No Insurance Defense for Leaking Underground Storage Tank

Courts had been struggling with interpretation of the “sudden and accidental” insurance clause discussed in this case for decades. There are two competing policy considerations of whether excluding insurance coverage for gradual pollution is good or bad for the environment. One theory suggests that holding corporations directly liable for pollution damage – liability which cannot be passed on to their insurance company – makes corporations more responsible for preventing pollution from occurring in the first place. Another theory suggests that cleanup, remediation, and compensation to victims of pollution damage is better accomplished by having insurance money available. The Michigan Supreme Court, in its analysis of this case, seeks to determine what the clause means, though, not what its policy implications are. Its holding that “sudden” means instant and temporal means that gradual leaks would not be covered by insurance, forcing businesses to reduce their financial risk by preventing pollution, but limiting the available cleanup and compensation funds if there is pollution.

The Upjohn Manufacturing Company pumped two toxic by-products from antibiotic production into an underground storage tank. Upjohn employees measured the level in the tank and discovered that the level was lower after a first batch of by-products was pumped into the tank. They continued to pump by-products into the tank despite this discrepancy, until a monthly audit determined that the storage tank was leaking. Upjohn sued its general liability insurer, Allstate, for damages and expenses. The insurance policy did not cover pollution unless the pollution release was “sudden and accidental.” The Michigan Supreme Court held that a release is not “sudden and accidental” if it is not unexpected. Because Upjohn’s employees had information suggesting that the tank was leaking, the leak was not unexpected, and Allstate did not have to cover the damages and expenses.

The Upjohn Manufacturing Company pumped two toxic by-products from antibiotic production into an underground storage tank. Each weekday, an Upjohn employee would measure the level of liquid in the underground storage tank, record the measurement, and file the information with his supervisor. On the first day that the by-products were pumped into the tank, the measurement showed that the level of liquid had actually fallen from the previous day, from ten inches to three inches. Despite this information, Upjohn pumped eight more batches of by-product into the tank over the next several weeks. Finally, Upjohn stopped pumping after a monthly audit of the tank measurements. Upjohn then determined that the tank had been leaking through three holes caused by corrosion. Overall, approximately 15,000 gallons of toxic by-product had leaked from the tank. Upjohn sued its general liability insurer, Allstate, for damages and expenses. The insurance policy, however, did not cover pollution leaks unless they were “sudden and accidental.”

Was the leak of toxic by-products “sudden and accidental” so as to be covered under Upjohn’s insurance policy?

The Court (Justice Riley joined by Justices Boyle, Mallett, and Griffin) held that Allstate did not have to cover the by-products leak. Because the “sudden and accidental” language in the insurance policy is unambiguous, it must be understood in its “plain and easily understood sense.” “Sudden” implies that something happens without warning and is unexpected. However, Upjohn did have warning that the tank was leaking, based on the tank measurements showing a discrepancy between the amount of by-product pumped into the tank and the amount inside the tank. Under the imputed-collective-knowledge standard, the Court determined that Upjohn had the knowledge of all its individual employees – in this case, knowledge of the discrepancy in the tank measurements. Because Upjohn knew about the discrepancy while it continued to pump by-products into the tank, the leak was not “unexpected,” and Allstate did not have to provide coverage.

Justices Cavanagh and Brickley agreed with the majority’s determination that the “sudden and accidental” language is unambiguous. However, they disagreed about the meaning of “sudden” as applied to this situation. They would send the case back to the lower courts to determine whether the holes in the tank all gave way at once. If this was the case, they would find this to be a “sudden” discharge covered by the insurance policy, regardless of how long it took Upjohn to discover the leak.

Justice Levin, dissenting, argued that “sudden and accidental” is ambiguous, that it should mean “unexpected and unintended,” and that a jury, not the Court, should determine whether the leak was unexpected and unintended.