Absolute Pollution Exclusion in Contractors Policy Does Not Bar Coverage
for Toxic Fume Injuries
November 2005
In a case addressing the applicability of
a pollution exclusion provision in a commercial general liability (CGL) insurance
policy, the New Jersey Supreme Court held that the absolute pollution exclusion
applied only to traditional pollution claims and could not be used by the insurance
company as a bar to coverage for personal injury allegedly caused by the exposure
to toxic fumes that emanated from a floor coating/sealant operation performed
by the insured contractor.
by J.
Kent Holland Jr.
Arch Insurance
Group Inc.
The insured contractor was NAV-ITS, Inc. (Nav-Its). It specialized in tenant
"fit-out" work, including the building of partitions, the laying of concrete,
the installation of doors, and the application of finishes, such as paint, sealants,
and coatings. Nav-Its entered into a contract to perform fit-out work at a shopping
center and had a CGL from defendant Selective Insurance Company of America (Selective)
for its work. Nav-Its hired T.A. Fanikos Painting (Fanikos) as a subcontractor
on the project to perform painting, coating and floor sealing work. While the
work was underway, a doctor (Roy Scalia) with office space in the shopping center
was allegedly exposed to fumes that were released while Fanikos performed the
coating/sealant work. As a result of that alleged exposure, Dr. Scalia claimed
that he suffered from nausea, vomiting, lightheadedness, loss of equilibrium,
and headaches.
The doctor filed a complaint against Nav-Its and several others for personal
injuries arising out of his exposure to fumes at his office. Nav-Its forwarded
the complaint to Selective, seeking defense and indemnification. Selective refused
to provide coverage to Nav-Its. In binding arbitration, Nav-Its was found liable
to the doctor.
Following its loss to the doctor, Nav-Its sued Selective in a declaratory
judgment action, asserting that Selective breached its duty to defend and indemnify
it against the doctor's claim.
Selective's insurance policy contained a pollution exclusion endorsement
that provided in relevant part:
[Selective] shall have no obligation under this coverage part:
-
to investigate, settle or defend any claim or suit against any insured
alleging actual or threatened injury or damage of any nature or kind
of persons or property which:
- arises out of the "pollution hazard:" or
- would not have occurred but for the "pollution hazard:"
-
to pay any damages, judgments, settlements, losses, costs or expenses
of any kind or nature that may be awarded or incurred by reason of any
such claim or suit or any such actual or threatened injury or damage;
or
-
for any losses, costs or expenses arising out of any obligation,
order, direction or request of or upon any insured or others, including
but not limited to any governmental obligation, order, direction or
request, to test for, monitor, clean up, remove, contain, treat, detoxify,
neutralize, in any way respond to, or assess the effects of "pollutants."
The policy defined pollutants as "any solid, liquid, gaseous, or thermal
irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis,
chemicals and waste." Under the policy, "[w]aste includes materials to be recycled,
reconditioned or reclaimed." It also defined "pollution hazard" to mean "an
actual exposure or threat of exposure to the corrosive, toxic or other harmful
properties of any 'pollutants' arising out of the discharge, dispersal, seepage,
migration, release or escape of such 'pollutants.'"
A limited exception to the pollution exclusion was provided by the policy
so that the pollution exclusion would not apply to:
B. Injury or damage arising from the actual discharge
or release of any "pollutants" that takes place entirely inside a building or
structure if:
-
the injury or damage is the result of an exposure which takes place
entirely within a building or structure; and
-
the injury or damage results from an actual discharge or release
beginning and ending within a single forty-eight (48) hour period; and
-
the exposure occurs within the same forty-eight (48) hour period
referred to in 2. above; and
-
within thirty (30) days of the actual discharge or release:
- the company or its agent is notified of the injury or damage
in writing; or
- in the case of 'bodily injury,' the 'bodily injury' is treated
by a physician, or death results, and within ten (10) additional
days, written notice of such injury or death is received by the
company or its agents.
- Strict compliance with the time periods stated above is required
for coverage to be provided.
Nav-Its argued that the applicability of the pollution exclusion clause should
be limited to traditional environmental type claims because this is consistent
with the majority of decisions from other jurisdictions. Nav-Its also argued
that its position is consistent with its reasonable expectations that coverage
would be provided for claims arising from the normal work of the insured for
which it was seeking insurance coverage, and that the purpose of the pollution
exclusion was to preclude coverage for claims involving environmental contamination.
Selective argued in response that the pollution exclusion, by its plain terms,
is not limited to traditional environmental claims. It claimed that insurance
companies and policyholders are entitled to have their rights protected by the
courts, and when insurance companies draft clear, unambiguous policies, the
policy should be enforced as written.
In analyzing the policy language, the court explained that if policy language
is clear, the courts will give the policy's words their plain and ordinary meaning.
But where the language is ambiguous, the policy will be construed in favor of
the insured and against the insurance company. The court stated that:
- Because of the complex terminology used in the policy and because the
policy is in most cases prepared by the insurance company experts, we recognize
that an insurance policy is a "contract […] of adhesion between parties
who are not equally situated.
The court further stated, "… courts also […] endeavor […] to interpret insurance
contracts to accord with the objectively reasonable expectations of the insured."
