At the end of January, the Rhode Island Supreme Court concluded that a pollution exclusion contained in a general liability policy did not bar coverage for a suit alleging that the policyholder’s negligence caused 170 gallons of home heating oil to leak into its customer’s basement resulting in property damage.  Regan Heating & Air Conditioning v. Arbella Protection Insurance Co., No. 2020-170-Appeal.

• First, the court confirmed that context matters. Just because a substance can be a “pollutant” in some contexts does not mean that all losses alleging damage caused by that substance are excluded “pollution” claims. 
• Second, the court recognized that a split in judicial opinions as to the meaning of a disputed policy term is “proof positive” of ambiguity – or, at a minimum, supports a finding that the policy is susceptible to more than one reasonable interpretation.

The Regan ruling is consistent with well-settled principles of policy interpretation. The onus has always been on insurance companies, who hold the drafting pen and the bargaining power, to use clear and unequivocal language to describe what is (or is not) covered. In the absence of clear language, or where reasonable minds could differ – as was the case in Regan – the policy is ambiguous and must be interpreted in favor of coverage.

Factual background

Regan’s insurer, Arbella, denied coverage for a lawsuit alleging property damage from a large spill of home heating oil based on the policy’s Pollution Exclusion, which provided that the policy “does not cover ‘property damage’ which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” 

At trial, and on appeal, Arbella argued that “oil, by its very nature” is a pollutant. Regan argued the policy definition of “pollutant” was ambiguous because it did not expressly include oil in the definition and, “in the context of its industry, home heating oil is not a pollutant.” Both parties cited case law supporting their respective interpretations.

Legal analysis

The court first considered whether home heating oil was “by its nature” a pollutant. Citing cases from various jurisdictions, the court recognized that those cases concluding that home heating oil was a pollutant involved “traditional environmental pollution” – i.e. circumstances where oil made its way into (and thereby polluted) the ground. In contrast, the suit against Regan alleged that the heating oil had leaked into a basement, causing damage to the customer’s home and personal property. 

The court acknowledged Rhode Island law was unsettled, and looked to case law from other jurisdictions, but found no consensus. Some jurisdictions held that the term “pollutant” is ambiguous as applied to home heating oil, while others did not. To resolve the issue, the court reinforced the holdings of two of its prior rulings, noting that “diversity of judicial thought as to the meaning of terms in an insurance contract is proof positive of ambiguity,” or, “at a minimum,” demonstrates that a policy is “reasonably susceptible of different constructions.”  Given the existing split in authority, the court ruled in favor of coverage, concluding that the term “pollutant” as applied to home heating oil was ambiguous.

Lessons for policyholders

The Rhode Island Supreme Court’s ruling confirms that context matters. While a substance can be considered a pollutant in one context, it does not necessarily mean that all losses caused by that substance fall outside the scope of coverage. A policyholder might “reasonably expect that oil leaking into the ground constitutes a pollutant,” but not that a suit alleging property damage from an oil spill inside a residence would be excluded from coverage. 

The Regan case joins a long line of well-reasoned decisions recognizing that a divergence in judicial opinions as to the meaning of a disputed policy term supports (or even establishes) a finding of ambiguity. See, e.g., Minnesota Mining & Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 180 (Minn. 1990) (ambiguity is “exemplified’ by a “sharp division in case authority from other jurisdictions”); Sec. Ins. Co. v. Investors Diversified, 407 So. 2d 314 (Fla. Dist. Ct. App. 1981) (two courts arriving at “opposite conclusions from a study of essentially the same language” is “proof of th[e] pudding” of ambiguity”); Cohen v. Erie Indem. Co., 432 A.2d 596 (Pa. Super. Ct. 1981) (conflicting judicial opinions create the “inescapable conclusion that the provision in issue is susceptible to more than one interpretation”).

The rationale for such an approach is clear. A policyholder cannot reasonably be expected to understand the meaning of a clause or term that even state and federal jurists cannot agree on.  That is especially true where, as in Regan, the divergence in judicial opinions existed before the policy was issued. In such cases, the onus is properly on the insurance company to recognize the ambiguity and adjust its policy language accordingly. When the insurer fails to do so, or employs policy language that courts cannot agree on, the policy will be susceptible to more than one reasonable interpretation, and such ambiguities must be resolved in favor of coverage.