We Texans like to pride ourselves on being a commonsensical kind of folk, neither impressed nor fooled by fancy suits, jargon or schemes.

This is why I was so baffled a few weeks ago by the argument a Cincinnati-based insurer used in federal court to avoid a potential $25 million liability in a 2007 office building fire that killed three.

Great American Insurance Company maintained that, if the building owner in the case was found negligent in any wrongful death lawsuits, it could deny coverage because it considered the smoke that killed the victims “pollution,” which WAS specifically excluded in the policy.

It seemed like an underhanded scheme designed to cheat premium-payers out of coverage. Texas judges would see straight through it and toss these greedy goons out of court. Right?

Wrong. Turns out, Texas is among the friendliest states in the nation to this twisted logic.

Our courts have consistently interpreted the wording in these “pollution exclusions” literally and broadly, in effect sanctioning its abuse. “Pollution” can mean virtually any irritant or contaminant: A spilled bottle of Drano.

Chlorine in a public pool. Perhaps, some would argue, this column.

This basic fact didn’t escape the 7th Circuit. The court, which considers appeals in Illinois, Indiana and Wisconsin, noted in 1992 that the definition of a pollutant, if applied literally without regard for how it was intended to be used, can be “virtually boundless” and “lead to some absurd results.”

Judges partly to blame

Still, at nearly every turn, Texas courts have ruled against common sense. It isn’t entirely the judges’ fault. For more than a decade, they have been bound by a 1995 Texas Supreme Court ruling known as CBI. [CBI Industries, Inc. v. National Union Fire Ins. Co., 860 S.W. 2d 662, rev’d 907 S.W. 2d 517 (Tex. 1995).]

In that case, a crane, operated by a contractor of CBI Industries Inc. had dropped its load on a pipe, which ruptured and leaked hydrofluoric acid into the air. People exposed sued, alleging injuries due to CBI’s negligence. CBI’s insurer, National Union Fire Insurance Co., denied coverage, arguing that the acid constituted “pollution,” which the policy didn’t cover.

Texas’ highest civil court agreed unanimously. But most importantly, the court found that because the wording of the pollution exclusion was clear on its face, there was no need to look deeper at other bothersome facts, such as, say, just what the provision was intended to be used for.

If the Texas Supreme Court had looked deeper, it would have found the true purpose of such provisions spelled out clearly by insurance industry representatives.

According to transcripts, industry representatives say that pollution exclusion language was overly broad, or “overdrafted,” but asked regulators to trust that insurers would apply it fairly.

In a 1985 hearing, Wade Harrell with Insurance Services Office Inc. admitted that the wording could be interpreted literally, but told board members, “I don’t know anybody that’s reading the policy that way.”

Harrell said that a mob of policyholders would be up at the State Board complaining “quicker than a New York minute if, in fact, every time a bottle of Clorox fell off the shelf at a grocery store and we denied the claim because it’s a pollution loss.”

In a foreshadowing of the Houston building fire case, Ed Rinehimer, representing Travelers Insurance, testified that his claims people “have no intention of trying to enforce the exclusion against smoke from a hostile (unintended) fire.” A year later, the ISO officials amended pollution exclusion language to clarify that heat, smoke and fumes from a fire shouldn’t apply.

They attached a memo explaining that pollution exclusions weren’t meant to be applied literally or on substances “not ordinarily considered pollution.”

Unseen transcripts

All this was news to several officials at the Texas Department of Insurance, who said they hadn’t seen the transcripts until I sent them copies.

Still, they said the testimony would be helpful in an investigation the agency launched shortly after reading about the Great American case in the Houston Chronicle.

Associate Commissioner Catherine Reyer, who oversees enforcement, said she didn’t want to prejudge Great American before the investigation she initiated is complete but said she was concerned that the insurer’s “novel application” of the exclusion could be a misapplication, that, if successful, could have “far-reaching effects.”

In a previous column, I suggested that U.S. District Judge Lee Rosenthal, who will consider Great American’s arguments, shouldn’t be fooled by the company’s tactics.

But the judge is no doubt wise to the game. In a December ruling in an unrelated case, she spelled out the difference between Louisiana law — which seeks to limit the scope of pollution exclusions to real environmental pollution, by actual polluters — and Texas law.

Rosenthal could easily follow the Texas Supreme Court’s lead, disregarding the unique facts that set apart the Houston building fire case or the obvious ambiguity that is at the heart of conflicting court decisions across the country.

But in this case, simply following Texas law means defying reason.

– END –

See also: HISTORY AND USES OF ENVIRONMENTAL RISK INSURANCE:

…An example of the operation of the “Absolute Pollution Exclusion” can be observed in the decision of the Texas Supreme Court in an oil and gas downstream industry case, National Union Fire Ins. Co. v. CBI Industries, Inc. [CBI Industries, Inc. v. National Union Fire Ins. Co., 860 S.W. 2d 662, rev’d 907 S.W. 2d 517 (Tex. 1995).] In National Union the insured was working as a contractor in a refinery turnaround, when a crane’s load was dropped onto a pipe connected to a hydrofluoric acid tank. The accident caused a release of hydrofluoric acid, and numerous lawsuits resulted. These were tendered for coverage to several insurers, each of whom denied coverage under two slightly different versions of the Absolute Pollution Exclusion. The Court had little trouble in upholding a denial of coverage, holding that the “absolute” exclusion was just that, “absolute”, and coverage was properly denied, notwithstanding the fact that the release was caused by an accident…

Print PDF