Pieces of Rock a “Pollutant” Under Pollution Exclusion

The Fifth Circuit, applying Texas law, affirmed the District Court’s finding that coverage for an unplanned discharge of rock fines, pellets produced during the course of quarry operations, is excluded by a pollution exclusion.  The Fifth Circuit found that when the effects of the discharge were looked at as a whole, the discharge of rock fines satisfied the definition of pollutants.

At its rock quarry in New Jersey, Eastern Concrete Materials, Inc.’s (“Eastern Concrete”) drills and blasts large pieces of stone off the face of a rock formation.  The stones are crushed and screened to produce different sizes or gradations of stone.  The smallest particles are called “rock fines.”  Rock fines are often gathered in settling ponds.   Eastern Concrete pumped water from the settling ponds into the nearby Spruce Run Creek.  Due to a failure to shut off the pump, a substantial amount of rock fines was released into Spruce Run Creek, causing physical damage to the stream and stream bed by changing the flow and contours of the stream.  The New Jersey Department of Environmental Protection issued “Notices of Violation” to Eastern Concrete, requiring it to remove the rock fines and take preventive measures to stop their migration downstream.  Eastern Concrete undertook the remediation and then notified its insurer, Great American Insurance Company (“GAIC”), demanding reimbursement for the cost of removing the rock fines and of defending the claim.

GAIC filed a declaratory judgment action in the Northern District of Texas seeking a declaration that the incident fell within the policy’s pollution exclusion, and thus, it had no duty to defend or indemnify.  The District Court granted GAIC’s motion for summary judgment based on the pollution exclusion.  Eastern Concrete appealed.

On appeal, the Fifth Circuit confirmed that Texas law applied to the dispute.  Texas courts apply the “law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties.”  The District Court held Texas law applied, and the Fifth Circuit agreed, because of the following factors: (1) the GAIC policy was negotiated, brokered, and issued in Texas; (2) Texas would not give weight to the location of the insured risk because the policy is national in scope; (3) the insured’s justified expectations, as purchaser, would be met by application of Texas law; and (4) New Jersey’s interest is small because the cleanup had already taken place.

Next, the Fifth Circuit addressed the issue of the pollution exclusion.  The pollution exclusion barred coverage for liability “arising out of or in any way related to … discharge, disposal, seepage, migration, release or escape of ‘pollutants.’”  “Pollutants” was defined as “any solid, liquid … irritant or contaminant, including, but not limited to … waste material,” which “includes materials which are intended to be or have been recycled, reconditioned or reclaimed.”  On appeal, Eastern Concrete argued that “[t]o fall within the definition of ‘pollutants’ under the exclusion, the rock fines must be either (1) a ‘waste material’ and an ‘irritant or contaminant’ or (2) otherwise qualify as an ‘irritant or contaminant.’”

In determining whether rock fines are pollutants, the Fifth Circuit looked to the definition of contaminants.  According to Black’s Law Dictionary, contamination is a “[c]ondition of impurity resulting from mixture or contact with foreign substance.’  According to Webster’s Third New International Dictionary, to contaminate means “to soil, stain, corrupt, or infect by contact or association … to render unfit for use by the introduction of unwholesome or undesirable elements.”  The Fifth Circuit found that the rock fines did not fit either definition when the question is about the impact on the quality of the water in Spruce Run Creek; however, when the effects on the overall ecosystem were examined, the rock fines fit the definition for “contaminants”.  “The rock fines, in short, ‘render[e]d [the creek] unfit for use’ as a habitat for trout and other species.”   Therefore, the rock fines were a pollutant under the pollution exclusion, and GAIC had no obligation to defend or indemnify Eastern Concrete.  Eastern Concrete Materials, Inc. v. ACE American Ins. Co., No. 18-11043 (5th Cir. Jan. 17, 2020).