In Narragansett Elec. Co. v. American Home Assur., the Second Circuit will soon decide whether and to what extent an insurer is obligated to provide a defense under a commercial general liability policy for wide-spread and systematic pollution despite the presence of a broadly drafted pollution exclusion. Should the Second Circuit ratify the District Court’s rulings in favor of the insured, this could mark a drastic shift in a nationwide trend of recognizing that commercial general liability policies were not conceived or designed to cover cases of environmental pollution.

The current appeal is the final hurdle in a case of industrial pollution that originated in 1930 and 1945, when Blackstone Valley Gas and Electric Company, the predecessor of the plaintiff-respondent Narrangansett Electric Company, contracted to dispose of hazardous by-products by burying it in a local lot. In 1984, a local landowner excavated a portion of the plot to build a foundation for a home, and discovered the hazardous by-products. Three years later, the State of Massachusetts sued Blackstone and other companies to recoup the costs of the remediation.

In May of 1994, Narrangansett sought coverage from Century Indemnity Company (the successor to Insurance Company of North America) under a commercial general liability policy effective January 1, 1985, to January 1, 1986. Three months later, Century declined to provide a defense and reserved its right to deny coverage citing, among other things, the pollution exclusion clause in the policy that removed from coverage any claims of property damage that “arises out of…[a] discharge” of pollutants “into or upon land, the atmosphere or any water course or body of water,” unless “such discharge…is sudden and accidental.” After lengthy litigation against the government, Narrangansett was found liable for the pollution. In 2011, Narrangansett sued Century and a host of other insurers to recoup some $9.1 million in defense costs.

The court held that under Massachusetts law, Century had a duty to defend because the pollution exclusion did not bar coverage as the landowner’s discovery of the toxic sludge constituted a “sudden and accidental” event. Narragansett Elec. Co. v. American Home Assur. Co., 921 F.Supp.2d 166, 181-85 (S.D.N.Y. 2013). In reaching this decision, the court observed that the complaint alleged that the exposure resulted from a residential landowner’s excavation, which constitutes a “sudden and accidental” event. On appeal, Century argues that the case arose from systematic and intentional pollution, and that the landowner’s subsequent discovery cannot constitute a separate event distinct from the actual pollution. It remains to be seen how the Second Circuit comes down.

This case tests the limits of the broad duty to defend and the right to disclaim based on what would otherwise appear to be clear grounds. Should the Second Circuit affirm the lower court’s ruling, it is difficult to imagine how any act of discovering industrial pollution, no matter its source, could not be deemed a “sudden and accidental” event. This could obviate pollution exclusions that contain such language, and essentially convert a commercial general liability policy into a pollution liability policy.

Thanks to Christopher Soverow for his contribution to this post.