Explosion case offers insights on policies, business risks

April 7, 2017 By    

In the case of Hiland Partners GP Holdings v. National Union Fire Insurance Co. of Pittsburgh, the 8th U.S. Circuit Court of Appeals affirmed a district court grant of summary judgment in favor of the insurance company.

The court found that it had no duty to defend and indemnify Hiland in a civil case resulting from an explosion at the company’s natural gas processing facility in North Dakota.

Hiland contracted with Missouri Basin Well Service to perform certain work at this facility, and it was required to list Hiland as an additional insured on its commercial general liability policy. It obtained this policy from National Union.

The policy provided common language on the duty to defend and indemnify. It also provided an exclusion from coverage for any claim arising out of “discharge, dispersal, seepage, migration, release, or escape of pollutants.” Pollutants were defined in an endorsement to be “any solid, liquid, gaseous or thermal irritant or contaminant, to include smoke, vapor, soot, fumes, acids, alkalis, chemicals or waste.”

Missouri Basin contracted with a third-party, B&B Heavy Haul LLC, to remove condensate from the facility at the request of Hiland. Condensate is flammable, volatile and explosive. As a B&B employee was about to remove the condensate, one of the holding tanks overflowed, found an ignition source and exploded.

The injured employee, Lenny Chapman, filed suit against Hiland. It in turn sought defense and indemnity from National Union.

Hiland settled Chapman’s claim separately. National Union denied the defense tender brought by Hiland. In the civil suit, the trial and appellate courts affirmed that, based on the pollution exclusion, National Union had no duty to defend and indemnify Hiland for the Chapman claim.

Persuasion attempts

In its appeal, Hiland made several arguments to persuade the court that it is entitled to defense and indemnity under the National Union policy.
Hiland argued the policy exclusion for pollution claims is ambiguous. In the area of insurance policy interpretation, any ambiguity in policy language is interpreted in favor of the insured. But Hiland did not raise the ambiguity argument at the trial court level.

The court found that the definition of pollution exclusions like the one in this insurance policy have been found by the vast majority of state and federal courts to be unambiguous. Nothing about the language in this policy required a different conclusion. Hiland also waived the argument by not raising it at the trial level, and it did not show manifest injustice would result if the waiver were enforced.

Hiland next argued that condensate is not a pollutant and thus is not controlled by the exclusion in the insurance policy. The policy did not define “irritant or contaminant.” North Dakota courts look to “plain ordinary meaning,” provided it is not subject to “strict technical usage.” Here, no party claimed these terms were subject to “strict technical usage.” The court looked to various dictionary definitions and found that condensate meets the pollution definition of the policy as alleged in the complaint, as it was “flammable, volatile and explosive” in this incident.

Next, Hiland argued that even if condensate can be defined as a pollutant it did not act as such in this incident. But the court dismissed this argument, finding that the very thing that happened in this case is that the condensate exploded and caused injury. Since the exclusion applies to contaminants, and that includes explosions, there is no coverage under the policy.

Finally, Hiland argued that National Union did not prove Hiland failed to satisfy an exception to the policy exclusion. The policy provided that if an event that is excluded occurs during the policy period and Hiland gives notice to National Union within 21 days of the event, it will be deemed an exception to the policy exclusion and the defense and indemnity obligation will apply. But the court noted the evidentiary burden to prove the exception was satisfied rested with Hiland to prove the notice was given within 21 days of the event. Hiland, however, presented no evidence it gave such notice.

This case illustrates the importance of obtaining an insurance policy that is tailored to your business risks. And if there is a notice requirement to trigger coverage, it is exercised in timely fashion.

John V. McCoy is with McCoy Leavitt Laskey LLC, and his firm represents industry members nationally. He can be reached at 262-522-7007 or jmccoy@MLLlaw.com.

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Allison Kral was a senior digital media manager at LP Gas magazine.

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