On May 6, 2020, a Montana federal court ruled that an insurer was not obligated to cover $1 million in cleanup costs incurred by an umbrella policyholder after spilling 238 barrels of crude oil and 1,200 barrels of production water into tail-water of the North Chinook Reservoir. In reaching that conclusion, the Court principally relied upon the umbrella policy’s exclusion of coverage for damage “arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” The Court was persuaded that this pollution exclusion was unambiguous and that no exceptions applied. However, an exception to the pollution exclusion might have preserved coverage if the umbrella policy’s underlying insurance requirements had been satisfied. The decision is a reminder that commercial insurance programs must be carefully structured and coordinated to meet expectations. See Bitco General Insurance Corp. v. J. Burns Brown Operating Co., 4:18-cv-00087 (D. Mont., May 6, 2020).

While both the insurer and policyholder generally agreed the spill fell within the policy’s pollution exclusion, they disputed whether an exception to the pollution exclusion nonetheless applied so as to provide coverage. Under the exception, the pollution exclusion did not apply when insurance for property damage caused by pollution “is provided by ‘underlying insurance’ at the limits shown in the schedule of ‘underlying insurance.’”

Here, the policyholder had obtained and exhausted coverage for the spill under a primary policy held with the same insurer. It thus argued that the exception should apply, or at least that it was ambiguous and must be construed in the policyholder’s favor. The Court disagreed.

Three Conditions

In parsing language of the exception, the Court explained that there could only be coverage for cleanup costs associated with property damage caused by pollution if three distinct conditions were met. First, the insured would need to hold an underlying insurance policy that was referenced in the umbrella policy’s schedule of underlying insurance. Next, the referenced policy would have to provide coverage for property damage caused by pollution. Here, both of those conditions were met.

Last, however, the referenced policy also would need to provide coverage for property damage caused by pollution at a coverage limit equal to or exceeding the coverage limits listed on the umbrella policy’s schedule of underlying insurance. Here, the primary policy only provided for $100,000 of coverage for property damage caused by pollution, whereas the umbrella policy’s schedule of underlying insurance identified $1,000,000. 

Implications  

The decision in this case is a cautionary tale for policyholders about the need to harmonize coverage requirements in their primary and umbrella policies. Here, despite obtaining coverage for the spill of pollutants under a primary policy, the policyholder may have been surprised that excess coverage was unavailable because the underlying limits did not sync with the umbrella policy’s requirements. It is critical for policyholders to ensure that policies in all layers of a coverage tower work together as expected.