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In 2015, you may remember Ashley or me posting about the Cow Palace dairy in Washington state. Cow Palace, along with two other dairies, entered into consent agreements to clean up and change how their dairies operated to prevent manure leaking into groundwater supplies. The previous posts are available here, here, here, and here.
The Cow Palace dairy attempted to get its insurer to indemnify the dairy. The insurer informed the dairy there was no duty to defend or indemnify due to the absolute pollution exclusions in the dairy’s insurance coverage. Cow Palace brought suit in federal court claiming the insurer had a duty to defend and indemnify the dairy. The federal district court agreed with the insurer, Bedivere Insurance Company, that the dairy’s coverage excluded pollution damage from the policy. The insurer according to the court had no duty to indemnify or defend Cow Palace due to the absolute pollution exclusion.
Duty to Indemnify
An insurer must indemnify the insured (person with insurance coverage) when the insurance policy provides coverage for the loss. In reviewing Washington law on this issue, the court had to determine if the coverage excluded the losses due to the absolute pollution exclusion in the policy. Then the court had to determine if the losses were the proximate cause of an event which would be covered by the insurance policy.
In looking at the absolute pollution exclusion, the exclusion applies when the cause of the losses in the insured, who is acting as a pollutant. As the court points out, absolute pollution exclusions are in general liability policies to prevent insurance companies from being on the hook for massive cleanups caused by pollution.
The policy defined a pollutant as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed” (Dolson Cos.,*4). The court rejected the dairy’s arguments that for manure to fall under “waste” in the definition, the insurer should have stated “animal waste” or “agricultural waste.” To the court, waste is waste regardless of the word in front of it. The court also rejected the dairy’s claims that manure should be excluded from “waste” since it can be used as a fertilizer, because the policy includes the pollution definition materials that can be recycled, reconditioned, or reclaimed (Dolson Cos., *4).
The dairy argued that manure should be excluded from waste because a reasonable person buying agricultural insurance coverage would not view manure as a waste. The court disagreed with this argument as well. The court found the standard should be whether a reasonable person would find manure to be labeled a pollutant when entering drinking water as a contaminant. No reasonable person could deny that manure would be a pollutant when the manure enters and contaminates drinking water.
Is a Covered Loss the Proximate Cause of the Damage?
When two events occur together to cause damage, one covered and the other excluded as a loss by the insurer, Washington courts will look to determine if the covered loss is the proximate cause of the damage. For example, looking at a previous decision, the court found a policy covered carbon monoxide damage even though the policy had a carbon monoxide damage exclusion. In that decision, the cause of the carbon monoxide damage was the negligent installation of a water heater, which set in motion the chain of events which caused the carbon monoxide damage.
Looking at this case, the water pollution was caused by two events: 1) over-applying manure as a fertilizer and 2) manure seeping out of lagoons and other storage areas. When applying manure as a fertilizer, the event is the application of manure and was not caused by a covered loss. With manure seeping out, it was the inadequate storage causing the damage; the court disagreed that the cause was the negligent construction of the storage. In both cases, the only acts causing pollution were spelled out in the exclusion. The court rejected arguments that the damage was the proximate cause of a covered loss triggering coverage by the insurer.
Duty to Defend
According to the court, the duty to defend “is broader than the duty to indemnify and arises when an action is first brought based on the potential for liability” (Dolson Cos.,*8). In Washington, courts use the “eight-corners” rule, meaning a court looks at the policy and the legal complaint to determine if a reasonable interpretation of the facts or law could result in coverage the insurer must defend. The court agrees with the insurer that looking at the policy and the legal complaint, non-coverage was clear and the insurer had no duty to defend.
As you can see, the language in insurance policies is extremely important to determine the policy’s coverage. With an excluded loss, the insured can consider riders or purchase additional coverage to cover other potential areas of loss. Understanding inclusions in the policy are key to determining if additional coverage is needed.
Back in 2015, I also posted about a decision out of Wisconsin that reached a similar result in excluding pollution caused by a dairy. Other states have reached this conclusion as well: manure can be a pollutant and excluded from general farm liability policies. My search has found no similar Maryland cases, and previous decisions may guide but would not be binding on Maryland courts.
The Cow Palace dairy has agreed to substantial clean-up costs associated with the damage caused by leaking manure or over application. The dairy also has huge legal costs associated with this damage. We will need to see if the dairy will appeal this decision.
The Dolsen Companies v. Bedivere Ins. Co., No. 1:16-CV-3141-TOR, 2017 WL 3996440 (E.D. Wash. Sept. 11, 2017).