Wisconsin cases interpreting insurance coverage under pollution exclusion clauses have failed to give insurers and their insureds guidance as to what circumstances would trigger a standard pollution exclusion clause. To a large extent, the cases involving pollution exclusions in Wisconsin have not set forth an objective test, thereby creating inconsistent results at the appellate level. However, the Wisconsin Supreme Court has the opportunity to clarify the law when it reviews the Court of Appeal's decision in Wilson Mut. Ins. Co. v. Falk, 2014 WI App 10, 352 Wis. 2d 461, 844 N.W.2d 380. In Falk, the question was whether cow manure, which polluted the ground water supply, was unambiguously a pollutant under a farm owner insurance policy. Falk, 2014 WI App 10, ¶2.
While Wisconsin Courts have acknowledged that pollution exclusion clauses are intended to have “broad application,” the cases have not defined the boundaries of this supposedly broad policy exclusion. Peace v. Northwestern Nat'l Ins. Co., 228 Wis. 2d 106, 137 n.1, 596 N.W.2d 429 (1999); see also Langone, 2007 WI App 121, ¶12, 300 Wis. 2d 742, 731 N.W.2d 334. The boundaries were further blurred by the decision in Falk, as will be explained in greater detail below.
The main point of contention with pollution exclusion clauses is whether the substance in question can unambiguously be classified as a “pollutant” under the policy. To determine whether the substance involved is unambiguously a “pollutant,” courts try to determine whether an “insured could reasonably expect coverage under the facts of the case.” Langone, 2007 WI App 121, ¶21. Obviously, the above standard is rather ambiguous so courts consider “the nature of the substance involved” and “the context or environment in which the substance is involved.” Langone, 2007 WI App 121, ¶¶ 17, 28; see also Falk, 2014 WI App 10, ¶13. Not surprisingly, Wisconsin decisions on the issue of pollution exclusions have been “somewhat inconsistent” despite similarities between “the exclusion[s] at issue . . . .” Falk, 2014 WI App 10, ¶¶ 11, 13.
2. ANALYZING POLLUTION EXCLUSIONS PRE-FALK
A. The nature of the substance involved
When considering the “nature of the substance involved” courts consider: (1) the hazard posed by the substance; (2) whether the substance's hazardous nature is commonly known; (3) the concentration at which the substance becomes hazardous; and (4) whether the substance is commonly present.
In Donaldson v. Urban Land Interests, the Court held that carbon dioxide was not unambiguously a pollutant under the policy. Donaldson, 211 Wis. 2d 224, 232-33, 564 N.W.2d 728 (1997). Importantly, the Court noted: “[i]t is also significant that, unlike the unexhaustive list of pollutants contained in the pollution exclusion clause, exhaled carbon dioxide is universally present and generally harmless in all but the most unusual instances.” Id. at 234 (emphasis added). Ultimately, the Court was “hesitant to conclude that a reasonable insured would necessarily view exhaled carbon dioxide in the same class as ‘smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.'” Id.
Similarly, in Langone, it was held that carbon monoxide was not unambiguously a pollutant under the policy. In Langone, the plaintiffs were injured as result of the accumulation of carbon monoxide gas. The Court held that given the facts, it was a “sick building” case because “an omnipresent substance became concentrated due to a ventilation defect.” Langone, 2007 WI App 121, ¶26. The Court reasoned that “[c]arbon monoxide, like carbon dioxide, becomes harmful when levels are abnormally high or exposure is unusually extended.” Id.
Both Langone and Donaldson placed significant emphasis on the fact that carbon monoxide and carbon dioxide are present everywhere in our daily lives. Furthermore, they stressed that carbon monoxide and carbon dioxide do not become harmful except in unusual instances (at abnormally high concentrations). Notably, in both cases, minimal emphasis was placed on whether the substances were commonly known to be dangerous.
However, in Hirschhorn the Court held that bat guano was unambiguously a pollutant under the policy. Hirschhorn, 2012 WI 20, ¶33 (“bat guano falls unambiguously within the term ‘pollutants' as defined by the Auto-Owners' insurance policy”). The Court held that, “[u]nlike exhaled carbon dioxide, bat guano is not ‘universally present and generally harmless in all but the most unusual instances.'” Id. ¶37 (citation omitted). “[B]at guano, like lead present in paint, is a unique and largely undesirable substance that is commonly understood to be harmful.” Id. “A reasonable homeowner would therefore understand bat guano to be a pollutant.” Id.
Similarly, in Peace the Court stressed that lead based paint is universally known to pose dangers to children who may ingest paint chips, flakes or dust. The Court cited numerous articles detailing the dangers of lead based paint and concluded lead based paint is ambiguously a pollutant. Peace, 228 Wis. 2d at 125, 147. The key facts in Peace were: (1) the insured knew that the lead was present in the building; (2) the insured knew that lead was dangerous; (3) most people understand the dangers of lead; and (4) lead is not a ubiquitous or omnipresent substance that only poses a danger in unusual circumstances. See generally Peace, 228 Wis. 2d 106.
