Transfer of PCB-Laden Oil From Tanker To Holding Tank Does Not Trigger A “Pollution Condition” Under The Policy

Colonial Oil Industries, Inc. v. Indian Harbor Ins. Co. (Second Cir., June 25, 2013)

This environmental coverage action arises from an alleged breach of a duty to defend and indemnify the policyholder resulting from costs associated with the transfer of contaminated fuel oil. Specifically, the policyholder is a company whose business involves the transportation, storage and sale of fuel oil.  In the course of its business, Colonial received a large delivery of oil from a third-party distributor that unknowingly contained polychlorinated biphenyl (PCB’s) and that was unloaded into one of Colonial’s aboveground storage tanks.  Later, a portion of the contaminated fuel oil from Colonial’s tanks was delivered to one of Colonial’s customers resulting in harm to both Colonial and its customer in the form of decontamination and remediation costs. Colonial sought coverage for these costs from its insurer under its “Pollution and Remediation Legal Liability Policy.”  The policy provided that the insurer will pay for costs “resulting from any ‘Pollution Condition’ on, at, under or migrating from any “Covered Location.’”  The phrased “pollution condition” was defined as “the discharge, dispersal, release, seepage, migration, or escape of Pollutants into or upon land, structure, the atmosphere, or any watercourse or body of water.” The court noted that the policyholder’s argument turned on whether oil which is transferred from a tanker truck into another containment vessel is “discharged” as that term is used in the Policy even if no spill, leak, or other accidental release occurs.  In other words, does the act of unloading the contaminated fuel oil into a transfer tank create a “pollution condition” under the policy by discharging a pollutant, PCB, into a structure. The Second Circuit affirmed the district court decision holding that under New York law, “‘discharge’ and ‘dispersal’ are terms of art in environmental law used with reference to damage or injury caused by disposal or containment of hazardous waste.”  Further, under well-settled New York precedent, the places for discharge contemplated by the policy exclusion (i.e., into or upon land, the atmosphere, or any water course) support the conclusion that the clause was meant to deal with broadly dispersed environmental pollution.  As such, the court noted that these cases make clear that the reasonable expectations of a businessperson viewing the policy language would be that it is intended to provide coverage for environmental harm resulting from the disposal or containment of hazardous waste.  However, this case merely involved the unwitting introduction and transfer of polluted oil into containers intended to hold oil.  Thus, the events did not lead to a “pollution condition” as defined in the policy.

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