The court proceeded in its analysis to do a lengthy review of the development
of the pollution exclusion. From that review, the court concluded that the exclusion
was only intended to exclude what it called traditional environmentally related
damages. The court also reviewed the history of how the exclusion was presented
and explained to the state insurance commissioner for approval. It concluded
as follows:
- [T]here is no compelling evidence that the pollution exclusion clause
in the present case, when approved by the Department of Insurance, was intended
to be read as broadly as Selective urges. SeeStempel,
supra, 34 Tort & Ins. L.J. at 33. ("If the absolute exclusion was
intended to reach as broadly as now contended, one would expect to see conclusive
ISO memoranda and similar documents"). To be sure, read literally, the exclusion
would require its application to all instances of injury or damage to persons
or property caused by "any pollutants arising out of the discharge, dispersal,
seepage, migration, release or escape of … any solid, liquid, gaseous, or
thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids,
alkalis, chemicals and waste." If we were to accept Selective's interpretation
of its pollution exclusion, we would exclude essentially all pollution hazards
except those falling within the limited "exception" for exposure within
a structure resulting from a release of pollutants "within a single forty-eight
hour period." We reject Selective's interpretation as overly broad, unfair,
and contrary to the objectively reasonable expectations of the New Jersey
and other state regulatory authorities that were presented with an opportunity
to disapprove the clause.
The court was critical of the insurance industry for presenting the absolute
pollution exclusion to the Insurance Department as mere clarification of the
policy intent when in fact the insurance industry is now asserting what the
court believes to be a major change in the coverage. Moreover, the court suggested
that with such a change, the carriers would have been required to reduce the
premium rates or seek approval from the Insurance Department for its rates.
The court concluded:
- Rather than "clarify" the scope of coverage, the clause virtually eliminated
pollution-caused property-damage coverage, without any suggestion by the
industry that the change in coverage was so sweeping or that rates should
be reduced. For those reasons, we decline to enforce the […] pollution-exclusion
clause as written. To do so would contravene this State's public policy
requiring regulatory approval of standard industry-wide policy forms to
assure fairness in rates and in policy content, and would condone the industry's
misrepresentation to regulators in New Jersey and other states concerning
the effect of the clause.
For these reasons, the court held:
- Because we conclude that the pollution exclusion clause as presently
approved should be limited to traditional environmental pollution, we disapprove
of any contrary view expressed in our case law. Nav-Its, Inc. v. Selective Insurance Company of America, (NO. A–20/21.
N.J. Supreme Ct., 2005)
Commentary
In reaching its unanimous holding in this case, the New Jersey Supreme Court
stated that its decision to limit the pollution exclusion to those hazards traditionally
associated with environmentally related claims is consistent with the highest
courts in California, Illinois, Massachusetts, Ohio, New York, and Washington.
There certainly appears to be a growing trend for courts to interpret the pollution
exclusions against insurers to limit their effectiveness and impact. As an alternative
to relying solely on exclusions, another possibility might be to craft policy
language to establish a separate sublimit for all claims arising out of pollutants
(with pollutants defined even more broadly). This could also be done for claims
arising out of or related to mold. At least in this way, the insured would be
harder pressed to assert that it didn't know it had no coverage or only very
limited coverage—especially since the sublimit would be stated clearly on the
Declaration Page of the Policy—easily seen and understood by the insured and
its broker.
Insurance companies can be caught between the proverbial "rock and a hard
place" when courts, like this one, criticize them for the way they present and
describe to state insurance departments their new exclusions (such as ISO language
exclusions). The exclusion in question was not intended to "change" the insurance
carrier's intent from the previous language. The exclusion was, as the carrier
here claimed, intended to merely clarify what had already been excluded in the
previous language. It was to restate what carriers had intended their language
to mean all along so that even the most creative plaintiff's attorney could
not confuse courts on the issues.
The problem for the carriers that led to the new language was that earlier
courts interpreted the language contrary to their intent. In response to those
decisions the carriers felt erroneous, care had to be taken in how to proceed
with new policies. If the carrier did nothing to revise its language in response,
the court might conclude the carrier was acquiescing to the court's interpretation.
See, for example, the case cited in my May 2005 IRMI.com Expert Commentary article discussing the New York case of Herald Square Loft Corp. v. Merrimack Mutual Fire Ins.
So what is an insurer to do? If the insurer were to go the insurance department
and say, "We're changing the language to reduce coverage from what we previously
intended," the plaintiffs' attorneys and courts would jump all over that as
a basis to grant coverage for all kinds of plaintiffs that had policies with
the previous language. This would be called an "admission against interest."
It would be used as evidence in court against the insurer in litigation involving
claims arising under old policies. So, it's pretty obvious the insurers can't
do that. But according to the New Jersey court, the carrier also cannot go to
the insurance department and say, "We're changing the language merely to try
to make it perfectly clear (even to plaintiffs attorneys and judges who love
plaintiffs and dislike insurance carriers), that we are not covering these types
of alleged losses under our policy nor have we intended to cover them under
the previous language." Yet, that seems like precisely what is needed, and that
courts should not penalize insurance carriers by finding mere clarifications
to be reductions in coverage.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.