B. The context of the environment in which the substance is involved
Courts consider “the context or environment in which the substance is involved.” Langone, 2007 WI App 121, ¶28. In other words, the substance involved cannot be analyzed in a vacuum; it must be evaluated in the context of the facts of the case. In some situations a substance may be a pollutant, in other situations it may not. See United States Ins. Co. v. Ace Baking Co., 164 Wis. 2d 499, 505, 476 N.W.2d 280 (Ct. App. 1991) (“it is a rare substance indeed that is always a pollutant; the most noxious of materials have their appropriate and non-polluting uses.”). For example, motor oil works great when it is used to lubricate a vehicles engine, but is not so good when dumped into a small stream. Thus, the context is important in evaluating whether a substance is unambiguously a pollutant under a policy.
In Ace Baking, ice cream cones were fouled after having been stored near fabric softener, which contained linalool. Id. at 501. “The parties agreed that linalool is harmless when properly used in appropriate products.” Id. However, coverage for the loss was denied under the pollution exclusion because linalool “was a ‘pollutant' in relation to [the ice-cream cones] . . .” Id. at 505. “[A]lthough linalool is a valued ingredient for some uses, it fouled Ace Baking's products.” Id.
C. Conclusions that can be drawn from the pre-Falk cases
When courts considered the nature of the substance involved, it seems that great emphasis was placed on whether the substance “is universally present and generally harmless in all but the most unusual instances.” Donaldson, 211 Wis. 2d at 234. Carbon dioxide is exhaled by all living creatures and carbon monoxide is a common byproduct of combustion which happens all around us all of the time. In contrast, lead has been heavily regulated and is not commonly encountered on a daily basis. Similarly, bat guano is not encountered on a daily basis by the average person.
Moreover, it seems that evaluating the context of the environment has more to do with deciding whether a substance was a pollutant in a given situation as opposed to determining whether a reasonable insured would consider the substance a pollutant. For example, if an oil spill on a highway caused a motor vehicle accident, then it cannot be said that the accident arose out of the release of a pollutant because it was not the substance's hazardous qualities that caused the damage. However, if that same oil spill contaminated a nearby stream, then, given the context of the situation, the oil would constitute a pollutant. It seems that considering the context is the only truly objective criteria used to evaluate the applicability of pollution exclusion clauses.
3. THE FALK DECISION AND THE NEED FOR CLARIFICATION
A. The Falk decision
In Falk, the question was whether cow manure, which polluted the ground water supply, was unambiguously a pollutant under a farm owner insurance policy. Falk, 2014 WI App 10, ¶2. The Court of Appeals held that “[a] reasonable farmer would not consider manure to be a ‘pollutant,” and ‘irritant,' a ‘contaminant,' or ‘waste.'” Id.¶14. “Manure is an everyday, expected substance on a farm that is not rendered a pollutant under the policy merely because it may become harmful in abnormally high concentrations or under unusual circumstances.” Id. The Court distinguished the case from Hirschhorn and Peace by stating: “[w]hile bat guano is ‘waste' to a homeowner, and lead paint chips are universally understood by apartment building owners to be dangerous and pollutants, manure is beneficial to a dairy farmer.” Id. ¶15.
B. Conclusions that can be drawn from Falk
The application of the law in Falk sheds light on the potential inconsistencies that can arise under Wisconsin law when determining the applicability of pollution exclusions. First, the Court seemed to focus on manure from the perspective of farmers, as opposed to the public at large. Second, the Court considered whether manure was “universally present and generally harmless” from the perspective of a farmer. Third, the Court seemed to disregard the holding in Ace Baking and instead focus on the nature of the substance. In other words, the Court seemed to disregard the fact that manure can be useful in some situations, but a pollutant in others.
C. Critical Questions for the Wisconsin Supreme Court
The Supreme Court has the opportunity to provide guidance on a number of questions regarding the applicability of pollution exclusions in light of Falk. First, when courts consider the perspective of a “reasonable insured,” should they consider the likely expectations of the public at large or the likely expectations of those similarly situated to the insured whose policy is being analyzed? Second, when courts consider whether a substance is “universally present and generally harmless,” should the substance's presence and potential for harm be analyzed through the lens of the public at large or those similarly situated to the insured whose policy is being analyzed? Third, should there be a distinction between commercial and noncommercial insureds? Fourth, if an insured regularly uses a substance in a beneficial way can that substance ever be a pollutant in relation to that insured? Fifth, is considering “the context of the environment in which the substance is involved” no longer important? Lastly, how important is knowledge of the potential dangers posed by the substance involved under certain conditions?
