Cities beat insurance industry on pollution again.

Englewood, Colo. – The insurance industry has lost another attempt to apply the “sudden and accidental polluter’s” exclusion in rejecting policyholders claims for environmental coverage – this time in the case of sewage sludge processing operated by city governments.

Giving a significant boost to municipalities seeking insurance coverage for pollution liability, the Colorado Court of Appeals reversed the trial court and ruled in favor of two Colorado cities, Englewood and Littleton, which sought indemnification and defense costs for EPA-mandated pollution cleanup. The claims arose out of sludge leakage from the cities, operation of their Bi-City Waste Treatment Facility. Commercial Union Assurance Co., The Hartford Accident and Indemnity Company and Fireman’s Fund Insurance Company had sold insurance policies to Englewood and the Bi-City plant, only to deny claims on the basis of the pollution exclusion.

The case, City of Englewood v. Commercial Union Assurance Cos., grew out of an agreement the two cities had forged in the 1970s to build and operate the Bi-City Waste Treatment Facility, which processed their sewage sludge before sending it on to the Lowry Landfill. During the 1980s, the two cities were notified that the U.S. Environmental Protection Agency considered them to be Potentially Responsible Parties under CERCLA for an alleged release of hazardous substances at the landfill.

The cities sought a defense and indemnity coverage from each of their liability insurance companies and the Bi-City Plant’s liability insurance companies as a result of EPA’s allegations. The insurance companies declined to provide either, so, in 1991, the two cities sued for a declaration of their rights under the insurance policies and the costs of defense and indemnity for cleanup of the landfill.

The trial court determined that the insurance companies did not owe the cities defense or indemnity because of, among other things, the “sudden and accidental” polluter’s exclusion. The appeals court reversed that decision, noting that the duty to defend is broader than and separate from the duty to indemnify. It noted that “an insurer has the duty to defend its insured unless it establishes that there is no factual or legal basis on which liability might be established. Here, there is a legal basis on which it may be concluded that the pollution exclusion does not apply to the cities. Accordingly, the insurers have failed to meet their heavy burden of showing that the allegations in the complaint are solely and entirely within the [policy] exclusions.”

The case is important for a number of reasons. First, the court did not accept the insurance industry’s attempt to narrow the scope of environmental insurance coverage. Second, the court noted that whether domestic sewage sludge is “an irritant, contaminant or pollutant” is not clear.

Additionally, the court appeared to have considered the companies’ own statements – via internal memoranda – that the sludge was not hazardous waste since it had been put to productive agricultural use.