The Troublesome Trend Of D&O, E&O Pollution Exclusions

Originally published on Law360, July 09, 2012,

In light of the emerging risks associated with climate change and related environmental liabilities, the proliferation of pollution exclusions in directors and officers (D&O) and errors and omissions (E&O) insurance policies is an alarming trend.

The insurance industry's long history of efforts to expand the scope of these exclusions adds cause for concern, because virtually any substance can be an irritant or pollutant in sufficient concentrations or under specific circumstances. The highest courts of many states recognize that this can lead to absurd results and have refused to allow overboard application of "absolute" or "total" pollution exclusions.

Beware: The Pollution Exclusion Can Render Anticipated Coverage Illusory

Many policyholders, particularly directors and officers, and professionals with E&O coverage, may not have even considered their potential exposure to liability arising from environmental risks, let alone that a pollution exclusion could render anticipated coverage illusory. This is especially true in certain industries.

Regrettably, these exclusions have even been used to defeat the exceedingly broad duty to defend. In fact, a large brokerage has publicly asserted that "best practices" call for clarification of the purpose and scope of pollution exclusions in D&O coverage, at least when it comes to climate change.

The use of pollution exclusions to evade the duty to defend D&O and E&O claims is of particular concern when it comes to mixed allegations involving negligence or business judgment, which should almost automatically give rise to a duty to defend. In some jurisdictions, claims routinely are denied on the basis that the underlying harm "arises from" or is "based on" the involvement of a pollutant in the broadest sense.

Among other things, D&O insurance policies are designed to protect corporate directors and officers from liability arising from the routine exercise of business judgment. D&O insurance policies, however, typically exclude "claims related to pollution, libel and slander, bodily injury and property damage, ERISA [Employee Retirement Income Security Act] or claims for which the directors have other insurance policies in force or for which their corporation indemnifies them."

One of the purposes of these exclusions may be to encourage the sale of more specialized, "environmental" insurance, but not all circumstances should require businesses to carry...