Aon Environmental

Article: “Sewage” is a Pollutant in Colorado

On March 29, 2012, the Colorado Court of Appeals ruled that raw sewage is a pollutant and is unambiguously excluded by an insurance policy’s absolute pollution exclusion. Shadi Figuli, et als v. State Farm Mutual Fire & Casualty, d/b/a State Farm Insurance Companies, 2012 COA 53; 2012 Colo. App. Lexis 459. In so doing, Colorado joins a number of states which have upheld pollution exclusions involving sewage.¹

The facts in the case are relatively straightforward. In 2004, the Figulis became ill while living in a rental property owned by Jean Chu and covered by a rental dwelling policy with State Farm and a personal liability umbrella policy. When testing on the property revealed mold and raw sewage the Figulis filed suit against Chu alleging that she “did not disclose to [them] (at any time) that the property had, in the past been contaminated by raw sewage and/or other hazardous materials, and had not been properly remediated before it was re-rented.” They alleged further that Chu had “failed to disclose and/or concealed other serous problems with the property, including several water leaks” which resulted in toxic mold.

Chu advised State Farm of the claim and requested that it defend and indemnify her. State Farm denied Chu’s claim on three separate grounds – both the rental and umbrella policies included an endorsement excluding coverage for fungus, including mold; the umbrella policy had an exclusion for loss caused by the insured’s business pursuits or arising out of business property; and the applicability of the exclusion at issue here, the Absolute Pollution Exclusion included in the rental policy. That exclusion provided in pertinent part as follows:

1. Coverage L – Business Liability and Coverage M – Premises Medical Payments do not apply to:

i. bodily injury or property damages arising out of the actual, alleged or threatened discharge, dispersal, spill, release or escape of pollutants:

(1) at or from premises owned, rented or occupied by the named insured;

. . . .

As used in this exclusion: “pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. “waste” includes materials to be recycled, reconditioned or reclaimed.

Based upon this exclusion, State Farm concluded the Figulis’ claimed injuries from “raw sewage and/or other hazardous materials” were injuries arising from the “discharge, dispersal, spill, release or escape of pollutants” and, therefore, were not covered by the policies.

Chu and the Figulis agreed to arbitrate their dispute. At the completion of arbitration, the Figulis were awarded $130,000 plus costs and interest, confirmed by order of the district court. Plaintiffs then filed the current action against State Farm alleging breach of contract based upon the denial of coverage. The district court granted summary judgment in favor of State Farm concluding that “raw sewage is unambiguously a pollutant as used in the Absolute Pollution Exclusion.” The Plaintiffs then appealed the sole issue of whether “water and sewage which overflowed from a residential toilet or sewer, and the bacteria and parasites that is carried, [are] “pollutants” for the purpose of the standard pollution exclusion.

The Court of Appeals concurred with the lower court finding that the “plain language” of the exclusion is not limited solely to environmental or industrial contexts, (citing TerraMatrix v. U.S. Fire Ins. Co., Inc. 939 P.2d 483, 488 (Colo. App. 1997)), and unambiguous when applied to raw sewage. The Court noted that the policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including…waste”. The court found that the plain dictionary meaning of sewage (“the contents of a sewer or household drain: refuse liquids or waste matter carried off by sewers”) is waste and waste is clearly included in the definition of pollutants as used in the Absolute Pollution Exclusion. The Court also noted that raw sewage is considered a pollutant under both the Clean Water Act and the Colorado Water Quality Control Act.

What this means is that in certain jurisdictions – certainly in Colorado, standard commercial insurance will not offer protection against pollution claims – not just those in the environmental or industrial context. Even in those states that have not weighed in on the debate or have determined the exclusion to be ambiguous, a business might find itself confronted at best with a strongly worded reservation of rights and worse an outright denial. Given the availability of affirmative and affordable environmental insurance coverage, sound risk and business management practices should include consideration of such coverage to protect against the time and expense in having to defend against such claims.

¹ See e.g., Certain Underwriters at Lloyds London v. B3, Inc., 2011 OK CIV APP 96 (July 2011); City of Grosse Pointe Park v. Michigan Municipal Liability and Property Pool, 702 N.W. 2d 106 (Mich. 2005); Penn-America Insurance Company v. Mike’s Tailoring, 125 Cal. App 4th 884 (CA Cal 2005); Newberg v. Commercial Union Insurance Co., 619 N.W. 2d 757 (CA Minn. 2000).