Liability Insurance Coverage for Leaking Underground Storage Tanks

Courts across the country had been struggling with interpretation of the “sudden and accidental” insurance clause for decades. The clause states that insurance companies will only pay for “sudden and accidental” pollution, but courts have defined those terms in different ways. On a policy basis, some say that holding corporations directly liable for pollution damage makes corporations more responsible for preventing pollution from occurring in the first place, because the liability cannot be passed on to their insurers. Another theory suggests that cleanup and compensation to victims of pollution damage is better accomplished by having insurance money available. See also Upjohn v. New Hampshire Insurance Company, decided the same day.

Robert Polkow owned and operated an oil-reclamation business near Hillsdale, which included eight underground storage tanks ranging in capacity from 3,000 to 20,000 gallons. Spills often occurred when liquid was transferred between transport trucks and the tanks. The Michigan Department of Natural Resources (DNR) believed that Polkow’s operations were responsible for contaminating the local groundwater. Polkow sued his insurance company to cover the costs of responding to the DNR. However, Polkow’s insurance policy does not cover matters concerning the release of pollution unless the release was “sudden and accidental.” The Michigan Supreme Court sent the case back to the lower courts to determine if the release was “sudden and accidental.”

Robert Polkow owned and operated an oil-reclamation business near Hillsdale. The business used eight underground storage tanks ranging in capacity from 3,000 to 20,000 gallons. Spills often occurred when the liquid was transferred between transport trucks and the tanks. The Michigan Department of Natural Resources (DNR) determined that Polkow’s operations caused the groundwater contamination. After his insurance company refused to cover the costs of responding to the DNR, Polkow sued the insurer. The insurance policy contained a pollution-exclusion clause, providing that the insurer will only cover pollution that is “sudden and accidental.” The trial court judge ruled for Polkow before either side had presented evidence, and the Court of Appeals agreed.

Should the trial court judge have determined that Polkow’s release of pollution was “sudden and accidental,” and thus covered by the Citizens Insurance Company insurance policy?

The Court (Chief Justice Cavanagh, joined by Justices Boyle, Levin, and Brickley) sent the case back to the trial court for further factual determinations. The trial court should not have ruled in Polkow’s favor because it was not clear whether the pollution discharge was from the spills, if the underground tanks were leaking, or if the discharge was from an unknown source. The application of the insurance pollution-exclusion clause depends on the facts of each case. Without determining what discharge had caused the contamination, the trial court could not have found that the release was “sudden and accidental.”

The dissenters (Justices Riley, Griffin, and Mallett) argued that the dispute could be resolved without additional facts, but they would resolve it in favor of the insurance company. They would hold that the release of pollution on the Polkow property was not “sudden and accidental” whether the release came from spills over several years, or from the gradual leakage of underground storage tanks.