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Court Rejects Umbrella Coverage for Oil Spill Cleanup Costs where Underlying Insurance Requirements were Not Satisfied

On May 6, 2020, a Montana federal court ruled that an insurer was not obligated to cover $1 million in cleanup costs incurred by an umbrella policyholder after spilling 238 barrels of crude oil and 1,200 barrels of production water into tail-water of the North Chinook Reservoir. In reaching that conclusion, the Court principally relied upon the umbrella policy’s exclusion of coverage for damage “arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” The Court was persuaded that this pollution exclusion was unambiguous and that no exceptions applied. However, an exception to the pollution exclusion might have preserved coverage if the umbrella policy’s underlying insurance requirements had been satisfied. The decision is a reminder that commercial insurance programs must be carefully structured and coordinated to meet expectations. See Bitco General Insurance Corp. v. J. Burns Brown Operating Co., 4:18-cv-00087 (D. Mont., May 6, 2020).

While both the insurer and policyholder generally agreed the spill fell within the policy’s pollution exclusion, they disputed whether an exception to the pollution exclusion nonetheless applied so as to provide coverage. Under the exception, the pollution exclusion did not apply when insurance for property damage caused by pollution “is provided by ‘underlying insurance’ at the limits shown in the schedule of ‘underlying insurance.’”

Here, the policyholder had obtained and exhausted coverage for the spill under a primary policy held with the same insurer. It thus argued that the exception should apply, or at least that it was ambiguous and must be construed in the policyholder’s favor. The Court disagreed.

Three Conditions

In parsing language of the exception, the Court explained that there could only be coverage for cleanup costs associated with property damage caused by pollution if three distinct conditions were met. First, the insured would need to hold an underlying insurance policy that was referenced in the umbrella policy’s schedule of underlying insurance. Next, the referenced policy would have to provide coverage for property damage caused by pollution. Here, both of those conditions were met.

Last, however, the referenced policy also would need to provide coverage for property damage caused by pollution at a coverage limit equal to or exceeding the coverage limits listed on the umbrella policy’s schedule of underlying insurance. Here, the primary policy only provided for $100,000 of coverage for property damage caused by pollution, whereas the umbrella policy’s schedule of underlying insurance identified $1,000,000. 


The decision in this case is a cautionary tale for policyholders about the need to harmonize coverage requirements in their primary and umbrella policies. Here, despite obtaining coverage for the spill of pollutants under a primary policy, the policyholder may have been surprised that excess coverage was unavailable because the underlying limits did not sync with the umbrella policy’s requirements. It is critical for policyholders to ensure that policies in all layers of a coverage tower work together as expected.

© 2020 Beveridge & Diamond PC National Law Review, Volume X, Number 134


About this Author

John H. Kazanjian Insurance Coverage Attorney Beveridge & Diamond New York, NY
Office Managing Principal

John is one of the top-rated insurance coverage lawyers in New York, with over forty years of experience in complex civil and commercial litigation.

He helps business clients recover the insurance dollars they purchased to protect themselves from critical loss exposure when their insurance companies resist paying. John applies his mastery of insurance coverage law and a range of disciplines for each underlying matter, including environmental law, toxic tort law, and securities law, to maximize recovery.

John advises policyholders in assessing the scope of their insurance...

Collin Gannon Environmental Litigation Attorney Beveridge & Diamond Baltimore, MD

Collin’s national practice in environmental, toxic tort, and constitutional litigation focuses on attaining regulatory compliance across industrial sectors.

His background in the humanities and natural sciences uniquely positions him to understand clients’ sophisticated technical processes, provide clients counsel concerning these processes, and then capably represent clients’ interests in any litigation forum.

Collin’s interest in environmental litigation stems from his study of the intersection between law and science. Before law school, Collin interned with the Sandia Mountain Natural History Center studying the ecological effects of forest fire on forest density and subsequently worked as a research assistant with the Carnegie Museum’s Department of Invertebrate Zoology. He has also participated in numerous college field study programs in geology, ecology, and paleontology. Collin chose to specialize in environmental litigation largely due to these experiences, which helped him to recognize the broad applications of environmental law.

During his time at the University of Michigan Law School, Collin served as a Symposium Editor for the Michigan Journal of Law Reform and was a Student Attorney in the school’s Human Trafficking Clinic. He was also a board member of the Environmental Law Society and participated in the National Environmental Law Moot Court Competition—as both a team member and a coach. Additionally, Collin contributed various publications in environmental, insurance, and international refugee law to the Michigan Journal of Environmental and Administrative Law, the Michigan Journal of Public Affairs, and the University of Michigan’s Program in Refugee and Asylum Law’s online resource, RefLaw.

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