Louisiana Appellate Court holds that pollution exclusions bar coverage for pollution caused by oil and gas operations

Louisiana Appellate Court holds that pollution exclusions bar coverage for pollution caused by oil and gas operations

Source: http://www.lexology.com, October 7, 2013
By: Ruth S. Kochenderfer and Kate M. Riggs, Steptoe & Johnson LLP

In Lodwick, L.L.C. v. Chevron U.S.A., Inc., No. 48,312-CA, 2013 WL 5477240 (La. Ct. App. Oct. 2, 2013) (applying Louisiana law), the Second Circuit Court of Appeal of Louisiana granted summary judgment in favor of commercial general liability (CGL) and excess insurers, holding that pollution exclusions barred coverage for pollution liability arising from gas and oil exploration and production activities.

The underlying liability arose when a group of land owners sued oil and gas operators for alleged property damage associated with oil and gas activities, including the operation of oil wells and disposal of oil field waste. In particular, plaintiffs allege that predecessors of the policyholder, Oracle, conducted oil and gas activities from 1978 to 1990 that caused pollution that migrated and damaged soil and groundwater underneath plaintiffs’ property. Id. at *1. The policyholder filed third-party claims seeking indemnification and defense from three CGL and excess liability insurers.1 The trial court granted partial summary judgment against two of the three insurers, agreeing with the policyholder that some of the underlying plaintiffs’ causes of action, such as breach of contract and trespass, could be unrelated to pollution damage, thus triggering the duty to defend and not falling within the scope of a pollution exclusion. Id. at *4. The trial court denied the policyholder’s summary judgment motion as to the third insurer on the basis that the insurer’s “other insurance” clause provided that the third insurer did not owe a defense if another insurer has a duty to defend. Id. at *2.

The intermediate appellate court reversed. It held that the underlying plaintiffs’ allegations were strictly limited to pollution damages: “[P]laintiffs make no demands for damages concerning defendants’ operations other than those related to the seepage or migration of pollutants,” and therefore, “all of the different theories of recovery and allegations are a direct result of defendants’ alleged contamination and pollution damages.” Id. at *6. The court then examined the language of the insurers’ respective pollution exclusions and found that the damages alleged unambiguously fell outside of coverage. The first insurer issued policies with a pollution exclusion and later “Total Pollution Exclusion Endorsement.” Id. at*11. The second and third insurers issued policies that contained pollution exclusion endorsements that provided for limited pollution condition coverage provided certain conditions are met, including that (1) the pollution is neither expected nor intended; (2) the pollution first commence during the policy period; (3) the policyholder discover and report the pollution incident to its insurer within specific timeframes. Id. at *13.2 The court held that the underlying allegations regarding the spillage, seepage, and migration of contaminants associated with oil and gas operations clearly fell under the policy exclusions. Id.3 The court also held that the record clearly indicated the policyholder did not meet the conditions required for limited pollution coverage under the second and third insurers policies. Id.

The court’s holding is important because it applies the Louisiana Supreme Court’s reasoning in Doerr v. Mobil Oil Corp., 774 So.2d 119 (La. 2000), which held that a pollution exclusion’s purpose was to exclude coverage for environmental pollution. Doerr, 774 So.2d at 127. Doerrset forth a three-part test for deciding whether allegations fall under a pollution exclusion under Louisiana law: “(1) whether an insured is a ‘polluter’ . . . (2) whether the injury-causing substance is a ‘pollutant’ . . . and (3) whether there was a ‘discharge, dispersal, seepage, migration, release or escape’ of a pollutant.” Id. at 135. The Lodwick court rejected the policyholder’s argument that the pollution exclusions were inapplicable under Doerr, reasoning that “[j]urisprudence has established that oil field operators and producers are ‘polluters’ under the Doerr test,” and that the instant case “is the exact type of case the Doerr court found pollution exclusions to be applicable.” 2013 WL 5477240, at *15 (citing Grefer v. Travelers Ins. Co., 919 So.2d 758, 771-72 (La. Ct. App. 2005) (holding intentionally discharged oil and gas waste fell was barred by CGL policies’ pollution exclusions)). Thus, the Lodwick opinion affirms that although Louisiana’s three-part Doerr test is fact-based, Louisiana law holds that policy pollution exclusions are unambiguous and exclude coverage for long-term environmental pollution damage such as that arising from oil and gas operations.

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