Pollution Exclusions

Dallas insurance lawyers need to have some familiarity with pollution exclusions in insurance policies. A 1998, Texarkana Court of Appeals case is worth reading. The style of the case is, Allen v. St. Paul Fire & Marine Insurance Company. Here is some information from that case.
This appeal arises from a summary judgment rendered in favor of St. Paul in an insurance coverage dispute. The Allens sued St. Paul based on the judgment in a suit by the Allens against Tawakoni Water Utility Corp. The underlying suit alleged damages arising out of Tawakoni’s failure to provide “potable” water, “good quality” water, water “reasonably fit for family residential use,” or water “approved and/or certified by the appropriate State of Texas and federal authorities.” The Allens also alleged that the water received was of “unpalatable quality,” “unfit for human consumption and/or use,” and that the water was contaminated.
St. Paul, an insurer of Tawakoni, denied coverage and refused to provide a defense for Tawakoni. St. Paul based its denial of coverage on pollution exclusions. Following a bench trial, a judgment of $17,326,174 was rendered in favor of the Allens.
The Allens filed this suit against St. Paul for declaratory relief and wrongful refusal to defend, alleging breach of contract claims and violations of the Texas Insurance Code and the DTPA. The trial court granted summary judgment. The Allens appealed.
The Allens contend that the trial court erred in granting summary judgment because St. Paul failed to conclusively establish that all the Allens’ claims and damages against Tawakoni were excluded under the policies.
The Allens argued that entry of summary judgment on their refusal to defend claim was error because St. Paul failed to conclusively prove that all claims alleged were excluded under the policies. The policies involved are commercial general liability policies. Pollution exclusions of two of the five policies were presented as summary judgment proof and provide, in part, that:
This insurance does not apply to:
f. (1) “Bodily injury” and “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:
….
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. includes materials to be recycled, reconditioned or reclaimed.

The Allens contend that, while their claims based on contamination were properly excluded under the pollution exclusions, other claims were not. In addition to claims that the water was contaminated, the Allens contend that their petition included separate allegations that the water delivered by Tawakoni was “not potable,” not of “good quality,” “not reasonably fit for residential use,” not “approved and/or certified by the appropriate State of Texas and federal authorities,” and of “unpalatable quality.” Findings of Fact and Conclusions of Law filed by the trial court in the underlying suit include findings that Tawakoni failed to supply clean, potable water suitable for human consumption.
The Allens argue that St. Paul and the trial court ignored the potability and non-certification allegations and focused entirely on the contamination allegation in determining that the pollution exclusions applied. Additionally, the Allens contend that because water could have all of these conditions without containing pollutants, these claims potentially fall within the policies’ coverage and, therefore, St. Paul had a duty to defend.
The issue, then, is whether the Allens’ claims of nonpotability and poor water quality are merely restatements of their claim of contamination falling within the policies’ exclusions of claims arising from “pollutants.”
The Allens complain throughout their pleadings that the water supplied them by Tawakoni contained “chemicals and contaminants” and “debris,” was “unfit for human consumption,” and that the contaminants were “cancer-causing,” “hazardous to health,” and “toxic.” However, the Allens’ pleadings do not allege facts that these claims of nonpotability, poor quality, and unfitness for residential use are separate claims caused by something other than contamination. Water in its pure form, by its nature, is potable and odorless. It is only when contaminants are in the water that it becomes nonpotable, of poor quality, and unfit for residential use.
Artful pleading of facts cannot bring excluded claims back within coverage. Courts must focus on the factual allegations that show the origin of the damages rather than on the legal theories alleged. The Allens’ pleadings did not allege facts separate from contamination. Because “contaminants” are included in the policies’ absolute pollution exclusions, all of the Allens’ claims were excluded under the policies. St. Paul therefore had no duty to defend Tawakoni.
The Allens also contended that St. Paul had a duty to indemnify because St. Paul failed to conclusively prove that all damages awarded in the Tawakoni suit were excluded under the policies.
The judgment for $17, 326,174 was rendered on March 31, 1994, after a non-jury trial. The court filed Findings of Fact and Conclusions of Law. At some time prior to entry of the judgment, Tawakoni assigned to the Allens its wrongful refusal to defend claims against St. Paul in return for a covenant not to execute.
An insurer’s duty to defend and duty to indemnify are distinct and separate duties. The duty to indemnify is justiciable before the insured’s liability is determined when the insurer has no duty to defend, and the same reasons that negate the duty to defend likewise negate any possibility the insurer will ever have a duty to indemnify. St. Paul had no duty to defend Tawakoni because the facts alleged by the Allens fell within the policy exclusions. For the same reason, St. Paul also had no duty to indemnify.
St. Paul raised the issue that Tawakoni’s assignment may have been invalid. There is summary judgment evidence that the underlying judgment may not have been the result of a fully adversarial proceeding. There is also summary judgment evidence that evidence was presented in the underlying proceeding and that it was adversarial. This may raise a fact issue. However, even if the Tawakoni assignment were found to be valid, the result would be the same because the Court determined that the Allens’ claims were not covered under the policies. Because of that disposition of the case, St. Paul’s wins.