The Western District of Michigan came bearing good news for policyholders earlier this week with a favorable ruling in Decker Manufacturing Corporation v. The Travelers Indemnity Company. In a February 3 decision, the court addressed Michigan’s so-called “initial discharge rule,” which Michigan courts have arguably applied inconsistently to date, in the context of waste disposal into a landfill. The district court was tasked with determining whether, for purposes of applying a pollution exclusion barring coverage for any discharge expected or intended by the insured, the relevant “discharge” was the initial placement of waste into a landfill or the subsequent escape of waste from the landfill.
From 1966 to 1981, Decker disposed of various wastes in a Michigan landfill, which shortly thereafter found its way onto the National Priority List as a Superfund Site. In 1998, Decker settled with the EPA and agreed to pay for the agency’s investigation and remediation costs at the site. Decker subsequently sued Travelers to recover those costs under comprehensive general liability policies issued between 1973 and 1976. Travelers argued that because Decker intentionally discharged its waste into the landfill, the pollution exclusion in its policies precluded coverage. Travelers pointed to Michigan’s “initial discharge rule,” which states that the initial discharge of a pollutant to the environment is the relevant discharge for determining if the pollution exclusion applies. In an important decision for Michigan policyholders facing environmental liability, the court instead ruled that under the “initial discharge rule,” the relevant discharge was not the initial placement of waste into the landfill, but rather the escape of waste from the landfill.
Perhaps most interesting about the ruling is the court’s emphasis not on the efficacy of the landfill, but on Decker’s understanding of the legality of the landfill and lack of intent to cause environmental harm. The court acknowledged that the landfill “was poorly located and was not designed to prevent the migration of contaminates” and “did not conform to the state of knowledge in the scientific and engineering communities at the time it began operations.” Indeed, the court provided a laundry list of reasons why the landfill was not fit to prevent contamination of groundwater (including that it was not an engineered structure, it was unlined, it was built on permeable sandy soils, and at some locations groundwater was actually in direct contact with refuse). Yet, it still ruled that the discharge was neither expected nor intended and that Travelers is on the hook for Decker’s costs. The court stated that the question is not whether the landfill conformed to the best practices in the scientific and engineering communities, but rather whether it met “then-contemporary standards” or was “state of the art.” Key to satisfying this lower standard was that the landfill was licensed by the state during all operational periods and that, by most accounts, its use was believed to be lawful and proper.
The Michigan Supreme Court has yet to weigh in on this question, and it will be interesting to see when and how it addresses the federal district court’s application of the “initial discharge rule” in the context of pollution at a landfill site. For now, however, policyholders should be encouraged knowing that the district court embraced a narrow application of the pollution exclusion.