Kentucky Court Holds Pollution Exclusion Applicable to Release of Diesel Fuel

In its recent decision in Hardy Oil Co. v. Nationwide Agribusiness Ins. Co., 2013 U.S. Dist. LEXIS 4760 (E.D. Ky. Jan. 11, 2013), the United States District Court for the Eastern District of Kentucky had occasion to consider the application of the pollution exclusion and under what circumstances it will be deemed ambiguous under Kentucky law.

Hardy Oil Company sought coverage under a general liability policy issued by Nationwide for a release of diesel fuel on its premises. Nationwide denied coverage on the basis of the lack of an occurrence and lack of third-party property damage.  Nationwide also denied coverage on the basis of its policy’s pollution exclusion, applicable to:

f. Pollution

(1) "Bodily Injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

(a) At or from any premises, site, or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.

                                [...]

(2)       Any loss, cost or expense arising out of any:

(a) Request, demand, order or statutory or regulatory requirement that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of, "pollutants"; [...]

By endorsement, the term “pollutants was defined as:

(a) 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.

(b) Gasoline, diesel fuel and all other petroleum products.

The court acknowledged that while the pollution exclusion was unambiguous on its face, Kentucky courts have nevertheless deemed the exclusion ambiguous as applied in certain contexts.  For instance, in Motorists Mut. Ins. Co. v. RSJ, Inc., 926 S.W.2d 679 (Ky. App. 1996), Kentucky’s Court of Appeals held the exclusion ambiguous as applied to carbon monoxide fumes emanating from a dry cleaner to two neighboring businesses.  Likewise, in Certain Underwriter's at Lloyd's, London v. Abundance Coal, Inc., 352 S.W.3d 594 (Ky. App. 2011), Kentucky’s Court of Appeals held the exclusion ambiguous as applied to allegations of “negligent trespass” of coal dust from the insured’s property to the plaintiff’s property.  In both cases, explained the Hardy court, the Kentucky Court of Appeals, looking to the historical use and understanding of the exclusion, concluded the exclusion was ambiguous in the context of “accidental, small-scale scenarios.”  The court distinguished these scenarios from that involving Hardy:

In contrast to these cases, Hardy Oil's claim involves a classic environmental catastrophe that led to a government-ordered cleanup. As Kentucky courts have recognized, these are exactly the type of situations that the pollution exclusion historically sought to exclude from coverage. … Therefore, the pollution exclusion is not ambiguous as applied to the factual circumstances of this case, and Hardy Oil cannot claim coverage under the Liability Policy.

The court further concluded that even if the exclusion was ambiguous under the circumstances, the lack of any third-party property damage further precluded coverage under the policy.