Broad pollution exclusions may be applied to bar coverage in certain circumstances. In Hiland Partners GP Holdings, LLC, et al. v. National Union Fire Insurance Company of Pittsburgh, the Eighth Circuit broadly applied a commercial general liability’s pollution exclusion, upholding an insurer’s denial of coverage.

In Hiland, an explosion occurred at a natural gas processing facility.  In its declaratory judgment action, the owner and operator of the facility were seeking additional insured status under another party’s CGL policy.  The CGL contained a pollution exclusion stating no coverage was provided under the policy for, damage arising out of the actual, alleged or threatened discharge of a contaminant.  Contaminant was not defined by the policy.  The insurer denied coverage under the policy on the basis of this exclusion.

On appeal, the Eighth Circuit concluded that the exclusion barred coverage reasoning that one of the byproducts, condensate, which was produced during the processing operation, constituted a contaminate because it was flammable, volatile and explosive and had the ability to infect the environment.  Accordingly, since the insured’s damages arose out of the condensate, the pollution exclusion barred coverage.

This case illustrates how broadly a court could potentially interpret a policy’s pollution exclusion to bar coverage.  However, not all courts may apply a policy’s pollution exclusion as broadly to bar coverage for damages stemming from operations in the oil and gas industry.  As such, if an insurer intends to issue a policy to an insured, operating in the field of oil and gas, an insurer may benefit from terms, provision and/or exclusions that are more specifically tailored to the risks associated with oil and gas operations, as to avoid providing coverage for damages to which an insurer did not intend.

Thanks to Colleen Hayes for her contribution to this post.