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Pollution Liability Exclusions - Contractors Insurance


February 15, 2023

3 Types of Pollution Liability Exclusions Explained

In the 1960s, the industrial revolution began. While it gave us modern products that we still use today, it also introduced industrial waste that destroys our environment and has harmful effects on people’s health. True enough, the environmental risks we face today stem from this era.

In response to this, the Insurance Services Office (ISO) started offering pollution liability insurance, which is designed to protect business owners against claims caused by toxic waste or chemicals that can damage property or cause bodily harm.

Before we can dive into the three pollution liability exclusions, a history of their importance needs to be explained to create some context. 

Pollution Liability Exclusions: A Brief History 

Up until the 1980s, many commercial general liability (CGL) policies included pollution liability coverage. In this context, pollution was either defined as “gradual” or “sudden and accidental” in nature. The standard pollution liability insurance normally covered three things:

1.) Hazardous materials used;

2.) Bodily injury; and

3.) Property damage. 

The ISO began looking at possible changes to the policy forms that their member insurance companies were using. This was done to narrow the pollution cleanup exposure faced by insurers since most cleanups were costly and sometimes impossible to perform. Thus, pollution liability exclusion clauses were formed. 

There are three pollution liability exclusions:

  • Standard pollution exclusion;
  • Absolute pollution exclusion; and
  • Total pollution exclusion. 

However, there was confusion surrounding the coverage mentioned above because it was difficult for insurance brokers to explain to buyers what the effects were or what could trigger a claim.

A factory beside the sea

Case Study: Montrose Chemical Corporation 

A good example of the confusion surrounding the pollution liability exclusions involved the Montrose Chemical Corporation of California, a company that produced the chemical dichlorodiphenyltrichloroethane, or DDT. This is an insecticide commonly used in agriculture. The company was discharging toxic waste into the Pacific Ocean for decades before a federal lawsuit required Montrose to pay for environmental cleanup costs.

Montrose’s insurance carriers issued CGL policies to the company prior to this lawsuit, in which they promised to defend the corporation against “any suit seeking damages on account of bodily injury or property damage, even if any of the allegations of the suit are groundless, false, or fraudulent.” The insurers also agreed to indemnify the company for “bodily injury or property damage caused by an occurrence.”

Note that in any insurance claim, the wording bears much weight on whether a claim will be awarded to you or not. In this case, “property damage” was defined as “injury to or destruction of tangible property” during the policy period. “Occurrence” was defined as an “accident, including continuous or repeated exposure to conditions.”

After being served the complaint, Montrose notified its carriers and requested they provide “defence pursuant to their policies.” However, Montrose’s insurers pushed back and provided their own reasons why they had to decline or deny coverage for Montrose’s claims. The insurers’ main argument was that the pollution was not “sudden and accidental” because the company had been knowingly dumping the toxic chemicals into the ocean, and that this had been going on for several years.

In short, since the chemical dumping was not unintentional, they were not liable to pay for the cleanup costs.

Standard Pollution Liability Exclusion 

The standard pollution exclusion clause was drafted as a response to the “sudden and accidental” exception—one factor that had been subjected to scrutiny since the 1980s. 

The ISO excluded bodily injury or property damage that came from the “discharge, dispersal, or release of smoke, vapours, soot, fumes, acids, alkalis, toxic chemical, liquids or gases, waste materials or other irritants, contaminants, or pollutants into or upon land, the atmosphere or any water course or body of water.” This excluded any “sudden or accidental” discharge of chemicals.

However, this “standard” clause still confused insurance companies and policyholders. As explained in the case study above, the “sudden and accidental” aspect gave Montrose’s insurance carriers a loophole; not to mention, the terms were a source of headaches themselves.

The word “sudden” is confusing for courts to decipher, as it could both mean “unexpected”, or “quick.” The term “accidental”, on the other hand, could be interpreted as “unintentional” or “unexpected.”

It was out of this confusion that the absolute pollution liability clause came to be.

Absolute Pollution Liability Exclusion 

This new exclusion was formed to help insurance companies remove their liability for pollution-related claims involving their clients. Although it attempts to exclude coverage for nearly all types of pollution, this exclusion does include coverage for pollution events unrelated to normal business operations.

To paraphrase, some of the common exceptions to absolute pollution liability exclusion are bodily injury or property damage arising from actual, alleged, or threatened discharge, release or escape of pollutants:

  • In a building owned, occupied, rented to, or loaned to an insured;
  • On premises, a site, or a location which is or was used by an insured to handle, store, dispose of, or process wastes;
  • On premises where an insured or any contractors or subcontractors are working directly or indirectly on the insured’s behalf; or
  • That were transported, handled, processed, or disposed of by an insured. 

In Canada, the term “pollutants” here is described to have been brought to the premises or location and means any solid, liquid, gas, or thermal irritant. This includes smoke, vapour, soot, fumes, acids, alkalis, chemicals, and waste.

A smoking factory pipe

Total Pollution Liability Exclusion 

In the 1990s, after much deliberation, the insurance industry introduced the total pollution exclusion. This was an even more restrictive pollution liability which excluded bodily injury or property damage that arise from any of the insured’s operations, including those which produce a “products-completed operations hazard.”

This also exempted losses, costs, or expenses borne out of any governmental direction or request to test for, monitor, remove, clean up, treat or neutralize pollutants. The word “pollutants” in this case, means the same as the one described in the absolute pollution liability exclusion.

Get Personalized Policies With Contractors Insurance 

Contractors Insurance is an award-winning insurance brokerage firm based in Ontario. Clients can always count on us to provide only the policy that they need—no unnecessary riders will be added. 

Our pollution liability insurance covers sudden pollution, gradual pollution, mould, and legionella. We also provide full transparency in discussing our policies; this means no hidden fees or complicated jargon.

Contact us today for more information on our policies.


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