Opinion
2023-CA-0169-MR
07-19-2024
ERIE INSURANCE EXCHANGE APPELLANT v. SHRI BRAMANI, LLC; ERIC MOBERLY; KAP LEASING, INC.; KEVIN MOBERLY; MOBERLY BROTHERS PROPERTIES, LLC; AND PRADIPKUMAR PATEL APPELLEES
BRIEFS FOR APPELLANT: MATTHEW D. ELLISON LEXINGTON, KENTUCKY BRIEF FOR APPELLEES ERIC MOBERLY, KEVIN MOBERLY, AND MOBERLY BROTHERS PROPERTIES, LLC: FRED E. PETERS RHEY MILLS LEXINGTON, KENTUCKY
APPEAL FROM FAYETTE CIRCUIT COURT HONORABLE KIMBERLY N. BUNNELL, JUDGE ACTION NO. 21-CI-03469
BRIEFS FOR APPELLANT: MATTHEW D. ELLISON LEXINGTON, KENTUCKY
BRIEF FOR APPELLEES ERIC MOBERLY, KEVIN MOBERLY, AND MOBERLY BROTHERS PROPERTIES, LLC: FRED E. PETERS RHEY MILLS LEXINGTON, KENTUCKY
BEFORE: CALDWELL, CETRULO, AND A. JONES, JUDGES.
OPINION
JONES, A., JUDGE
Erie Insurance Exchange ("Erie") appeals the order of the Fayette Circuit Court, entered on January 23, 2023. Therein, the circuit court determined that the pollution exclusion contained in the commercial policy of insurance Erie issued to named insureds, Lane Allen Food Mart and Shri Bramani LLC d/b/a KAP Leasing Inc., did not exclude coverage for the negligent leakage of gasoline from one of the insured's underground fuel storage tanks onto the neighboring real property owned by Appellees. After careful review of the briefs, record, and law, we reverse and remand for entry of a judgment in Erie's favor.
Collectively referred to herein as "Lane Allen Food Mart."
I. Background
A. The Parties
Shri Bramani, LLC ("Shri") is a limited liability company. (Record ("R.") at 9.) It operates a Valero gas station and convenience store, the Lane Allen Food Mart, at 831 Lane Allen Road in Lexington, Kentucky. Id. KAP Leasing, Inc., ("KAP") owns the real property and improvements located at 831 Lane Allen Road. (R. at 10.) Pradipkumar Patel is a member, shareholder, financial beneficiary, and/or employee of Shri Bramani, LLC and KAP Leasing, Inc. Id.
Moberly Brothers Properties, LLC ("Moberly Brothers") is a limited liability company, which owns approximately six acres of real property located adjacent to the Lane Allen Food Mart. Id. Kevin Moberly and Eric Moberly are members of and have a financial interest in Moberly Brothers. Id.
Erie is an unincorporated association, authorized under the laws of the Commonwealth of Kentucky, and specifically, the Kentucky Department of Insurance, to issue certain types of casualty loss insurance policies for risks and subjects located in Kentucky. (R. at 9.)
B. The Policy
On or about June 12, 2018, Erie issued Shri and KAP a commercial general liability policy of insurance which covered the premises and the operation of the convenience store and gas station on Lane Allen Road. (R. at 10.) The policy was initially in force for one year, and renewed on June 12, 2019, for another year, until June 12, 2020. (R. at 11.) Relevant to this action, the policy generally provides coverage for legal liability to third parties arising out of bodily injury, property damage, or personal and advertising injury. Id. However, as with most policies of insurance, the policy contains several exclusionary clauses. Specifically, the policy excludes coverage for injuries or damages caused by "pollution." It states:
According to Erie,
When applying for the Policy coverage, neither Shri nor KAP requested or inquired into the availability of liability coverage for claims by third parties arising out of the leakage of fuel from its underground storage tanks. Had they done so, Erie would have informed them that it did not write such coverage, and if they specifically desired such coverage, they would need to specifically obtain such coverage from another commercial insurance carrier (for example Chubb, Travelers, or AIG) who wrote pollution liability policies. Neither Shri nor KAP communicated any expectation that the policy being applied for with Erie would also include coverage of the type normally associated with pollution liability coverage.(R. at 11.)
