An unresolved issue of Tennessee coverage law: The scope of pollution exclusions

Insurers often include exclusions within their liability policies to prohibit coverage for claims arising out of pollution exposure. The exact wording of the exclusion can differ significantly, but the key issue is whether the underlying allegations fall within the scope of the exclusion.

In this regard, there are “two distinct views” on the scope of pollution exclusions. Sulphuric Acid Trading Co. v. Greenwich Ins. Co., 211 S.W.3d 243, 245 (Tenn. Ct. App. 2006). One theory “maintains that the exclusion applies only to traditional environmental pollution into the air, water, and soil, but generally not to all injuries involving the negligent use or handling of toxic substances that occur in the normal course of business.” Id. at 252. “The other camp maintains that the clause applies equally to negligence involving toxic substances and traditional environmental pollution, and that the clause is as unambiguous in excluding the former as the latter.” Id.

“Tennessee has yet to decide which line it will follow.” W. Bend Mut. Ins. Co. v. Healy Homes, LLC, 3:20-cv-00003, 2021 WL 5283070, at *2 (E.D. Tenn. Aug. 5, 2021). As such, this remains “an unresolved issue of law in Tennessee.” State Auto. Mut. Ins. Co. v. Frazier's Flooring, Inc., No. 3:08-CV-178, 2009 WL 693142, at *6 (E.D. Tenn. Mar. 13, 2009).

Because of this, rulings on the scope of pollution exclusions under Tennessee law have been inconsistent to say the least. Compare CBL & Assocs. Mgmt., Inc. v. Lumbermens Mut. Cas. Co., No. 1:05-cv-210, 2006 WL 2087625, at *8 (E.D. Tenn. July 25, 2006) (“The Court concludes, however, that Tennessee courts, if faced with this issue, would adopt the reasoning of the second line of cases and would conclude that the pollution exclusion applies to all types of pollution, including sewage, and not just to traditional environmental pollutants. This result is in accordance with and dictated by the Tennessee rules of construction for interpreting insurance policies.”) and Admiral Ins. Co. v. I.C.E. (US) Inc., No. 3:21-cv-00130, 2021 WL 4820551, at *1 (M.D. Tenn. Oct. 15, 2021) (granting default final judgment that there was no coverage for carbon monoxide exposure pursuant to pollution exclusion); with Idleaire Techs. Corp., No. 08-10960, 2009 WL 413117, at *10 (Bankr. D. Del. Feb. 18, 2009) (concluding a pollution exclusion only applies to traditional environmental pollution) (applying Tennessee law).

Most recently, in Healy Homes, the US Eastern District Court of Tennessee certified the question of whether pollution exclusions apply beyond traditional environmental pollution to the Tennessee Supreme Court. 2021 WL 5283070, at *5. The Tennessee Supreme Court, unfortunately, declined to exercise its jurisdiction to answer the question. Order, No. M2021-00902 (Tenn. Dec. 8, 2021).

There is, however, at least one takeaway. So long as traditional environmental pollution is present, even if the damages sought in the lawsuit are not for environmental damage, a Tennessee court is likely to conclude the exclusion applies without reaching the issue of whether pollution exclusions apply beyond environmental pollution.

Indeed, this was the approach taken in Sulphuric Acid Trading Co. v. Greenwich Ins. Co., 211 S.W.3d 243 (Tenn. Ct. App. 2006). There, the claimant was in the process of transferring sulphuric acid when a tank broke causing 1,800 gallons of sulphuric acid to be sprayed into the air and surrounding area. Id. at 245. The claimant was severely injured when the sulphuric acid was sprayed on his face and body. Id. The subject policy included a pollution exclusion that barred coverage for bodily injury “which would not have occurred in whole or in part but for the actual … discharge, disposal, dispersal, seepage, migration, release or escape of pollutants.” Id. at 245-46.

The court acknowledged the issue of whether the exclusion applied beyond traditional environmental contamination had not yet been addressed in Tennessee. Id. at 248. Nevertheless, the court held that it did “not need to decide with which side Tennessee should be aligned.” Id. at 253. The court explained “the undisputed facts clearly demonstrate that [claimant] was injured when 1,800 gallons of sulphuric acid were sprayed into the air and onto the surrounding environment—an event that necessitated a clean-up costing some $100,000.” Id. at 253.

The court forcefully “reject[ed] the [insured’s] argument that the accidental discharge of 1,800 gallons of sulphuric acid into the environment ‘[was] in no way related to environmental pollution’ … [because] [i]t would defy logic to hold that the discharge of 1,800 gallons of sulphuric acid into the environment was anything other than environmental pollution.” Id. at 253-54. Accordingly, the court held:

We hold that these facts demonstrate the type of “classic environmental pollution” that would trigger the [ ] Pollution Exclusion under either of the two lines of reasoning adopted by the various states. While the facts before us do involve an employee injured in the course and scope of his employment, we must look at the big picture and cannot ignore the fact that the injury occurred during an event resulting in substantial environmental pollution. As applied to the facts of the instant case, we agree with the trial court that the [ ] Pollution Exclusion is not ambiguous. As to which of the two diverse lines of cases should be adopted in Tennessee, that decision must await another day and another case.  

Id. at 254.

In sum, whether pollution exclusions extend beyond traditional environmental pollution is undecided under Tennessee law. In the author’s view, the focus should be on the express terms of the particular exclusion, as opposed to general policy considerations. Thus, if an exclusion explicitly states it applies to “environmental pollution” then it should be limited as such. But if an exclusion applies to all damages “arising out of, having any connection with, and/or related to exposure to a pollutant,” then the exclusion should be applied as broadly as it is written. The Tennessee Supreme Court has often advised that “[i]Insurance contracts like other contracts should be construed so as to give effect to the intention and express language of the parties.” Tata v. Nichols, 848 S.W.2d 649, 650 (Tenn. 1993) (citations omitted). Pollution exclusions should not be construed any differently.

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