5th Cir: Pollution Exclusion

Insurer has duty to defend because “environmental damage” allegation in complaint too vague to guarantee the pollution exclusion applies.

The Fifth Circuit Court of Appeals, applying Texas law, reversed summary judgment previously granted to Northfield Insurance Co. (“Northfield”) that it had no duty to defend insured Bryan Wagner, owner of the Wagner Oil Co. (collectively “Wagner”) in a Texas state court case brought by ExxonMobil.

The complex case relates to Wagner’s purchase of oil and gas properties from Exxon. Exxon filed a Texas state court action seeking a declaration it was not liable to Wagner under the terms of the sale.

One of Wagner’s insurer’s, Federal Insurance Co. (“Federal”), sued another Wagner insurer, Northfield, in federal court seeking contribution for the expenses of defense and indemnification of the Texas state court action.  The Fifth Circuit reversed the district court’s summary judgment to Northfield on the basis of a pollution exclusion endorsement in the Northfield policies.

The appellate panel noted that Texas applied the “eight-corners rule” that an insurer’s duty to defend is determined only by the four corners of the insurance policy and the complaint.  Because Exxon’s pleadings were vague and alleged “environmental damage,” Federal argued that construed broadly “environmental damage” could refer to claims not barred by the pollution exclusion such as vegetation damaged by heavy machinery.

The appellate court acknowledged that, while some of underlying claims were barred by the pollution exclusion, given the “breadth and generality of the allegations” in the underlying Exxon complaint, it was unclear if all of them were excluded; thus, Northfield owed a duty to defend.  The court reasoned that it had “no way of knowing at this juncture whether ExxonMobil is asserting claims such as the hypothetical ones described by Federal because we cannot look past the allegations in ExxonMobil’s petition.”

Anticipating that the claims might ultimately be confined to those excluded by the pollution endorsement in Northfield’s policy, the court also addressed whether the Underground Resources and Equipment Buyback coverage extension endorsement in Northfield’s policy required a defense be provided. Agreeing with the district court, the Fifth Circuit found that the endorsement only provided property damage coverage to Wagner and not Exxon’s operations.  Because Wagner was sued by Exxon for the damage present when it purchased the land, and not for any of Wagner’s operations thereafter, there was no duty to defend the Exxon suit.

Finally, the Fifth Circuit found that the Northfield contractual liability exclusion did not apply in this case, noting that the policy exclusion had exceptions including for “insured contracts” such as Wagner’s purchase from Exxon.

Federal Ins. Co. v. Northfield Ins. Co., Case No. 14-20633 (5th Cir. Sept. 16, 2016).

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