Erie canceled the policy on August 17, 2020, due to the non-payment of premiums due and owing. Id.
f. Pollution
1) "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":
a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured....(R. at 86.)
According to the policy,
15. "Pollutants" mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Wastes includes materials to be recycled, reconditioned, or reclaimed.(R. at 97.)
C. The Gas Leak
On or about October 17, 2019, the Kentucky Division of Waste Management ("KDWM") received a telephonic complaint of petroleum odors around the Lane Allen Food Mart. (R. at 12.) A KDWM official was sent to investigate and noted what appeared to be petroleum leeching through a groundwater spring. Id. Further investigation and testing indicated that the petroleum was coming from one of the Lane Allen Food Mart's underground petroleum storage tanks. Id.
On December 12, 2020, Lane Allen Food Mart entered into an Agreed Order with the Energy and Environment Cabinet admitting that it had violated Kentucky Revised Statutes ("KRS") Chapter 224, and the statute's accompanying regulations, as related to its underground petroleum storage tanks. (R. at 129-35.) Pursuant to the Agreed Order, Lane Allen Food Mart consented to an assessed penalty of ten thousand dollars for the agreed-upon violations. (R. at 131.)
D. Post-Leak Events
Following discovery of the fuel leak, Moberly Brothers made a prelitigation claim against Lane Allen Food Mart. (R. at 12.) Moberly Brothers alleged that the fuel leak caused it to suffer economic harm as a result of widespread, permanent environmental contamination. Id. Specifically, Moberly Brothers asserted that the leaked fuel entered and contaminated a natural water spring located on its property, which rendered the property unfit for the bottled water facility that was planned for the property. Id. Moberly Brothers demanded Erie pay five million dollars to resolve its pre-litigation claim against the Lane Allen Food Mart. (R. at 13.) Erie denied the claim based on the pollution exclusion contained in the policy. Id.
On May 14, 2021, Moberly Brothers filed suit against Shri, KAP, and Mr. Patel, alleging they were legally liable for the damages it suffered as a result of the fuel leak. (R. at 13.) Therein, Moberly Brothers alleged as follows:
The complaint also named Erie as a defendant and asserted a bad faith unfair settlement practices act claim against it.
10. The six acres of land that [Moberly Brothers] own[s] on Lane Allen Road has been permanently and totally destroyed for all substantial uses, including all commercial uses that [Moberly Brothers] had planned on using on said premises before [Lane Allen Food Mart's] negligence caused it to become worthless. The direct and proximate cause of the damage [was] the actions and inactions of [Lane Allen Food Mart], specifically the food mart, gasoline company, and the owners in negligently operating said fuel tanks on said premises, and after finding out they were leaking, negligently failing to stop said leak and preventing the damage to the surrounding property. They also negligently failed to notify property owners and the State of the leak when they had ample notice and opportunity to notify everyone, and they concealed said leak and spillage unlawfully. [Moberly Brothers] state[s] that their property has been totally destroyed, and any and all uses they had for said property are permanently destroyed by the violations of the State statutes and regulations by [Lane Allen Food Mart], and the past negligence and continued negligence of [Lane Allen Food Mart] from February 2019 through December 2019, and their concealment of said negligence from [Moberly Brothers] and all other neighbors, causing [Moberly Brothers] to suffer damages in excess of the minimal jurisdictional amount of this Court.(R. at 125-26.) Moberly Brothers sought "[c]ompensation for the diminished value, costs to repair, costs for remediation, and all other expenses and costs incurred . . . in trying to restore and recover the use and the value of the property[.]" (R. at 127.)
