United States: Oklahoma Federal Court Holds Pollution Exclusions Bar Duty To Defend Pollution Claims For Transporting Oil And Gas Drilling Waste

Last Updated: November 1 2013
Article by Ruth S. Kochenderfer

The United States District Court for the Eastern District of Oklahoma granted an insurer's motion for summary judgment and held that pollution exclusions barred any duty to defend allegations that the policyholder's transportation of oil and gas drilling wastes caused pollution. Star Insurance Company v. Bear Productions, Inc., No. CIV-12-149-RAW, 2013 WL 5637733, **1-2 (E.D. Okla. Oct. 16, 2013) (applying Oklahoma law).

A putative class action lawsuit, which alleged that the policyholder transported "produced fluid waste" to a dump site, was filed against the policyholder and others. Id. "Produced fluid waste" consisted of waste fluids and solids that were generated during oil and gas completion drilling operations and included saltwater, sand, acid, oil-based drilling fluids, frack flowback fluid, and the like. Id. at *2.

The policyholder sought a defense under a primary commercial general liability policy and an umbrella policy, both of which were in effect from March 16, 2006 through March 16, 2007. id. The primary policy contained a pollution exclusion that excluded coverage for injury or damage "arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' . . . ." id. at *3. An endorsement to the primary policy provided a limited exception to the pollution exclusion for a "pollution incident" at a designated well site within the coverage territory that lasts only 72 hours, that is accidental, that is reported within 90 days, and that first occurs during the policy period. id. The umbrella policy had a pollution exclusion barring coverage for injury or damage "arising out of the actual or threatened discharge, dispersal, seepage, migration, release or escape of pollutants from any source anywhere in the world." id. at *4. Both policies defined a "pollutant" as "any solid, liquid, gaseous, or thermal irritant or contaminant, including but not limited to, smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste materials. Waste material includes materials which are intended to be or have been recycled, reconditioned, or reclaimed." id. at **3-4.

After analyzing both policies, the federal district court held that it was "clear that there is no potential of liability under either policy" and, thus, the insurer had no duty to defend. id. at *5. In doing so, the court found that the complaint's description of "produced fluid waste" qualified as a "pollutant" under both policies. id. at **5 & 6 n.6.

In regard to the primary policy, the court found that the limited exception for coverage of a "pollution incident" was not applicable. id. at *5. The court stated that the alleged pollution took place between 2003 and 2009, and that the policyholder had entered into a contract to "dispose of water produced in connection with the production of oil and gas wells." id. Based on these facts, the court concluded that there was no covered "pollution incident" because the pollution began before the primary policy period, lasted beyond 72 hours, and "clearly was not accidental." id.

In seeking coverage under the umbrella policy, the policyholder argued that, unlike the primary policy, the umbrella policy's pollution exclusion did not include the word "alleged," and therefore the insurer should be required to defend the policyholder "if it is proven that [it] did not actually pollute." id. at *6. The court disagreed. Because the duty to defend clause only required the insurer to defend against "any claim or Suit seeking damages covered by this policy," and pollution was clearly not covered by the policy, the court held that the insurer was not required to defend the allegations of pollution. id. at *6 (citing policy language) (emphasis added).

Although the court expressly stated that these facts were "not determinative," the court noted that the policyholder was a corporate business that had successfully "bargained for an exception to the pollution exclusion" by way of the endorsement providing coverage for a "pollution incident." id. at *6. The court was not persuaded by the policyholder's argument that the policies, when "read literally . . . provide virtually no coverage for risks inherent to its business." id. *6. The court explained that the policy provided some pollution coverage for a "pollution incident" and that the policyholder was "entitled only to the coverage for which it negotiated and paid." id. at *6.

This case holds that oil and gas drilling wastes are pollutants falling within the scope of a pollution exclusion. Additionally, it reaffirms that, under Oklahoma law, the policyholder/insurer relationship is "contractual in nature" and a court "may not rewrite the policies to make them better for either party." id. at **4 & 6.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ruth S. Kochenderfer
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