Pollution Exclusion Survives Challenge in Equine Environmental Coverage Dispute
Applying California law, the U.S. District Court for the Eastern District of California held that pollution exclusions may apply to bar coverage for litigation and settlement of Clean Water Act and Resource Conservation and Recovery Act claims alleging contamination from byproducts of equine operations. Great Am. Ins. Co. v. Cosumnes Corp., 2026 WL 798024 (E.D. Cal. Mar. 23, 2026). Ruling on a motion to dismiss or stay, the court (i) permitted the insurer’s claims for reimbursement of defense costs to proceed at the pleading stage; (ii) allowed the claimant in the underlying litigation to be joined as a third-party defendant in the insurer’s declaratory judgment action; and (iii) denied as moot the policyholder’s motion to stay pending the outcome of the underlying litigation.
The dispute stemmed from an underlying enforcement action brought by an environmental group against a company and its owner operating in the equine sector. The claimant alleged that the equine operation discharged “horse manure, bedding, sediment, equine footing, trash, and other pollutants associated with equine operations” into protected waters without required permits, in violation of the Clean Water Act and the Resource Conservation and Recovery Act. Although the insurer initially defended the equine company under a reservation of rights, it subsequently filed this federal action seeking a declaration that it owed no duty to defend or indemnify and sought reimbursement of all defense costs paid. The insurer included the environmental group as a third-party defendant, seeking to ensure that any outcome of the coverage action applied to the underlying claimant as well. During the pendency of the declaratory judgment coverage action, the underlying environmental suit was settled and dismissed.
The relevant insurance policies included pollution exclusions barring coverage for “property damage” arising out of the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants[.]’” The policies defined “pollutants” as any “solid, liquid, gaseous or thermal irritant or contaminant, including. . . waste.” A narrow carve-back specified that “waste” does not include “natural fertilizers of plant or animal origin while used in normal or usual ‘farming’ operations provided the operations are not in violation of any ordinance or law.” On a motion to dismiss, the equine company argued that because the allegations involved animal waste, the exception applied.
The court rejected the policyholder’s interpretation, noting that the “natural fertilizer” exception is expressly conditioned on the operation’s compliance with all laws. Because the underlying complaint specifically alleged violations of federal environmental statutes, the court concluded that the equine company failed to demonstrate that the allegations could potentially state a covered claim. The court therefore denied the policyholder’s motion to dismiss the declaratory judgment action, permitting the insurer’s suit seeking recoupment of paid defense costs.
Regarding procedural matters, the court affirmed that the environmental group that brought the underlying suit was a proper defendant in the insurer’s declaratory relief action. The court explained that, under California law, insurers are permitted to join injured third parties to ensure they are bound by the coverage determination. Finally, because the underlying litigation had reached a final settlement and the subsequent appeal was dismissed, the court denied the policyholder’s motion to stay the coverage case as moot.