Erie agreed to defend the claim against the Lane Allen Food Mart under a reservation of rights. (R. at 14.) Subsequently, on November 18, 2021, Erie filed a separate action against Shri, KAP, Mr. Patel, Kevin Moberly, Eric Moberly, and Moberly Brothers. Therein, Erie sought a "declaration of rights stating that it owes no duty to indemnify or defend Shri, KAP and/or Patel against Moberly's prelitigation claim or Complaint" as the "claim is excluded from coverage under the Policy because it falls within the plain and unambiguous language of the 'pollution exclusion.'" (R. at 18.) Relying upon the allegations in Moberly Brothers' complaint, as supplemented by its admissions to factual allegations in the underlying petition, Erie moved for summary judgment arguing that there were no genuine issues of material fact and the pollution exclusion unambiguously applied to the fuel leak. (R. at 154-65.) Finding that the policy did not exclude the inadvertent leakage of gasoline and that there was no significant environmental impact to the ecosystem, the circuit court denied the motion and entered a judgment against Erie. (R. at 182.) This appeal followed.
As explained in Kentucky Farm Bureau Mutual Insurance Company v. Brewer, 596 S.W.3d 620 (Ky. App. 2020):
An insurer that believes there may be no coverage can decide to defend the claim and litigate the coverage issue later. In that circumstance, the insurer normally preserves its right to challenge coverage at a later date by a reservation of rights letter. Aetna Cas. & Sur. Co. v. Commonwealth, 179 S.W.3d 830, 841 (Ky. 2005). If an insurer issues a reservation of rights letter to an insured, the insured has the option of accepting the insurer's defense or refusing the defense and conducting his own defense. Med. Protective Co. of Fort Wayne, Indiana v. Davis, 581 S.W.2d 25, 26 (Ky. App. 1979). A timely reservation of rights is significant because without it, the insurer may be estopped from denying coverage after it has defended the insured for a prolonged period.Id. at 622.
Pursuant to KRS 418.040, "[i]n any action in a court of record of this Commonwealth having general jurisdiction wherein it is made to appear that an actual controversy exists, the plaintiff may ask for a declaration of rights, either alone or with other relief; and the court may make a binding declaration of rights, whether or not consequential relief is or could be asked."
II. Standard of Review
In a case such as this "in which the trial court has granted summary judgment in a declaratory judgment action and no bench trial is held, we use the appellate standard of review for summary judgments." Foreman v. Auto Club Property-Casualty Insurance Company, 617 S.W.3d 345, 349 (Ky. 2021).
Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." CR 56.03. "An appellate court's role in reviewing a summary judgment is to determine whether the trial court erred in finding no genuine issue of material fact exist[ed] and the moving party was entitled to judgment as a matter of law." Feltner v. PJ Operations, LLC, 568 S.W.3d 1, 3 (Ky. App. 2018). The standard of review for an appellate court is de novo because only legal issues are involved. Isaacs v. Sentinel Ins. Co. Ltd., 607 S.W.3d 678, 681 (Ky. 2020).
Kentucky Rules of Civil Procedure.
III. Analysis
Resolution of this dispute hinges on interpretation of the pollution exclusion contained in Erie's policy. The Kentucky Supreme Court recently explained how courts should approach the interpretation of exclusionary clauses in policies of insurance.
"De novo review extends to the trial court's interpretation of the insurance contract as a matter of law." Thomas v. State Farm Fire &Cas. Co., 626 S.W.3d 504, 506 (Ky. 2021). "Additionally, we adhere to our long-held standard that when we interpret insurance contracts, perceived ambiguities and uncertainties in the policy terms are generally resolved in favor of the insured." Id. at 506-07. This rule of construction favoring coverage, however, "does not mean that every doubt must be resolved against it and does not interfere with the rule that the policy must receive a reasonable interpretation consistent with the parties' object and intent or narrowly expressed in the plain meaning and/or language of the contract." St. Paul Fire &Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223, 226 (Ky. 1994).
