Breadth of Pollution Exclusions in Insurance Contracts

Charley Barber et al. v. Arch Insurance Company

Case No. 20-63078
2021 WL 2828021, at *1 (6th Cir. 2021)

Decided: July 7, 2021


In 2018, a federal grand jury indicted eight Armstrong Coal Company (“Armstrong”) employees on one count of conspiracy to defraud the United States, in violation of 18 U.S.C. § 371.  Those employees are the plaintiffs in this case.  According to the indictment, the employees conspired to falsify coal dust samples to submit to the Mine Safety and Health Administration (“MSHA”).  The criminal case against the employees is pending in the Western District of Kentucky.  Throughout the criminal proceedings, the employees have sought coverage for defense costs from Arch Insurance Company (“Arch”).

Facts and Procedural History

The terms of Arch’s insurance policy provided Arch would cover Armstrong employees’ defense costs related to criminal proceedings arising from an employee’s wrongful act.  The policy went on, however, to deny coverage for any claim “arising from, based upon, or attributable to” any discharge or threat of discharge of any “pollutant” or any “direction, request, or voluntary decision” to test for or monitor any “pollutant.”  Arch denied coverage, concluding that because coal dust was a pollutant, and the criminal proceedings against Armstrong’s employees arose from a direction to monitor and test for coal dust, that the pollution exclusion precluded coverage.

In response, the plaintiffs filed a lawsuit against Arch in Kentucky state court alleging breach of-contract, violation of Kentucky’s Unfair Settlement Practices Act, and bad-faith denial of insurance coverage.  The case was removed to federal court based on diversity jurisdiction. The federal district court granted summary judgment in favor of Arch, finding that the pollution exclusion barred coverage of the employees’ claims.

On appeal, the plaintiffs argued that: (1) coal dust is not a “pollutant” under the insurance policy; and (2) the criminal proceeding was not “arising from, based upon, or attributable to” any of the excluded claims under the pollution exclusion.  The Sixth Circuit disagreed and affirmed the lower court’s decision.

The Court found that coal dust was a “Pollutant” under the insurance policy.

The plaintiffs argued that coal dust in a coal mine is where it is supposed to be, and thus not a pollutant.  Therefore, they should not have been denied coverage under Arch’s policy. The plaintiffs relied on a Delaware trial court case, Mine Safety Appliances Co. v. AIU Ins. Co., N10C-07-241 MMJ, 2016 WL 498848 (Del. Super. Ct. Jan 22, 2016). In that case, the court explained that a pollutant can be virtually any substance and that a substance does not become a pollutant until it is released from where it was supposed to be.

In response to this argument, the Court noted that the word “pollutant” was defined in the policy, and therefore “the context-based definition crafted by the Delaware court [did] not apply.”  Pollutant was defined as a “contaminant or irritant” under the contract, so the Sixth Circuit explained that the question before the court was actually whether coal dust was a “contaminant or irritant.”

The plaintiffs admitted that coal dust may be considered a contaminant or irritant when released into a space where it does not belong, but the plaintiffs argued that it should not automatically be considered a contaminant or irritant under Kentucky law. The plaintiffs explained how the Kentucky Court of Appeals had endorsed a “case-by-case” approach to determine whether coal dust falls within a pollution exclusion. This approach involved three considerations: (1) whether other judges had held alternative interpretations of the same language to be reasonable; (2) that terms in contracts should be given their ordinary meaning as persons with the ordinary and usual understanding would construe them; and (3) the practical consequences of the way in which the court applies a provision.

Regarding the first factor, whether other judges had held alternative interpretations of the same language to be reasonable, the plaintiffs relied on two Kentucky cases, London v. Abundance Coal, Inc., 352 S.W.3d 594 (Ky. App. 2011) and Motorists Mut. Ins. Co. v. RSJ, Inc., 926 S.W.2d 679 (Ky.App. 1996), where the court interpreted contracts using similar language to Arch’s insurance policies. In the two cases, the Court reasoned that the pollution exclusions in the insurance policies precluded liability for environmental catastrophes brought on by intentional industrial pollution.  However, the Court held that Arch’s policy was drafted more broadly than the policies in the two Kentucky cases.

The Court concluded that, unlike the contracts in the two Kentucky cases, Arch’s policy also precluded liability for actions arising from “a direction, request, or voluntary decision” to test for or monitor any “pollutant.” The court reasoned that “[t]he presence of an additional exclusionary category indicates that ‘pollutant’ means…not only a substance that actively pollutes, but also a substance that is regulated because of its potential to pollute.” Therefore, the court concluded that the MSHA’s strict monitoring and reporting obligations demonstrate that coal dust has the potential to pollute and therefore Armstrong’s employee’s claims were barred.

Regarding the second factor, that terms in contracts should be given their ordinary meaning, the Court concluded that any ordinary person would consider coal dust to be a contaminant or irritant. The Court reasoned that coal dust makes the air in a mine impure, which satisfied the dictionary definition of contaminant.  Further, the Court reasoned that coal dust irritates miner’s lungs, causing a morbid condition—black lung, and thereby satisfying the dictionary meaning of irritant.

Regarding the third factor, the practical consequences of the way in which the court applies a provision, the defendants had argued that classifying coal dust as a pollutant would render the insurance policy illusory; or, in other words, that companies will have purchased insurance policies that will not protect them because virtually anything could classify as a contaminant or irritant.  The Court disagreed: “[n]o absurdity results from concluding that coal dust is a contaminant or irritant under the terms of these policies and the circumstances of these claims.” The Court held that the exclusion was broader because it denied coverage for actions arising from decisions to monitor pollutants. As it was Armstrong’s responsibility to monitor coal dust pursuant to MSHA regulations, the court found that it fit within the pollution exclusion’s intended scope.

The Court found that the criminal proceedings against plaintiffs arose out of the obligation to monitor and test for pollutants.

Next, the plaintiffs argued that the criminal charges were not “arising from, based upon, or attributable to any…direction, request, or voluntary decision to test for, abate, monitor, clean up, remove, contain, treat, detoxify or neutralize Pollutants.” The plaintiffs argued that the phrase “arising from” required causality. In other words, the plaintiffs argued the criminal charges did not result from Armstrong’s duty to regulate coal dust, but rather, a conspiracy to commit fraud.

The Court again disagreed, finding that “arising from” does not require direct proximate causation, but rather, merely requires some causal connection. In this case, the Court found there was some causal connection between the criminal charges and the direction to test for and monitor coal dust, and it held that the pollution exclusion applied to preclude coverage of the plaintiffs’ claims.

The Court concluded that no coverage was required, and therefore Arch had no duty to indemnify the plaintiffs, it likewise had no duty to defend the plaintiffs.  Further, the Court rejected the bad faith denial of coverage claim because the plaintiffs could not prevail on a bad faith denial claim if coverage were not required in the first place. Accordingly, the Sixth Circuit affirmed, and this case will undoubtedly set precedent for insurance litigation related to pollution exclusion clauses going forward.

*DBL Law Summer Associate Matthew Marino contributed to this article.