The South Carolina Supreme Court recently set a new precedent for South Carolina law on insurance coverage for environmental damages by ruling that environmental cleanup costs constitute “damages” under a general liability insurance policy.(1)
Questions of insurance coverage for environmental damages have generated a lot of litigation over the years. On this particular issue, some courts have ruled that environmental cleanup done at the request of the EPA or a similar state agency is not covered as “damages” under a general liability insurance policy. Those courts reason that cleanup requested by a regulatory agency is “injunctive relief” and “equitable” in nature, rather than payment on a legal claim for damages.(2)
The South Carolina Supreme Court rejected that reasoning. The court observed that the ordinary person understands “damages” as meaning money paid on an insured loss, such as property damage. The ordinary meaning of the term “damages” is not legalistic and does not depend on whether the damages are “legal” or “equitable.” The South Carolina Supreme Court also observed that the majority of state courts examining this issue has held that environmental cleanup costs are “damages” for purposes of insurance coverage. The court concluded that it was time to “align South Carolina with the majority of jurisdictions that have allowed insurance coverage for this type of loss.” The court therefore ruled that environmental cleanup costs are “damages” within the meaning of a general liability insurance policy.
The court then turned to a pollution exclusion in the policy, which excluded coverage for property damage arising out of environmental contamination, unless the discharge of contaminants was “sudden and accidental.” South Carolina courts have interpreted the term “sudden” in this exclusion to mean “unexpected.” In this case, the evidence demonstrated that the environmental contamination was caused by the policyholder’s routine business operations, in which spills were common. For that reason, the court concluded that the contamination was not “unexpected and accidental.” Consequently, the court found that the pollution exclusion precluded coverage for these damages.
This new precedent marks a shift in South Carolina law on the meaning of “damages” in general liability insurance policies. By focusing on the ordinary meaning of damages and refusing to draw a distinction between “legal” and “equitable” remedies, the court may have set a precedent that will impact cases beyond the environmental context.
This case also sets a new precedent on the interpretation of the “sudden and accidental” pollution exclusion, giving an insurance company an argument for denying coverage if the contamination resulted from the policyholder’s routine business operations.
(1) Helena Chemical Co. v. Allianz Underwriters, Ins. Co., 357 S.C. 631 (2004).
(2) See, e.g., Maryland Cas. Co. v. Armco, 822 F. 2d 1348 (4th Cir. 1987) (interpreting Maryland law).