Pollution Exclusion Barred Coverage of Defense Costs Insurer Incurred in Defending Suit Brought by Its Insured

February 28, 2015 | Insurance Coverage

A federal district court in Pennsylvania has ruled that an insurance company was not obligated to compensate its insured, another insurance company, for defense costs it incurred in defending itself in a coverage case brought by its insured, which had been required to undertake certain environmental cleanup work. 

The Case

Port LA Distribution Center, L.P. sued United National Insurance Company (“UNIC”) for coverage, alleging that the Los Angeles Regional Water Quality Control Board directed Port LA to clean up petroleum-related chemicals detected in groundwater at its Los Angeles property. UNIC took the position that the work required of Port LA by the Los Angeles Regional Board was excluded because the work did not constitute “cleanup costs” covered by the policy.

After UNIC was sued, UNIC notified its insurer, Indian Harbor Insurance Company, of the Port LA action. UNIC successfully defended itself against Port LA’s lawsuit and then tendered the defense fees relating to the suit to Indian Harbor, seeking reimbursement of all fees in excess of the $1 million self-insured retention in the Indian Harbor policy.

The Indian Harbor policy provided “all risk” coverage subject to certain exclusions.  Indian Harbor refused to compensate UNIC for its defense costs, relying on an exclusion for certain pollution-related claims.

UNIC sued Indian Harbor, which moved for judgment on the pleadings, contending that the clear language of the pollution exclusion in the policies it issued to UNIC exempted it from any obligation to compensate UNIC for its defense costs in the underlying lawsuit.

The Court’s Decision

The court granted Indian Harbor’s motion.

In its decision, the court explained that, according to UNIC, the Port LA lawsuit arose after UNIC denied coverage to Port LA for “costs arising from a request by [the Los Angeles Regional Board] to investigate the deep groundwater at the [Port] LA site.” Moreover, the court continued, the Port LA complaint was clear that the Los Angeles Regional Board’s request resulted from the identification of possible pollutants in the soil and groundwater at the Port LA site. Thus, the court found, both the request and the ensuing dispute that resulted in Port LA’s lawsuit against UNIC were, in the words of the exclusion provision of the Indian Harbor policies, “based on or directly or indirectly arising out of or resulting from” either an “actual, alleged, or threatened exposure to or generation, storage, transportation, discharge, emission, release, dispersal, escape, treatment, removal, or disposal of” pollutants listed in the pollution exclusion or a “regulation, order, direction, or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize” any of said pollutants or “any action taken in contemplation or anticipation of any such regulation, order, direction, or request.” Moreover, the court added, Port LA’s lawsuit was a “claim” within the meaning set forth in the Indian Harbor policies because it was a “civil proceeding in a court of law or equity” as contemplated by the policies.

The court found that the language of the pollution exclusion was “clear and unambiguous,” and it concluded that Indian Harbor had no obligation to pay the costs that UNIC had incurred in connection with the Port LA lawsuit.

The case is United National Ins. Co. v. Indian Harbor Ins. Co., No. 14-6425 (E.D. Pa. Feb. 2, 2015).

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