The court denied cross motions for summary judgment after analyzing the application of a total pollution exclusion. Nat’l Am. Ins. Co. v. Certain Underwriters at Lloyd’s London, 2026 U.S. Dist. LEXIS 98232 (W.D. Texas March 16, 2026).

Skye Blue Services, LLC and Blackbeard entered into a Master Service Agreement (MSA) governing Skye’s provision of oilfield services to Blackbeard. The MSA required Skye to name Blackbeard as an additional insured on Skye’s policies and to indemnify Blackbeard for bodily injury claims brought by Skye employees.

Two Skye employees were injured when working at Blackbeard’s Marooner tank battery facility. They were cleaning the inside of a heater treater tank when an explosion or flash fire occurred inside the heater treater, injuring the two employees.

The employees sued and Blackbeard tendered the lawsuit to National American as an additional insured under Skye’s policy. National American issued two policies to Skye; a primary liability policy with a $1,000,000 per occurrence limit and an excess liability policy with a $10,000,000 per occurrence limit. Underwriters insured Blackbeard under a commercial umbrella policy with a $10,000,000 per occurrence limit.

National American accepted Blackbeard’s tender as an additional insured under the policy. The underlying suit settled for $9,500,000. National American paid the amount of its primary policy limit and additional $4,000,000 under its excess policy. BITCO, Blackbeard’s primary and first layer excess insurer, paid $3,000,000, and Underwriters paid the remaining $1,700,000. The insurers agreed to litigate whether the Total Pollution Exclusion (TPE) in National American’s excess policy barred coverage for the underlying claims.

National American sought reimbursement of the $4,000,.000 it paid under the excess policy, while Underwriters maintained the TPE did not apply and sought recovery of the $1,700,000 it contributed toward the settlement.

The pollution exclusion barred coverage for “discharge, dispersal, seepage, migration, release or escape” of pollutants. “Pollutants” were defined to include “any solid, liquid, gaseous or thermal irritant or contaminant,” including “smoke, vapor, soot fumes, acids alkalis, chemicals and waste.” The parties did not dispute that the flammable material inside the tank was a pollutant.

The parties disagreed, however, about whether the TPE applied here. National American contended that hydrocarbon material inside the heater treater sludge emitted flammable vapors during the cleaning operation, that the vapors ignited inside the tank, and that the exclusion applied even if the vapors never left the tank before ignition. Underwriters argued that the record did not establish that the ignited vapors emanated from sludge or other material inside the tank and that the more likely source was residual hydrocarbon gas or vapor already lingering in the heater treater. Underwriters also contended that regardless of the ignition source, the exclusion did not apply because no pollutant moved from the heater treater to another location before the explosion.

The court determined that the policy did not support Underwriters argument that a pollutant must cross the outer boundary of the heater treater before the exclusion applied. For example, a vapor emitted from hydrocarbon material inside the tank could be “discharged” from sludge even if it never left the tank before ignition.

Even if “release’ required release from containment, “discharge” was broader. This defeated Underwriters’ argument that the exclusion applied only if pollutants moved outside the heater treater.

The court then considered whether National American, as the party invoking the exclusion could prove that the loss arose from some qualifying discharge, dispersal, seepage, migration, release, or escape of pollutants. The record on this point was disputed. Underwriters offered evidence that residual hydrocarbon vapors remained in the heater treater after depressurization and that those residual vapors provided the fuel for the explosion. National American, by contrast, offered evidence that pressure washing and stirring the sludge emitted hydrocarbon vapors from the sludge and that those vapors were the source of ignition. Summary judgment for either side was improper. Both motions were denied.