The Importance of Context in Insurance Policy Interpretation

February 27, 2015

Insurance LawThe case reporters are replete with decisions reminding lawyers and insurance professionals that the meaning of insurance policy language must be interpreted in the context of the policy. Context is not, however, limited to the four corners of the policy. Some courts look to the “full context” of the policy provision at issue which may include the broader culture of the world at large.”

Two recent decisions of the Wisconsin Supreme Court illustrate this broader form of contextual interpretation. In both Wilson Mutual Insurance Co. v. Falk, 857 N.W.2d 156 (Wis. 2014), and Preisler v. General Casualty Insurance Co., 857 N.W.2d 136 (Wis. 2014), the Wisconsin Supreme Court focused on the context of the underlying claim in determining whether a substance is a “pollutant” within the meaning of a CGL policy’s Pollution Exclusion. In Falk and Preisler, the court found that cow manure and septage qualify as “pollutants” when found in a well, even if they may not so qualify in other contexts.

Factual Background

In both Falk and Preisler, the insured dairy farmers used cow manure (Falk) or septage  (Preisler) to fertilize farm fields, a common practice among farmers. The insureds in Preisler also processed septage for use on their fields and sale to other farmers. In both cases, neighbors alleging that their well water had become contaminated by the manure or septage sued the insured.

The insureds sought coverage under the commercial general liability portions of their farm insurance packages. The policies insured against liability for bodily injury or property damage caused by an “occurrence” and defined an occurrence as “an accident, including . . . repeated exposures to” similar harmful conditions. The policies also contained similarly worded pollution exclusions that excluded harm “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” The policies defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”

Dairy Farmers’ “Liquid Gold” Is Neighbor’s Pollutant

The trial courts in both cases ruled that the pollution exclusion precluded coverage for the neighbors’ lawsuits. The intermediate appellate court affirmed in Preisler but reversed in Falk. The Falk appellate court reasoned that a reasonable farmer would consider cow manure to be “liquid gold” and not a pollutant when applied to a farm field. For a farmer, “manure is an everyday, expected substance … that is not rendered a pollutant under the policy merely because it may become harmful in abnormally high concentrations or under unusual circumstances.”

The Wisconsin Supreme Court reinstated the trial court rulings. After finding that the contamination of the wells qualified as an occurrence within the meaning of the policies’  insuring agreements because the seepage was neither expected nor intended, the supreme court focused on whether the pollution exclusions precluded coverage. In Preisler, the court opined that “a reasonable insured would understand decomposing septage to be a contaminant when it seeps into a water supply” such as plaintiffs’ wells. The court further noted that state and federal regulations of septage handling supported the conclusion that the insureds should have been aware of the health risks connected with hauling, storing and applying septage.

In Falk, the court adopted a two part test for determining the pollution exclusion’s applicability to a given set of facts. First, a substance is a pollutant if it is “largely undesirable and not universally present in the context of the occurrence [for which] the insured seeks coverage.” Second, a substance is a pollutant when “a reasonable insured would consider the substance causing the harm involved in the occurrence to be a pollutant.” The court found both elements satisfied here because cow manure in well water is undesirable, it is commonly understood to be harmful, and it is not universally present in well water.

Chief Justice Abrahamson wrote strongly worded dissents to both decisions in which she focused on the insureds’ reasonable expectations in light of the nature of their businesses. In Preisler, she observed that the insureds would not consider “septage a pollutant under the pollution exclusion clause of general liability policies they purchased to cover liability for damage caused by their septic business operations.” In Falk, she reasoned that farmers, covered under a farmowner’s liability policy, would not consider manure a pollutant.