Nonetheless, "[a]s long as coverage is available under a reasonable interpretation of an ambiguous clause, the insurer should not escape liability, and the exclusionary provision addressed herein may be subject to more than one good faith interpretation." Id. at 227. An ambiguity may exist either on the face of the contract, i.e., from the nature of the language itself, or "when a provision is applied to a particular claim." Id. The latter is a latent ambiguity that arises when the contractual terms "are brought in contact with the collateral facts." Carroll v. Cave Hill Cemetery Co., 172 Ky. 204, 189 S.W. 186, 190 (1916). "When analyzing challenged terms for clarity we note that the terms of insurance contracts have no technical legal meanings and must be reasonably interpreted as they would be understood by a lay reader." Thomas, 626 S.W.3d at 507. Nevertheless, "an insurance company should not be allowed to collect premiums by stimulating a reasonable expectation of risk protection in the mind of the consumer, and then hide behind a technical definition to snatch away the protection which induced the premium payment." Aetna Cas. &Sur. Co. v. Commonwealth, 179 S.W.3d 830, 837 (Ky. 2005) (quoting Moore v. Commonwealth Life Ins. Co., 759 S.W.2d 598, 599 (Ky. App. 1988)).
Moreover, this Court has always "strongly adhered to a policy of protecting the reasonable expectations of policyholders." Lewis ex rel. Lewis v. West American Ins. Co., 927 S.W.2d 829, 833-34 (Ky. 1996). "Although 'insurance carriers have the right to impose reasonable' limitations on their coverage, 'the question then becomes the reasonableness of the condition as a limitation on public policy as opposed to one of strict contract considerations between private parties where no public interest is involved.'" Id. at 834 (quoting Jones v. Bituminous Cas. Corp., 821 S.W.2d 798, 802 (Ky. 1991).Ashland Hospital Corporation v. Darwin Select Insurance Co., 664 S.W.3d 509, 516 (Ky. 2022).
This Court has twice interpreted pollution exclusions similar to the one at issue in this case. We first did so in Motorists Mutual Insurance Company v. RSJ, Inc., 926 S.W.2d 679 (Ky. App. 1996). In RSJ, the insured, a dry-cleaning business, sued its commercial general liability insurer, seeking a declaration of coverage for the personal injury damages claims asserted by the owners of an adjoining business after carbon monoxide fumes escaped from a vent pipe of the insured's boiler. The insurer argued that the claims were not covered due to the policy's unambiguous pollution exclusion clause. After the trial court ruled in favor of the insureds, the insurer appealed.
The RSJ court first determined that since the exclusion was not ambiguous on its face, any "ambiguity necessarily arises in the application of the provision to the specifics of a particular claim." Id. at 680. In assessing whether the exclusion was ambiguous as applied, the RSJ court identified three factors worthy of its consideration: (1) how other jurisdictions had applied the exclusion under similar factual circumstances; (2) the basic premise that terms in a policy should be given their ordinary meaning as persons with the ordinary and usual understanding would construe them; and (3) whether a literal application of the exclusion would lead to absurd consequences. Id. at 681-82. After considering the three factors in combination with one another, the RSJ court held that the exclusion was ambiguous when applied to personal injuries arising out of the unanticipated breakdown of equipment and the ensuing leakage of carbon monoxide.
A few years later, we were again called upon to consider application of another pollution exclusion in Certain Underwriters at Lloyd's, London v. Abundance Coal, Inc., 352 S.W.3d 594 (Ky. App. 2011). In Abundance Coal, the insurer filed a complaint seeking a declaration that its insurance contract did not provide coverage for real property claims (negligent trespass) brought by neighboring landowners against its insured, a coal company, after coal dust entered and damaged their property. The trial court ruled that the insurer was responsible for coverage, exemptions notwithstanding. The insurer appealed.
