Unambiguous Enforcement of Absolute Pollution Exclusions under New Mexico Law

Introduction

This appeal arises from a diversity suit in New Mexico federal court in which Chisholm’s Village Plaza, LLC (“Chisholm’s”) sought defense and indemnity under two commercial general liability policies issued by Fidelity and Guaranty Insurance Underwriters (“Fidelity”) and Cincinnati Insurance Company (“Cincinnati”). Chisholm’s had been named a defendant in a CERCLA cost-recovery and contribution action brought by the City of Las Cruces and Doña Ana County for soil and groundwater contamination allegedly caused by a former dry-cleaning operation on Chisholm’s property. Both insurers denied coverage based on absolute pollution exclusions in their policies. The district court, applying New Mexico law, held that those exclusions were ambiguous, imposed a duty to defend, and granted summary judgment for Chisholm’s. Fidelity and Cincinnati appealed, and the Tenth Circuit reversed, holding that under New Mexico law the exclusions are unambiguous and preclude any duty to defend.

Summary of the Judgment

The Tenth Circuit applied New Mexico contract-interpretation principles to hold that the absolute pollution exclusions in both insurers’ policies unambiguously bar coverage for “property damage” arising from “the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.”
The court rejected the district court’s view that the exclusions were ambiguous because they did not list every conceivable pollutant by name, or because of splits in other jurisdictions’ treatment of pollution exclusions.
The panel ruled that under settled New Mexico precedent, broad exclusionary terms are enforced literally when their “common and ordinary meaning” is clear, and that cross-jurisdictional disagreement does not itself create ambiguity.
The court also held that Cincinnati’s narrow “alternative liability” carve-out did not extend to common-law tort claims, and no such claims were pled in the CERCLA complaint.
The district court’s grant of Chisholm’s summary judgment and denial of the insurers’ motions were reversed, and no duty to defend existed.

Analysis

1. Precedents Cited

The Tenth Circuit relied primarily on New Mexico Supreme Court decisions governing policy interpretation:

Knowles v. United Services Automobile Ass’n, 832 P.2d 394 (N.M. 1992) – Distinguishes duty to defend from duty to indemnify and holds that the duty to defend arises only if the complaint’s allegations “potentially” fall within coverage.
Bernalillo County Deputy Sheriffs Ass’n v. County of Bernalillo, 845 P.2d 789 (N.M. 1992) – Explains that if allegations “clearly fall outside” a policy's terms, there is no duty to defend.
Ponder v. State Farm Mutual Automobile Ins. Co., 12 P.3d 960 (N.M. 2000) – Sets forth the contract-law approach to policy interpretation: unambiguous terms are enforced as written, and ambiguity must be construed against the drafter.
United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644 (N.M. 2012) – Holds that a split among other jurisdictions over the meaning of a policy term may be “indicative” of ambiguity but does not by itself establish it; courts must examine context, dictionary definitions, usage, and, if needed, extrinsic evidence.

The panel also referenced Erie doctrine principles (Erie R.R. Co. v. Tompkins), federal diversity-jurisdiction precedents (Wade v. EMCASCO, Evanston Ins. Co. v. Desert State Life Mgmt.), and out-of-state decisions (e.g., Flexdar from Indiana; Clean Harbors from Massachusetts) to show contrasting interpretive approaches rejected under New Mexico law.

2. Legal Reasoning

The court’s reasoning unfolded in three key steps:

Plain-Language Interpretation: Both policies expressly exclude “property damage” arising from the “actual, alleged or threatened discharge…of pollutants,” defining “pollutant” to include “contaminants.” Under New Mexico’s rule, if policy language has a “common and ordinary meaning,” that meaning controls. The court found “contaminant” unambiguously covers any substance that soils, stains or infects—precisely what the CERCLA complaint alleged (PCE releases, groundwater contamination, cleanup costs). No exhaustive listing of every chemical is required to render the exclusion unambiguous.
Rejection of Outlier Interpretive Models: The district court had predicted New Mexico would adopt Indiana’s “literal but narrow” approach, requiring naming each pollutant, or would reverse-narrow exclusions by importing “traditional pollution” limits. The Tenth Circuit held New Mexico Supreme Court precedents favor a straightforward enforcement of broad exclusions drafted by insurers, and New Mexico has expressly refused to require exhaustive enumerations of excluded items (Flores).
Duty to Defend and Scope of Carve-Out: New Mexico law requires that the complaint itself allege facts potentially covered before a duty to defend arises. Cincinnati’s policy included an “alternative liability” exception for claims that would exist even without a regulatory order. The court read that carve-out as limited to statutory cleanup demands, not as a free-standing common-law tort exception. The CERCLA complaint asserted only statutory cost-recovery claims, not negligence or nuisance, so no carve-out applied.

3. Impact

This decision carries significant practical and doctrinal consequences:

Clarity for New Mexico Insurers: Insurers writing policies in New Mexico may continue to draft absolute pollution exclusions with broad, generic definitions (e.g., “contaminant”) without fear that courts will require them to list every chemical or narrow coverage.
Limits on Duty to Defend: Policyholders cannot force insurers to defend based on hypothetical or potential common-law liability not actually asserted in the complaint—defense obligations remain tethered to the complaint’s actual allegations.
Uniform Contract Principles: The opinion reinforces that policy interpretation in New Mexico aligns with general contract law: clear terms are enforced as written; courts do not “create ambiguity where none exists.”
Guidance for Lower Courts: New Mexico federal and state trial courts are directed to apply the literal approach, disregarding splits in other jurisdictions or policyholder-friendly outlier doctrines when the policy language is clear.

Complex Concepts Simplified

CERCLA Liability: Under the Comprehensive Environmental Response, Compensation, and Liability Act, private parties (including municipalities) can recover cleanup costs from owners/operators of sites where hazardous substances were released. Here, Chisholm’s was sued for costs associated with tetrachloroethylene (PCE) plume remediation.
Duty to Defend vs. Duty to Indemnify: The duty to defend is triggered if a complaint’s allegations potentially bring a claim within coverage. The duty to indemnify depends on the facts established at trial. In New Mexico, these duties are distinct; an insurer may owe a defense even if it ultimately owes no indemnity.
Absolute Pollution Exclusion: A clause that categorically denies coverage for losses “arising out of” any release of pollutants. Such exclusions are “absolute” because they apply regardless of how or why the pollutant was released.
Ambiguity and Contra Proferentem: When policy language is “reasonably susceptible” to two interpretations, courts construe doubts against the insurer. But if the words are clear in ordinary usage, courts must enforce their plain meaning.

Conclusion

The Tenth Circuit’s decision in Chisholm’s-Village Plaza v. Cincinnati Insurance clarifies and solidifies New Mexico’s rejection of narrow or “outlier” readings of absolute pollution exclusions. By enforcing broad exclusionary terms in their ordinary meaning and refusing to manufacture ambiguity based on other jurisdictions’ splits, the court reaffirmed that insurers’ written terms govern. For policyholders, the ruling underscores the importance of precise policy language and realistic expectations as to defense obligations. For insurers and drafter counsel, it provides firm authority for drafting clear, sweeping pollution exclusions without endless chemical catalogues. This precedent will guide defense-coverage disputes and environmental-liability policies throughout New Mexico.