California Court Holds Non-Owned Site Disposal Exclusion Is Ambiguous

In its recent decision Sierra Recycling & Demolition v. Chartis Specialty Insurance Co., 2011 U.S. Dist. LEXIS 127354 (E.D. Cal. Nov. 3, 2011), the United States District Court for the Eastern District of California considered the scope a non-owned site disposal exclusion, a form of exclusion commonly found in pollution liability insurance policies.

Sierra Recycling concerned coverage under a contractors pollution liability insurance policy issued by Chartis (formerly known as American International Specialty Lines Insurance Company) to Sierra, which provided coverage for bodily injury, property damage or environmental damage resulting from pollution conditions caused by Sierra’s contracting operations.  The policy contained a non-owned site disposal exclusion, barring coverage for:

Bodily injury, property damage or environmental damage arising from the final disposal of material and/or substances of any type (including but not limited to any waste) at any site or location which is not owned, leased or rented by you.

Sierra was hired to transport construction debris from a demolition site.  It hauled some three hundred tons of debris to a facility that it did not own, lease or rent.   Of significance, the facility to which Sierra hauled the debris was not a landfill, but instead a recycling facility that sold, recycled, or otherwise transferred all material brought to its facility.  Sometime after Sierra transported the debris, it was advised by the facility that the debris contained elevated levels of zinc and mercury.  Sierra sought coverage for necessary cleanup costs under the Chartis policy, but Chartis disclaimed coverage on the basis of the non-owned site disposal exclusion.

In the ensuing coverage litigation, Chartis moved for summary judgment on the basis of the policy’s non-owned site disposal exclusion. Chartis argued that the exclusion applied to an insured’s “final disposal” of material at any site, regardless of its nature, as long as the site is not owned, leased or rented by Sierra. Sierra relinquishment of the debris at the facility, Chartis asserted, constituted “final disposal” for the purpose of the exclusion.  Sierra, on the other hand, argued that the exclusion was ambiguous, at least as applied to the facts before the court, because “final disposal” connoted disposal at a landfill (i.e. a place of final disposal), not at a recycling facility where material and waste will be resold, recycled or subsequently transferred to another facility or landfill.  Under Sierra’s interpretation, the exclusion does not apply to disposal of waste or material at an intermediary facility, even if the insured has otherwise relinquished control of the waste or material.

Without citing to any particular line of authority, court concluded that Sierra’s construction of the phrase “final disposal” was “in line with the ordinary and popular understanding of the term ‘final disposal, and … therefore reasonable.”  The court further held that Chartis’ construction of the exclusion as applying to an insured’s final relinquishment of waste or material also was reasonable.  Thus, under California law, explained the court, since both sides presented reasonable interpretations of the exclusion, it was necessarily was ambiguous and to be construed against the insurer.