Relying on RSJ, the Abundance Coal court first recognized that even though the exclusion may appear unambiguous on its face, Kentucky courts have adopted a case-by-case approach which requires consideration of the exclusion in the context of the factual situation at hand. Id. at 598. Then, after applying the RSJ three-factor approach, the Abundance Coal court determined that the exclusion was ambiguous. The court's analysis, however, did not end there. The court went on to explain:
Taken as a whole, these factors weigh strongly in favor of finding ambiguity in the insurance agreement. The circuit court properly determined the contract was ambiguous.
The circuit court was not correct, however, in concluding that the Sparkman plaintiffs' claims should necessarily be covered by the policy. Ambiguity in an insurance policy does not justify automatic construction of the term in favor of the insured. RSJ, 926 S.W.2d at 680. The circuit court should have ascertained whether the injury alleged in the Sparkman complaint was the type contemplated for coverage in the insurance agreement. It was not possible to do so based on the pleadings alone. It is not clear from the record what type of injury the Sparkman plaintiffs alleged. Has the dust made plaintiffs' water undrinkable? Has it caused humans or animals respiratory problems? Allegations such as this might indicate a pollution claim. On the other hand, if they are merely complaining about physical damage to their property or the accumulation of dirt without environmental consequences, that would indicate injuries that do not result from pollution. In sum, the dust at issue here is not a pollutant if it does not cause the irritation, contamination, negative health or environmental effects, or other types of harm contemplated in the insurance agreement.
There is a state of facts under which Lloyd's can prevail, at least in part, based on the policy's pollution exclusions. Dismissal of the complaint was therefore improper. To the extent the circuit court held that all claims based on entry of dust upon a landowner's property are necessarily covered by the policy, it is vacated.Id. at 599.
Consistent with RSJ and Abundance Coal, we must now consider: (1) how other jurisdictions have applied the exclusion under similar factual circumstances; (2) the ordinary meaning of the terms; (3) whether a literal application of the exclusion under these circumstances would lead to absurd results; and (4) the nature of the damage alleged by Moberly Brothers.
(1) Application of the Exclusion by Other Courts.
The parties have not cited any Kentucky cases involving application of a similar pollution exclusion to an underground petroleum leak, and we have not located any such cases. Therefore, we must look to other jurisdictions for assistance. The results are mixed; however, the majority and more modern approach is that the exclusion is not ambiguous when applied to petroleum gasoline leaking from an underground storage tank onto neighboring property. The cases cited by Moberly Brothers in favor of ambiguity have relied heavily on the absence of "gasoline" or "petroleum" from the definition of pollutant. However, as observed in both RSJ and Abundance Coal, the list of potential pollutants is virtually boundless. It would be both impractical and inefficient for the insurer to attempt to include a laundry list of every potential pollutant in its policies. We simply cannot agree that the insurer's failure to include petroleum or gasoline in its definition of a pollutant renders the term ambiguous in this instance. On the balance, this factor weighs slightly in favor of concluding that the exclusion is not ambiguous in this situation.
