exclusions in commercial general liability (“CGL”) insurance policies barred coverage of claims arising out of the cleanup of environmental contamination at a former fertilizer manufacturing facility. 

The Case 

Beginning in 1906, Planters Fertilizer and Phosphate Company (now Ross Development Corporation) operated a phosphate fertilizer manufacturing facility at a 43 acre site in Charleston, South Carolina. Planters manufactured fertilizers by burning pyrite ore as fuel and reacting sulfuric acid with phosphate rock, which generated a pyrite slag byproduct containing high concentrations of arsenic and lead. Over the years, Planters used this slag byproduct on the site as fill material and to stabilize roads. 

Planters sold the site in 1966. Years later, Ross purchased primary insurance coverage from Fireman’s Fund Insurance Company (“FFIC”) for the period from 1973 through 1992 and excess coverage from United States Fire Insurance Company (“USFIC”) for the period from 1979 through 1984. The FFIC policies for the period from 1973 through 1987 and all of USFIC’s excess coverage policies included a “qualified pollution exclusion.” Policies issued by FFIC for the period from 1987 through 1990 included an “absolute pollution exclusion.” 

In the 2000s, Ashley II of Charleston LLC, owner of a large portion of the site, began to remediate environmental contamination there. Ashley subsequently sued PCS Nitrogen, Inc., a successor-in-interest to a former owner of the site, seeking a declaratory judgment that PCS was jointly and severally liable for response costs incurred in remediating contamination at the site under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Thereafter, PCS sued other parties with past and present connections to the site, including Ross. 

Ross sought a declaration that the FFIC and USFIC insurance policies provided coverage for liabilities from the underlying CERCLA action against it, as well as for related shareholder and fraudulent conveyance suits. The district court granted summary judgment to the insurers, holding that the absolute and qualified pollution exclusion provisions excluded any coverage for liability arising out of the underlying CERCLA action and, by relation, the shareholder and fraudulent conveyance suits. Ross, and PCS as its judgment creditor, appealed. 

The Fourth Circuit’s Decision 

The Fourth Circuit affirmed.

The circuit court found that the underlying CERCLA action (and, by relation, the shareholder and fraudulent conveyance actions) initially triggered the policies by imposing liability on Ross for environmental damages to third party property. The Fourth Circuit continued by finding that it was “equally clear” that the qualified or absolute pollution exclusions in each policy excluded this liability from coverage. 

The circuit court explained that this was so because Ross’ liability for third party property damages in the CERCLA action “arises out of” its “discharge” – use as fill material – of “waste” or a “waste material” – the pyrite slag byproduct – on the site. 

Then, the circuit court rejected the argument that the 1972-87 policies provided coverage notwithstanding the qualified pollution exclusion because the pollution damages to third party property were both “sudden” and “accidental.” The circuit court reasoned that that argument rested on a “fundamentally flawed reading of the ‘sudden and accidental’ exception,” explaining that the exception’s “plain language” required that the discharge, not the pollution damages, be “sudden and accidental.” 

Accordingly, the circuit court concluded that the district court had not erred in holding that neither insurer had a duty to defend Ross in the underlying CERCLA action, or Ross’ former shareholders and directors in the two related cases. 

The case is Ross Development Corp. v. PCS Nitrogen Inc., No. 12-2059, 12-2454 (4th Cir. June 6, 2013).

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