South Carolina Appeals Court finds exclusion applicable even though “odors” not specifically listed in exclusion, and do not need to be harmful to be a “pollutant.”

A South Carolina Appellate Court, applying South Carolina law, affirmed a circuit cort’s ruling that the state-run South Carolina Insurance Reserve Fund (the “Fund”) owed no duty to defend or indemnify the East Richland County Public Service District (the “District”) for a law suit for inverse condemnation, trespass, and negligence due to sewage odor.  The ruling upheld the circuit court’s finding that the pollution exclusion in the Fund’s policy applied and it did not conflict with any provision of the South Carolina Tort Claims Act (the “Act”).

The underlying complaint alleged that the District had installed a sewage force main on the complainant’s street and an air relief valve that released offensive odors multiple times a day on his  property.  According the complaint, after the District failed to remedy the problem, the complainant was forced to move, but was unable to sell the old property.  The District tendered the complaint to the Fund pursuant to its insurance policy and the Fund denied coverage based on a pollution exclusion.

The Fund sought a declaratory judgment that it had no duty to defend or indemnify the District for the underlying complaint.  During the trial, the District’s executive director testified about how the sewage main operated, about how the air release valve on the sewage main was necessary to keep the pipe from exploding, and about how the District unsuccessfully attempted to remedy the problem by modifying the valve.  The circuit court ruled that because there was no conflict with the Act, the policy’s terms controlled whether the Fund was required to defend the underlying action.

The pollution exclusion in the Fund’s policy barred coverage for “personal injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritant, contaminates or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental[.]”  The circuit court held that the offensive odors at the root of the negligence and trespass claims were included in the policy’s pollution exclusion’s reference to gases and fumes.  The circuit court also found that the discharge of the offensive odors was included in the District’s ordinary operations, and therefore, the pollution was not “sudden and accidental.”

On appeal, the District first argued that the pollution exclusion was void because it conflicted with the provisions of the Act which required the Fund to provide coverage for all risks which immunity has been waived under the Act.  The District purchased tort liability insurance from the Fund pursuant to the Act.  The South Carolina Code authorized the Fund to provide insurance “so as to protect the State against tort lability.”  The Appellate Court examined the language of the Act to determine the intent of the legislature.  The court found that the legislature did not intend to ban pollution exclusions from tort liability policies because similar pollution exclusions were included in other general liability policies issued pursuant to the South Carolina Code.  Therefore, the Appellate Court held that the pollution exclusion was valid in the Fund policy.

Second, the District argued that the pollution exclusion was inapplicable to the underlying complaint because it does not list offensive odors.  The Appellate Court disagreed and ruled that the pollution exclusion applied because the odors at issue in the case could be properly classified as irritating and offensive “fumes” or “gases.”  The court refused to find that the odors must be harmful in some way to be considered pollutants.

Last, the District argued that the even if the pollution exclusion applied, the exception would apply to the underlying complaint because the circumstances surrounding the release of the odors was unique and unexpected.   The Appellate Court disagreed and held that the release of the gases, which included the offensive odor, “was a routine and expected function of the system.”  The Appellate Court was not persuaded by the District’s argument that the exception applied because the magnitude and impact of the odors in the particular situation was unexpected.  South Carolina Ins. Reserve Fund v. East Richland County Pub. Serv. Dist., No. 2014-000728 (S.C. Ct. App.  Mar. 23, 2016).