The following cases have concluded that similar pollution exclusion policies were not ambiguous as applied to fuel leaks. Whittier Properties, Inc. v. Alaska Nat. Ins. Co., 185 P.3d 84, 90 (Alaska 2008) ("We hold that there is no ambiguity because, even though gasoline that is in the [underground storage tank] is a 'product' for purposes of other parts of the insurance policy, when the gasoline escapes or reaches a location where it is no longer a useful product it is fairly considered a pollutant."); Montana Petroleum Tank Release Compensation Bd. v. Crumleys, Inc., 174 P.3d 948, 959 (Mont. 2008) ("In sum, we hold that the terms of the pollution-exclusion clause are not ambiguous. Viewed from the objective perspective of the average consumer, we conclude that diesel is included in the clause's definition of the term 'pollutant.' This is evidenced by both the clear language of the policy, and by the obvious hazards diesel fuel poses to community health and safety once it has leaked into the soil."); Federated Mut. Ins. Co. v. Abston Petroleum, Inc., 967 So.2d 705, 715 (Ala. 2007) ("Because the pollution-exclusion clause is unambiguous, the personal injury and property damage suffered by the Schills are not covered by the Federated Mutual policy issued to Abston Petroleum, and the trial court therefore erred in entering a summary judgment in favor of Abston Petroleum and the Schills on Counts I and II of the complaint."); Wagner v. Erie Ins. Co., 801 A.2d 1226, 1234 (Pa. Super. 2002), judgment aff'd without opinion, 847 A.2d 1274 (Pa. 2004) ("[T]he policy at issue clearly and unambiguously excludes owner's claim for coverage due to harm caused by gasoline leakage into the soil."); Harrison v. R.R. Morrison & Son, Inc., 862 So.2d 1065, 1072 (La.App. 2d Cir. 2003) (footnotes omitted) ("We find that the pollution exclusion clause . . . excludes insurance coverage of any pollutant that escapes . . . and causes injury to another. Pollutants are defined in the insurance policy as any liquid contaminant. We further find that gasoline is a liquid contaminant within the plain meaning of pollutant in the insurance policy. Since we find that the language in the insurance policy is not ambiguous and is not open to more than one interpretation, the plain meaning of the policy should control."); Truitt Oil & Gas Co., Inc. v. Ranger Ins. Co., 498 S.E.2d 572 (Ga.App. 1998) ("Gasoline which has leaked from its storage container and has contaminated the surrounding environment constitutes a pollutant within the meaning of the policy. In light of the policy language and the usual significance of the words used in the policy, it was unnecessary for the policy to specifically list gasoline as a pollutant."); Millers Mut. Ins. Ass'n of Illinois v. Graham Oil Co., 668 N.E.2d 223, 228 (Ill. App. 1996) ("Although gasoline safely contained in a storage tank is a useful product, its presence in the subsoil of a neighbor's property can hardly be said to be anything but a contaminant and thus a pollutant under the terms of the policies."); Crescent Oil Co., Inc. v. Federated Mut. Ins. Co., 888 P.2d 869, 873 (Kan. App. 1995) ("We hold the policy definition of 'pollutants' includes gasoline which has escaped and caused contamination to neighboring property."); Union Mut. Fire Ins. Co. v. Hatch, 835 F.Supp. 59, 65-66 (D.N.H. 1993) (holding that policy language was clear and unambiguous and using the ordinary meanings of the words, gasoline leaking from underground storage tank was a "pollutant"); Guilford Industries Inc. v. Liberty Mut. Ins. Co., 688 F.Supp. 792 (D. Me. 1988), judgment aff'd without opinion, 879 F.2d 853 (1st Cir. 1989) (holding that the absolute pollution exclusion excluded coverage of claims arising when oil escaped from storage tanks located at the insured's textile mill and damaged property downstream from the mill).
Anderson Gas & Propane, Inc. v. Westport Ins. Corp., 140 S.W.3d 504, 508-09 (Ark. App. 2004) ("Westport failed to include the term 'gasoline' in the policy's definition of 'pollutants.' Also, the terms 'irritant or 'contaminant' can reasonably be construed as including 'gasoline' -or not including it. We believe, therefore, that the language of the exclusion is fairly susceptible to more than one reasonable interpretation and, thus, is ambiguous."); Hocker Oil Co., Inc. v. Barker-Phillips-Jackson, Inc., 997 S.W.2d 510, 518 (Mo.Ct.App. 1999) ("[Insurer's] failure to identify 'gasoline' as a pollutant in its pollution exclusion resulted in uncertainty and indistinctness. The policy was, therefore, ambiguous as to whether gasoline was a pollutant for purposes of the exclusion."); American States Ins. Co. v. Kiger, 662 N.E.2d 945, 949 (Ind. 1996) ("[T]he term 'pollutant' does not obviously include gasoline and, accordingly, is ambiguous.").
