New Jersey Appellate Division Clarifies Applicability of the Standard Pollution Exclusion in Cases Involving Residential Underground Storage Tanks
In a recent, unpublished opinion, the Appellate Division offered some clarification regarding the applicability of the standard pollution exclusion in the context of a homeowner’s claim for property damage due to a leaking underground storage tank. In Schoneboom v. Allstate New Jersey Ins. Co., A-1472-18T2, 2020 WL 1322828 (App. Div. Mar. 19, 2020), the Appellate Division overturned the trial court’s decision denying a property owner’s motion for summary judgment and granted summary judgment to her homeowner’s insurance company, Allstate New Jersey Insurance Company. The homeowner in question, Sallie Schoneboom, sought a declaratory judgment for coverage related to investigation and remediation expenses associated with a leak from an underground storage tank (UST) that was located on her property and used to store home heating oil. The Appellate Division, having found that the trial court interpreted the term “sudden and accidental” in a manner inconsistent with prior case law, reversed.
The policy in question included several provisions that are commonly referred to as the standard pollution exclusion. These provisions exclude coverage for “property damage consisting of or caused by, the discharge, dispersal, release or escape of oil, fuel oil, kerosene, liquid propane or gasoline intended for or from storage tank(s) located at the address stated on the Policy Declarations.” This exclusion was followed by an exception, also commonly found within the standard pollution exclusion, which states that the exclusion “does not apply when the discharge, dispersal, release or escape is sudden and accidental.”
Importantly, the exclusion, and the “sudden and accidental” exception to it, had been approved by the New Jersey Department of Banking and Insurance (DOBI) in 2004. When Allstate made the application to include that language in its homeowners insurance policies, it truthfully disclosed to DOBI that its intent was to not provide coverage for its insureds’ costs associated with leaks from fuel tanks due to corrosion.
Based on the foregoing language, Allstate issued a denial of coverage on September 7, 2012, stating that its investigation did not “disclose any covered loss or occurrence under the Policy.” It explained that no coverage existed because “the leaking UST [did] not result in a sudden and accidental direct physical loss.” It noted that coverage was not provided for “land or its replacement, restoration or stabilization.” Allstate concluded that no coverage was available “because the leaking UST [did] not cause property damage arising from an occurrence.”
In reaching its decision denying the plaintiff’s motion for summary judgment and granting Allstate’s, the trial court found that the release from the UST, which was apparently caused by corrosion and started between 1969 and 1975, did not meet the definition of “sudden and accidental.” In overturning this decision, the Appellate Division found that the trial court had interpreted the phrase “sudden and accidental” in a manner inconsistent with the way that term had been defined previously by the Supreme Court in Morton International, Inc. v. General Accident Insurance Co. of America, 134 N.J. 1 (1993).
In Morton, the New Jersey Supreme Court found that the term “sudden and accidental” should not be given its plain meaning due to representations made by insurance industry representatives when seeking approval for the clause in commercial general liability policies before the DOBI. Specifically, the Supreme Court found that the insurance industry made representations to the DOBI that the exclusion would simply clarify existing coverage, but the language of the exclusion all but eliminated coverage for pollution-caused property damage. Based on this, the Supreme Court declined to enforce the clause as written on the basis that doing so would contravene the state’s policy in requiring regulatory approval of standard, industry-wide policy forms to assure fairness in rates and policy content. Thus, Morton held that, consistent with representations made to the DOBI, the standard pollution exclusion would only bar coverage for pollution-caused property damage if the insured intentionally caused the discharge or dispersal of a known pollutant.
Based on the Supreme Court’s pronouncement in Morton, the plaintiff argued that the trial court incorrectly denied her motion for summary judgment and granted Allstate’s cross-motion, and the Appellate Division agreed. The Appellate Division found that the gradual deterioration of a fuel oil storage tank was not necessarily inconsistent with a sudden discharge nor was there anything to suggest intentional conduct on the part of the plaintiff in causing the release.
Regarding the regulatory estoppel issue, the Appellate Division found that Allstate’s apparently truthful representations to the DOBI were not relevant to the analysis since Allstate, like other insurers, was bound by the Supreme Court’s pronouncement concerning the definition of the term “sudden and accidental” in Morton, and nothing in Morton suggested that trial courts should be required to investigate the insurer’s conduct before regulatory authorities in every case.
This case expands the applicability of the Supreme Court’s holding in Morton to include not just general commercial liability policies, but also homeowners’ insurance policies covering residential property damages from leaking underground storage tanks. In order for an insurance company to successfully argue applicability of the exclusion, it will need to somehow show that the inception of the leak was not sudden and that the insured either acted intentionally in causing the release or, at a minimum, was negligent in failing to act with reasonable care with regard to maintenance of the tank in question.
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