Enforcement of Unambiguous Absolute Pollution Exclusions under New Mexico Law: Insurers’ No-Duty-to-Defend Rule for CERCLA Contamination Claims

Introduction

Chisholm’s-Village Plaza LLC (“Chisholm’s”) sued its insurers, Fidelity & Guaranty Insurance Underwriters (“Fidelity”) and Cincinnati Insurance Company (“Cincinnati”), for refusing to defend it in a CERCLA cost-recovery suit brought by the City of Las Cruces and Doña Ana County. At issue was whether each insurer’s “absolute pollution exclusion” in its general liability policy unambiguously barred coverage (and thus any duty to defend) contamination claims under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). The District Court for the District of New Mexico held that the exclusions were ambiguous—by predicting an “outlier” interpretive approach—and imposed a duty to defend. On appeal, the Tenth Circuit reversed, holding that under New Mexico law the pollution exclusions were clear as written and that cross-jurisdictional disputes about how to read such exclusions cannot create ambiguity.

Summary of the Judgment

• The Tenth Circuit applied New Mexico’s substantive insurance-contract law to hold that both Fidelity’s and Cincinnati’s absolute pollution exclusions unambiguously preclude coverage for any “property damage” arising from the “actual, alleged or threatened release or escape of pollutants or contaminants” at Chisholm’s property.
• The Court declined to follow the District Court’s prediction that New Mexico would adopt an “Indiana approach” requiring the policy to specify each pollutant by name. Instead, it enforced the clear, broadly-worded exclusion.
• It further rejected the District Court’s alternative holding that a split of authority in other states alone establishes policy ambiguity. Under United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644 (N.M. 2012), cross-jurisdictional disagreement “does not establish” an ambiguity in New Mexico.
• As to Cincinnati’s policy, the Court held that the “alternative liability” carve-out (for claims that would exist absent a governmental cleanup order) did not apply because no common-law nuisance or negligence claim was pled in the CERCLA complaint—only statutory CERCLA liability.
• The result: reversal of the District Court’s grant of summary judgment to Chisholm’s and denials of summary judgment to Fidelity and Cincinnati—the insurers never owed a duty to defend.

Analysis

1. Precedents Cited

Knowles v. United Servs. Auto. Ass’n, 832 P.2d 394 (N.M. 1992): duty to defend arises only when the complaint’s allegations potentially fall within policy coverage.
Bernalillo Cnty. Deputy Sheriffs Ass’n, 845 P.2d 789 (N.M. 1992): if allegations “clearly fall outside” policy, no defense or indemnity duty.
Ponder v. State Farm Mut. Auto. Ins. Co., 12 P.3d 960 (N.M. 2000): ordinary contract-interpretation principles apply to insurance policies; unambiguous terms control.
United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644 (N.M. 2012): a split in other jurisdictions about ambiguity does not, by itself, create ambiguity under New Mexico law.
International authority: State Auto. Mut. Ins. Co. v. Flexdar, Inc. (Indiana approach), Clean Harbors Env’t Servs. v. Boston Basement (common-law exception), and appellate split surveys (e.g., Headwaters Res., Inc., Second Circuit’s Hugo Boss Fashions).

2. Legal Reasoning

a. Duty to Defend vs. Duty to Indemnify
Under New Mexico law, the duty to defend is triggered by the allegations in a third-party complaint; if those allegations fall within policy coverage on their face, the insurer must defend regardless of ultimate liability.

b. Interpreting “Absolute Pollution Exclusion”
Each policy excluded “property damage arising out of the actual, alleged or threatened . . . release or escape of pollutants,” defined as “any . . . contaminant, including . . . chemicals, petroleum products, waste, [etc.].” New Mexico courts interpret undefined policy terms by their “common and ordinary meaning” (e.g., dictionary definitions) and enforce clear language “as written.” The complaint’s repeated allegations that hazardous substances released by a former dry-cleaner “contaminated” groundwater and drinking water squarely match “contaminants” under the exclusion.

c. Rejecting the “Outlier” (Indiana) Approach
The District Court predicted New Mexico would require the policy to list specific chemicals by name—contrary to New Mexico precedent that a broad exclusion need not exhaustively catalog every non-covered item. Under Flores, 876 P.2d 227 (N.M. 1994), a general term is sufficient; there is no duty to rewrite or narrow clear exclusion language.

d. Cross-Jurisdictional Split Cannot Create Ambiguity
The District Court’s alternative theory—that divergent approaches elsewhere automatically make a clause “ambiguous”—conflicts with United Nuclear, which expressly held that “a split in legal authority may be indicative of unambiguously [sic] in the policy, but it does not establish one.” New Mexico requires analysis of the text, context, industry usage, and only then (if still ambiguous) construing any genuine ambiguity against the drafter.

e. Alternative Liability Exception
Cincinnati’s carve-out for liability “that the insured would have in the absence of” a governmental order was held inapplicable because the CERCLA complaint did not allege any common-law nuisance or negligence claims—only CERCLA cost-recovery claims. No duty to defend what was never pled.

3. Impact on Future Cases and the Law

Affirms that New Mexico will enforce clear pollution exclusions as written—insurers need not anticipate every pollutant by name.
Bars insureds from manufacturing ambiguity via cross-jurisdictional debate: only New Mexico precedent and policy text matter.
Clarifies that policy exceptions (like alternative liability carve-outs) apply only to claims actually pled, not hypothetical private-law causes of action.
Provides guidance to courts, insurers, and policyholders on distinguishing unambiguous exclusions from genuinely ambiguous clauses requiring a defense.

Complex Concepts Simplified

Duty to Defend: An insurer must defend if the complaint’s allegations potentially fall under coverage—even if the insurer believes it will ultimately win.
Absolute Pollution Exclusion: A policy clause that denies coverage for any loss “arising out of” releases of pollutants or contaminants.
Pollutant/Contaminant: Terms broadly defined to include any chemical, waste, irritant, or unwholesome element that “contaminates” air, soil, or water.
Contra Proferentem: If a clause is genuinely ambiguous, courts construe it against its drafter (the insurer).
CERCLA Liability: A federal statutory cause of action allowing governmental entities to recover cleanup costs from parties responsible for hazardous releases.
Diversity Jurisdiction: A federal court’s authority to hear a case when parties are citizens of different states and the amount in controversy exceeds $75,000.

Conclusion

The Tenth Circuit’s decision in Chisholm’s-Village Plaza v. Travelers Commercial Insurance cements a clear principle under New Mexico law: where an absolute pollution exclusion is drafted in plain language, it unambiguously precludes coverage—and thus any duty to defend—for contamination claims like those under CERCLA. Moreover, disagreement among other jurisdictions about how to read such exclusions cannot conjure ambiguity in New Mexico. Insurers and insureds in New Mexico will look to this ruling as definitive guidance: enforce what is written; do not create coverage where the policy disclaims it.