Moberly Brothers relies on Hocker to support its argument that we should focus on whether gasoline was the insured's product. Hocker, 997 S.W.2d at 518. As the United States Court of Appeals for the Eighth Circuit has recognized, "[t]hat focus was a minority position when adopted, has been almost uniformly rejected by appellate courts in other jurisdictions, and has not since been cited or referred to favorably by the Supreme Court of Missouri." Doe Run Resources Corp. v. Lexington Ins. Co., 719 F.3d 868, 875 (8th Cir. 2013).
(2) Ordinary Meaning.
The second factor the RSJ court considered to determine whether the policy was ambiguous as applied was "the basic premise that terms used in insurance contracts 'should be given their ordinary meaning as persons with the ordinary and usual understanding would construe them.'" RSJ, 926 S.W.2d at 681 (quoting City of Louisville v. McDonald, 819 S.W.2d 319, 320 (Ky. App. 1991)). This is known as the reasonable expectations doctrine. However, the Kentucky Supreme Court has subsequently held that the reasonable expectations doctrine is only applicable once an ambiguity has been determined to exist. True v. Raines, 99 S.W.3d 439, 443 (Ky. 2003) ("The reasonable expectation doctrine . . . applies only to policies with ambiguous terms - e.g., when a policy is susceptible to two (2) or more reasonable interpretations.... We find the reasonable expectation doctrine inapplicable in this case because we discern no ambiguity within Rice's Preferred Risk policy as to whether that policy extended UIM coverage to Raines.").
Even though this factor may not be relevant to assessing whether the policy is ambiguous, we will nonetheless consider it. Citing Hocker, Moberly Brothers argues that "a gas station contracting for insurance would understand that gasoline, the product on which its business thrives, is covered by its liability policy. In this context, gasoline is a product not a 'pollutant.'" This argument is far too narrow. "'Reasonable expectations' are not ascertained from the subjective belief, however genuine, of the insurance applicant . . . [t]he test in determining reasonable expectations is based on construing the policy language as a layman would understand it, rather than considering the policyholder's subjective thought process regarding his policy." Sparks v. Trustguard Ins. Co., 389 S.W.3d 121, 128 (Ky. App. 2012).
Considering the issue from the objective viewpoint of a consumer with average intelligence, we conclude that most consumers would recognize that gasoline is a product when securely contained but would consider it a pollutant when it leaks into the ground and contaminates soil and water. As the United States Supreme Court recognized, even a valuable and useful product can become a pollutant when it contaminates a natural resource. United States v. Standard Oil Co., 384 U.S. 224, 226, 86 S.Ct. 1427, 1428, 16 L.Ed.2d 492 (1966) (rejecting the argument that oil was not refuse and holding that it became a pollutant once it leaked into the river). Similarly, gasoline, while commercially valuable to the gas station owner and useful to consumers when properly secured and contained, nonetheless becomes a pollutant once it has leaked into the soil and groundwater.
The focus of the inquiry under the absolute pollution exclusion is not on the nature of the substance alone, but on the substance in relation to the property damage or bodily injury. Even if a substance such as gasoline is a commercially useful product in one context, it may become a pollutant when it is released and becomes a foreign substance in another medium. For example, if a consumer sued a gas station for mislabeling its pumps, causing her to put leaded fuel in the unleaded engine of her car, the gasoline, which stayed properly contained and caused only damage to the car's engine, would clearly be a product not a pollutant. But, in a case such as this, where a neighboring property owner is suing a gas station for damages caused to its real property after gasoline escaped from an underground storage tank and contaminated the soil and water, we believe most ordinary consumers would understand that the gasoline has ceased to be a product and has become a pollutant.
The Court finds support for this conclusion in KRS 224.60-110, which discusses the need to regulate the storage of petroleum in tanks within the Commonwealth. It provides:
As used in the statute "petroleum" "includes motor gasoline, gasohol, other alcohol-blended fuels, diesel fuel, heating oil, special fuels, lubricants, and used oil[.]" KRS 224.60-115(15).
