Broad Pollution Exclusion Is Ambiguous: Lead Covered by Policy
May 2005
A federal court in New York found the language
of the standard pollution exclusion of a commercial property insurance policy
to be overly broad and ambiguous so as not to exclude coverage for lead dust
resulting from a contractor's efforts to remove lead paint from a building.
by J.
Kent Holland Jr.*
ConstructionRisk.com LLC
In Herald Square Loft Corp. v Merrimack Mutual Fire
Ins., 344 F Supp 2d 915, (SD NY 2004), the question for the court was
whether the pollution exclusion applied to lead poisoning that got into a building
by lead paint dust blowing in through the windows when contractors sanded them.
The property owner claimed more than $100,000 in cleanup expenses to clean up
the lead paint dust contamination, replace window air-conditioning units and
other equipment contaminated with the lead dust, and relocate some of the residents
during the cleanup.
The court agreed that lead contaminants are a "pollutant" and that the lead
contaminants were "released or dispersed" into the building. The court concluded,
however, that the exclusion would not be applied in this case for the following
reasons:
- Overbroad language of the exclusion did not exclude coverage with the
required specificity.
- Applying the exclusion would not be consistent with "common sense and
the reasonable expectations of the parties."
- New York cases hold that lead paint is not an excluded contaminant.
- The insurance company's notice of reduction in coverage adding a lead
paint exclusion states an intent to reduce coverage and therefore suggests
lead was covered prior to the addition of this new exclusion which was issued
after the facts giving rise to the claim in this instance.
- The insurance industry has left the relevant language in pollution exclusion
clauses unchanged notwithstanding the numerous cases that question or reject
its applicability to lead paint.
Exclusion Language
The policy in question contained an exclusion from coverage damage or loss
arising out of the:
- discharge, dispersal, seepage, migration, release or escape of "pollutants"
unless the discharge, seepage, migration, release or escape is itself caused
by any of the "specified causes of loss." But if the discharge, dispersal,
seepage migration, release or escape of "pollutants" results in a "specified
cause of loss," we will pay for the loss or damage caused by that 'specified
cause of loss.'
The term "pollutants" was defined in the policy to be:
- any solid, liquid, gaseous or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes
material to be recycled, re-conditioned or reclaimed.
The "specified causes of loss" for which pollution coverage was granted include:
- fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles;
riot or civil commotion; vandalism; leakage from fire extinguishing equipment;
sinkhole collapse; volcanic action; falling objects; weight of snow, ice
or sleet; and water damage.
Reasonable Expectations
According to the court: "The parties could not have reasonably expected the
pollution exclusion … to bar coverage for damages from repairs to the Building."
The question, says the court, "is not whether leaded dust is a 'pollutant' for
purposes of a pollution exclusion clause; it is whether a 'reasonable policyholder'
would consider leaded dust removed from exterior windows and fire escapes during
routine repairs to be environmental pollution." The court stated that the insurance
company's interpretation of the exclusion clause is that the same language excludes
coverage for damages from a large scale toxic environmental pollution as from
repairs done to window sills. Without any explanation, the court concludes:
"This could not have been the expectation of the parties when the … policy was
issued."
When the court says it "could not have been the expectation of the parties"
to apply the exclusion equally to large scale pollution and dust arising from
"repairs," it relies on previous New York cases finding the exclusion ambiguous
with regard to coverage for dust and pollution from repair work. But the court
fails to acknowledge that many insurance companies have intended and assumed
that the exclusion would apply to all pollution regardless of size. What the
court does, however, is state that because the insurance companies have left
the relevant standard language of the pollution exclusion unchanged notwithstanding
the numerous cases that question or request its applicability to lead paint,
it must be concluded that "pollution exclusion clauses are inapplicable to losses
resulting from lead paint unless such losses are specifically excluded."
The fact that the insurance company here eventually issued a "reduction in
coverage" for a subsequent policy term seemed to the court to prove that the
company considered damages from lead paint to be covered by the original policy
language. Otherwise, reasons the court, why issue the exclusion? The court notes,
however, that even if that was not the insurance company's intent, just the
fact that the insurance company issued the separate lead paint exclusion prevents
it from now arguing that the original exclusion was "clear and unequivocal"
in excluding lead pollution.
Comment and Opinion
One of the first things the court stated in its decision was this: "The language
of the pollution exclusion clause of the 2002 policy is so broad that it cannot
literally mean what it says." Really?! Does the court imply that the language
should be taken figuratively? Are we to start looking for metaphors in the policy?
Policy language is not the stuff of fiction and imagination. It is to be read
and applied literally—accepting its plain meaning as its real meaning.
In view of the creative ways that insureds, their attorneys, and the courts
have boldly found pollution coverage where insurance companies thought they
had excluded it, perhaps a more foolproof way to successfully limit coverage
would be to add a separate sublimit for pollution related to lead, asbestos,
mold, and any number of other issues in which courts seem to favor finding coverage—even
in the face of insurance company efforts to write pollution exclusions that
are "absolute" or "total." If the words of the policy state that the most an
insured will get for asbestos, lead, and mold is a specified, small dollar amount,
it might be easier to make this stick in court.
The court used the fact that the insurance industry had not revised the standard
form pollution exclusion following so many losses in the courts against the
insurance carrier in this case. According to the court, this failure to revise
the language must mean that the industry is satisfied with the coverage interpretations
of the courts. How ironic, however, that any such revision to the standard form
exclusions would logically be used by this same court against the insurers.
Since this court found that adding a lead exclusion to the policy in question
was evidence of the carrier's intent to cover lead under the original exclusion,
wouldn't the court reach a similar conclusion if the standard exclusion itself
was revised? By this court's reasoning, the insurers are damned if they do (revise
the language), and damned if they don't.
There are times when an insurer may decide to revise its policy language—not
because it wants to add a new exclusion, but because it decides to make the
existing exclusion clearer. This might not be because the exclusion really needs
clarification for the most people (i.e., the "reasonable man"), but because
some courts have said it needs clarification. In light of court interpretations
of exclusionary language that insurers thought was abundantly clear, insurers
need the liberty to amend their forms, and even issue additional exclusions,
without having courts then use this against them by either creating an adverse
inference concerning the insurers' intent on the original language, or by concluding
that the insurer cannot subsequently argue that the original language as "clear
and unequivocal."
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