A US New Mexico federal court upheld an exclusion for pollution cover which excluded damage to property that the insured owns, rents or occupies including sums paid for the repair, restoration or maintenance of the property and paid to prevent injury to third party property.

The insured operated a ski resort under licence from the US Department of Agriculture. An oil and water separator maintained by the insured failed, threatening underlying ground water and a nearby river. Working with the government the insured successfully abated the contamination at an expense of more than $1 million which it claimed from the insurer. The lower court applied the exclusion and found for the insurer.

The insured alleged that the exclusion did not apply because it was against public policy. The insured would be encouraged to take no preventive action and only lodge a claim when there was actual third party damage.

The court held that this argument overlooked the other exclusion of “expected or intended” property damage. Had the insured ignored the report that the pollution would inevitably migrate to third party property, the insured would still not have had a claim because the property damage was “expected”.