Pollution from Oil Furnace Fuel Line Break Q&A 138 – Claims Magazine

ISSUE:

At the end of the mowing season, the insured, a New England resident, stored his lawn mower in the basement near the oil tank for his furnace. He and his family then left the home for a few days vacation. Upon their return they found that the 150 gallons of oil that had been in the tank had spilled onto the basement floor. The oil had found its way into the surrounding soil through the sump pump well. The odor from the oil permeated the house. Investigation revealed that the above-ground copper line from the oil tank to the furnace had been nicked, partially severing the line and allowing the oil to escape. The best guess is that the insured accidentally hit the line with the lawn mower when putting it into storage.

The insured's ISO HO 00 03 04 91 policy excludes loss caused by "[d]ischarge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against under Coverage C of this policy." Is the damage to the building and contents caused by the oil and the clean up of the oil covered?

ANALYSIS:

Here the coverage analysis depends on the type of heating system involved. The damage and clean up of the oil is probably covered if the furnace in question is part of a steam or hot water heating system. Otherwise, there is probably no coverage for the damage or clean up.

Peril 13 under Coverage C insures against loss caused by "[s]udden and accidental tearing apart, cracking . . . of a steam or hot water heating system." If the furnace in question is an oil-fired hot-air furnace, this peril could not apply to the Coverage C loss. Since no other Coverage C perils are even arguably applicable, the loss to the contents would not be covered, the pollution exclusion would apply to the dwelling loss, and no debris removal coverage could possibly be afforded.

However, if the furnace in question is part of an oil-fired steam or hot water heating system, Peril 13 could apply. Such furnaces are common in New England. Webster's New World Dictionary 1445 (2d College Ed. 1984) defines "system" in relevant part as "a set or arrangement of things so related or connected as to form a unity or organic whole." A dwelling's "heating system" would thus be comprised of all items necessary to heat the dwelling from fuel supply tank through chimney. The oil line is thus part of a "heating system."

The line apparently broke (cracked or tore apart) suddenly and accidentally. While we know of no case law interpreting peril 13, we believe this event constitutes a "[s]udden and accidental tearing apart [or] cracking . . . of a steam or hot water heating system" within the meaning of the Coverage C peril. This peril probably does not require that a violent explosion occur. Explosion is a separate peril named in Coverage C. To require an explosion in order to trigger peril 13 would make peril 13 redundant. Even if we accept the idea that the intent of peril 13 is to provide boiler-and-machinery-type-coverage under the Homeowner policy, this event would probably qualify as an insured "accident" under a modern boiler policy. Modern boiler and machinery forms only require the insured "accident" to manifest itself as physical damage which requires repair or replacement.

Coverage A's pollution exclusion specifically excepts release of pollutants caused by any of the Coverage C perils. Since "[s]udden and accidental tearing apart [or] cracking of a steam or hot water heating system" is peril 13 under Coverage C, the resulting release of oil is not within the pollution exclusion, but is a covered cause of loss.

Clean up of the oil from the building and contents would thus be covered as the cost of remedying direct physical loss to the building and contents by a peril insured against. Clean up of the oil from land and water is probably covered under the Debris Removal Additional Coverage as long as the spilled oil is regarded as "debris" of insured property resulting from a covered peril. The few decided cases on this issue support the idea that covered oil released by a covered peril is "debris" for purposes of the standard debris removal additional coverage, or that the presence of spilled oil in the ground on the premises which renders the dwelling uninhabitable constitutes a direct physical loss to the insured dwelling. See, for example, Lexington Ins.Co. v. Ryder System, Inc., 234 S.E.2d 839 (Ga. App. 1977) (cost of clean up of oil released from an above-ground tank by vandals covered under the debris removal coverage), and Hetrick v. Valley Mut. Ins. Co., 1993 Fire & Casualty Cas. (CCH) 12,831 (Pa. Ct. of Common Pleas 1992) (dwelling suffered direct loss if it was rendered uninhabitable by oil contamination of surrounding soil resulting from covered vandalism).

Odor from fuel oil is just as much direct physical loss as is light smoke damage. In both cases, the loss may be detectable only by the sense of smell. The industry routinely pays for the cost of washing, dry cleaning, or other measures necessary to remedy the odor from such light smoke damage. Other odors have been held to constitute direct physical loss. See, for example, Farmers Ins. Co. v. Trutanich, 858 P.2d 1332 (Or. App. 1993) (odor caused by tenant's use of insured house as methamphetamine lab was an insured direct physical loss). Similarly, the fuel oil smell should be considered direct physical loss to the dwelling and contents, with the amount of the loss being the cost of removing the smell.