Definition of Pollutant in Insurance Contract Found Ambiguous
In Regan Heating and Air Conditioning, Inc. v. Arbella Protection Insurance Company, Inc., No. 2020-170-Appeal (Jan. 27, 2023), the Rhode Island Supreme Court, on the facts before it, expanded the obligations of insurers to examine potential policy ambiguities. In short, the Court found that "diversity of judicial thought" as to the meaning of insurance policy language is "proof positive of ambiguity." The implications for insurers are unclear at the moment, but at least on these facts – whether oil was a "pollutant" and thus losses arising from an oil spill were excluded – the Court has now determined that insurance policy contract language may be considered ambiguous where its treatment differs across various jurisdictions. This decision may now impose a duty on insurers to examine how other states treat relevant policy language before making coverage decisions.
Regan Heating and Air Conditioning, Inc. (Regan), sold and serviced residential heating and air conditioning systems. Regan purchased business protection insurance from Arabella Protection Insurance ("Arabella"). Regan performed work on a client's home. That night, the client found 170 gallons of home heating oil in his basement and sued Regan for damages.
Regan tendered the claim to Arabella. Relevant to this discussion, Arabella denied the claim on the basis that oil was considered a "pollutant" and the policy's pollutant exclusion barred coverage for the claim. Notably, the policy did not define "pollutant" to include "oil."
Litigation ensued. The lower court agreed with Arabella and the coverage battle ultimately made its way to the Rhode Island Supreme Court.
Policy Interpretation Analysis
Relevant to this discussion were the parties' arguments about whether oil was a "pollutant" under the policy. While the policy did not define oil as a "pollutant," Arabella argued that the circumstances of this loss – the release of 170 gallons of heating oil in a home – lead one to conclude the ordinary and plain terms of the policy would require a court to find that the release of a hazardous substance in a home would constitute a pollution event. Regan however argued that since "oil" was not defined as a "pollutant," and since the issue was open to multiple interpretations, the policy language was ambiguous in this instance, the "pollution exclusion" must be read as against Arabella, meaning that the exclusion would not apply.
The Court agreed with Regan and supported its decision by looking at how courts in other states have handled the issue. It found that some courts have found that home heating oil was not a "pollutant" because ordinarily, pollution exclusions have been interpreted narrowly, speaking only to "traditional" environmental pollution events. The Court also considered, but ultimately rejected, the "situational" approach from other states where pollution exclusions were interpreted on a case-by-case basis.
Ultimately however, the Court adopted a "third approach" and found that because states have treated this issue differently, that difference in treatment was "proof positive" of policy ambiguity. Because the pollution exclusion was therefore ambiguous as it applied to the release of home heating oil in a basement, it did not apply, and coverage should have been afforded to the insured.
Implications for Insurers
This highlights the fact that insurers may now need to examine how other states have handled coverage issues before deciding on the state-specific coverage issue before them. This is the case now certainly in Rhode Island and perhaps even in Connecticut which just a few years ago expanded an insurer's "duty to defend" analysis to include a nationwide examination into how courts across the country would address the coverage question before them.
The insurance coverage attorneys at WSHB stand ready to answer any questions or handle any concerns that insurers may have as they work to navigate the ever-changing national landscape on "duty to defend" and "duty to indemnify" issues.