In regard to the last question, the Falk Court distinguished the case from Peace by essentially stating that landlords know the dangers of lead paint, whereas farmers view manure as a beneficial resource. This begs the question as to whether or not farmers in general are aware of the potential for manure to pollute. Certainly large scale commercial farms understand that manure can be a pollutant, but do small farms have the same understanding? Does the distinction matter? Or should the questioning be taken out of the farm context entirely?
The above questions need to be addressed by the Supreme Court if there is ever going to be any clarity on the applicability of pollution exclusions in Wisconsin.
4. POSSIBLE CONSEQUENCES IF FALK IS AFFIRMED
A. Practical Consequences
If the analysis utilized in Falk is affirmed, then there will be significant implications for insurers and insureds in the State of Wisconsin.
First, under the analysis utilized in Falk, the applicability of pollution exclusion clauses would be greatly eroded. A pollution exclusion clause would almost never apply so long as the substance that caused the damage was commonly used by persons or entities in the same industry as the insured.
Second, insurers would be forced to reevaluate the risks they are actually assuming when they sell a liability policy to an individual or business. For instance, in regard to farm owner policies, an insurer may be responsible for any damage caused by the manure that was spread onto a field. The potential damage could be enormous. Manure can seriously contaminate ground water, necessitating remediation. Furthermore, the presence of manure in ground water could sicken a large number of people in an area; maybe even cause death, thereby further increasing the damages. Moreover, nearby homes may be required to drill deeper wells to guarantee access to safe drinking water. Ultimately, what was initially just an insurance policy issued to a small dairy farm could turn into liability exposure in the millions.
Third, insurers may be forced to rewrite pollution exclusions to properly exclude unforeseen risks that are difficult to quantify. For example, pollution exclusion clauses may need to list out each and every common chemical or substance used by a particular insured. This would require significant time and resources. Inevitably, certain substances would be missed in the process. Furthermore, policies may need to explicitly exclude any cleanup and/or environmental remediation costs that the insured becomes liable for under any circumstance.
Fourth, insureds may be subjected to higher premiums in the future to account for the increased risk associated with their insurance policy.
Lastly, under the right conditions, a company's pollution exclusion clause may not apply while in the same situation a homeowner's pollution exclusion may apply. For example, if Company X accidentally releases a substance, which Company X uses regularly and is highly beneficial, and that substance damages Person Y's home, then Company X may be afforded coverage while Person Y is denied coverage. Under Falk, it would be critical that the involved substance is common in Company X's industry and is very beneficial. Similarly, it would be critical that the substance, from Person Y's perspective, is useless, damaging, and rarely encountered. In other words, Person Y may need to file suit, hire attorneys, and wait until the conclusion of the lawsuit to actually collect for the damage caused to his home by Company X.
B. Public Policy Considerations
Issuing an insurance policy to a business or individual inevitably creates a moral hazard. Pollution exclusions act to eliminate this moral hazard. The potential cost of damage caused by pollution can be enormous. Take for example the BP Oil Spill in the Gulf of Mexico. Carelessness on the part of an insured can lead to hundreds of millions, if not billions, of dollars in damage. Ultimately, insuring against pollution related damages “may diminish the insured's incentive to detect pollution while it is occurring or to take steps to mitigate damage once pollution is detected.” Kenneth S. Abraham, Catastrophic Oil Spills and the Problem of Insurance, 64 Vand. L. Rev. 1769, 1784 (2011).
The pollution exclusion analysis, as applied in Falk, drastically increases the potential risk that insurers are exposed to. First, insurers would be liable for more situations than they had originally intended. Second, insureds will likely become more careless (moral hazard) as a result of being insured and thereby create even more situations that expose insurers to liability. This is not only bad for insurers, but also society as a whole.
As it stands, the applicability of pollution exclusions is a crapshoot. The Wisconsin Supreme Court has the opportunity to clarify Wisconsin law in a way that would provide greater guidance and clarity to insureds and insurers alike.
The Court's decision in Falk should be closely monitored and scrutinized by insurers. Depending on the Court's decision, changes may need to be made to future liability policies to properly protect insurers from the unpredictable risks inherent in pollution damage situations.
The Wisconsin Supreme Court recently heard oral arguments, but a date has not been set for the release of the Court's opinion.
It should be noted that the Supreme Court could affirm the Court of Appeals, but base the decision on different grounds. The key issue with Falk is the analysis of the Court of Appeals, not the outcome per se. As was explained above, Falk seems to apply the law differently than prior cases. Thus, the consequences that are discussed in this section are contingent on the Supreme Court adopting and affirming the Court of Appeals' analysis entirely, without clarification.
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