The General Assembly of the Commonwealth of Kentucky finds and declares that:
(1) Significant quantities of petroleum and petroleum products are being stored in petroleum storage tanks in the state to meet the needs of its citizens and to foster economic growth and development and the overall quality of life in the state;
(2) Spills, leaks, discharges, and other releases into the environment from petroleum storage tanks, however, have occurred, are occurring, or will occur, and such releases may pose a threat to public health and safety and the environment;
(3) Adequate financial resources must be readily available to provide a means for investigation and cleanup of contamination without delay;
(4) In recent years, petroleum storage tank owners or operators have been unable to obtain affordable pollution liability insurance coverage to pay for corrective action measures;
(5) It is in the best interests of the state to protect public health and safety and the environment by creating a fund for corrective action measures for releases into the environment from petroleum storage tanks;
(6) Commercial insurers may increase the availability and affordability of pollution liability insurance coverage for petroleum storage tanks if a comprehensive and efficient financial responsibility program for tanks is established;
(7) An efficient program of financial responsibility should include corrective action requirements that encourage petroleum storage tank owners or operators to take corrective action measures in the first instance;
(8) An efficient program of financial responsibility for petroleum storage tanks should minimize disputes over the causation of and responsibility for releases into the environment from petroleum storage tanks;
(9) An efficient program of financial responsibility should protect petroleum storage tank owners and operators from fraudulent claims against the fund to insure the fund's financial viability and should authorize the vigorous pursuit of fraudulent claims;
(10) It is necessary and essential that the state use all practical means to control or eliminate pollution hazards posed by leaking petroleum storage tanks; and
(11) It is the intent of the General Assembly that a state fund be created to assist petroleum storage tank owners or operators in complying with the federal financial responsibility requirements promulgated under federal regulations and to assist petroleum storage tank owners or operators in cleaning up contamination caused by a release.Id. (emphasis added). This statute plainly indicates that Kentucky considers escaped petroleum to be a pollutant, and that storage tank owners wishing to insure against such events must obtain special pollution liability insurance coverage.
(3) Whether a literal application of the exclusion would lead to absurd consequences.
There are situations where a literal application of the exclusion might lead to absurd consequences. If petroleum gasoline was considered a pollutant in every instance, the exclusion could be used to avoid coverage in the mislabeling hypothetical discussed above, or where a customer merely slipped and fell on some spilled gasoline beside a pump. This is not such a case. Here, we are dealing with petroleum gasoline that is alleged to have escaped from an underground tank due the insured's negligence and entered and damaged neighboring property. This appears to be precisely the type of event the exclusion was designed to exempt from coverage and the result is not absurd.
(4) Nature of the Alleged Damage.
Where the purported pollutant does not result in truly environmental kinds of harm or damage the pollution exclusion is ambiguous and coverage exists. But where the purported pollutant results in "contamination, negative health or environmental effects," the exclusion is enforceable. Abundance Coal, 352 S.W.3d at 599. A review of the record indicates that Moberly Brothers alleges significant environmental damage to its real property due to the gasoline that leaked from the Lane Allen Food Mart's underground storage tank. Moberly Brothers alleges in its complaint that the petroleum gasoline damaged and contaminated its property and seeks damages "to restore and recover the use and value of the property." (R. at 127.) This is precisely the type of pollution-related damage that falls within the scope of the exclusion.
In conclusion, we hold that gasoline is clearly a pollutant when it leaks from an underground storage tank and enters a neighbor's land and contaminates the water and soil thereon. To the extent there is any ambiguity in the policy language, no reasonable person could expect that the exclusion would not apply to gasoline leaking out of an underground storage tank and damaging neighboring property. In fact, this scenario seems to be the exact situation the exclusion was intended to exempt from coverage.
IV. Conclusion
Because the pollution-exclusion clause is unambiguous, the property damages suffered by Moberly Brothers are not covered by Erie's policy of insurance, and the trial court therefore erred in entering a judgment against Erie. We reverse the judgment and remand the cause for further proceedings consistent with this Opinion, including entry of a declaratory judgment in Erie's favor.
ALL CONCUR.