Construction Debris Is Excluded Pollutant under Professional Liability Policy
February 2009
In James River
Ins. Co. v. Ground Down Eng'g, 540 F.3d 1270 (11th Cir. 2008), an
engineering company was sued by its client (a real estate developer) for
allegedly performing a Phase I Environmental Site Assessment (ESA)
negligently by failing to discover and report that construction debris and
underground storage tanks were buried on the site.
by J.
Kent Holland Jr.
ConstructionRisk.com
LLC
The developer, Priority Development, purchased the affected property
after the engineer reported it found no recognized environmental conditions.
Subsequently, the developer found a significant amount of buried
construction debris, as well as several 55 gallon drums and "half an
underground storage tank."
Priority filed suit for breach of contract, negligence, and negligent
misrepresentation. Priority alleged that the drums and tank previously
contained petroleum and had to be disposed of at a special waste facility.
Priority also alleged that the construction debris caused elevated levels of
methane gas that required environmental remediation.
The engineer demanded that its professional liability insurer, James
River Insurance Company, provide a defense to the claim. James River began
providing a defense under a reservation of rights, but it also filed suit in
federal district court seeking declaratory judgment that, due to the
pollution exclusion of the policy, it was not required to provide a defense.
District Court Decision Finds Coverage and Duty To Defend
The district court denied the insurance company's complaint for
declaratory judgment. It found that the broad pollution exclusion in the
policy did not apply to exclude coverage. The district court reasoned that
the basis of the complaint against the engineer was an alleged negligent
failure to find tanks and debris. There was no allegation that the engineer
actually caused any pollution by its actions. The pollution exclusion was
not intended to apply to this type of claim, concluded the district court.
In seeking to avoid the pollution exclusion, the developer and the
engineer argued to the district court that there was no connection between
the service performed by the engineer and the pollution that was found on
the property. The trial judge agreed that because the engineer had not
actually caused the pollution complained of in the complaint, the pollution
exclusion did not apply. The insurer was, therefore, required by the
district court to provide a defense to the engineer in the underlying
action.
Policy Language Concerning Coverage and Pollution Exclusion
The professional liability policy in question stated that it would cover
"wrongful acts" in the engineer's "performance of or failure to perform
professional services" that the engineer was qualified to perform in its
"capacity as an architect, engineer, landscape architect, land surveyor or
planner."
The policy included a "pollution exclusion" excluding from coverage for
"[a]ll liability and expense arising out of or related to any form of
pollution, whether intentional or otherwise." The exclusion stated that the
policy did not cover "any damages, claim, or suit arising out of the actual,
alleged or threatened discharge, dispersal, seepage, migration, release or
escape of 'pollutants.' " It further specified that this included:
Any loss, cost, expense, fines and/or penalties arising out of
any (1) request, demand, order, governmental authority or directive or that
any private party or citizen action that any insured, or others, test for,
monitor, clean up, remove, contain, treat, detoxify or neutralize or in any
way respond to, or assess same, the effects of pollutants, environmental
impairments, contaminants, or (2) any litigation or administrative procedure
in which any insured or others may be involved as a party as a result of
actual alleged or threatened discharge, dispersal, seepage, migration,
release, escape or placement of pollutants, environmental impairments, or
contaminants into or upon land, premises, buildings, the atmosphere, any
water course, body of water, aquifer or ground water, whether sudden,
accidental or gradual in nature or not, and regardless of when.
Pollutants were defined to include:
any solid, liquid, gaseous, fuel, lubricant, thermal, acoustic,
electrical, or magnetic irritant or contaminant, including but not
limited to smoke, vapor, soot, fumes, fibers, radiation, acid, alkalis,
petroleums, chemicals or "waste." "Waste" includes medical waste,
biological infectants, and all other materials to be disposed of,
recycled, stored, reconditioned or reclaimed.
The policy stated that this exclusion applies "regardless of whether ...
an alleged cause for the injury or damage is the Insured's negligent hiring,
placement, training, supervision, retention, or, wrongful act."
Appellate Court Reverses District Court
In reversing the district court, the Eleventh Circuit Court of Appeals
made several significant findings and legal holdings that are important to
understanding how the pollution exclusion is to be interpreted and applied.
The court rejected the argument that in order for pollution to be subject
to the exclusion, it must have been "caused by" the insured. According to
court, because the exclusion applies to pollution claims "arising out of"
the insured's performance of services, it does not matter whether or not the
insured "caused" the condition. As explained by the court, the term "arising
out of" is broader in meaning than "caused by" and it "means 'originating
from,' 'flowing from,' 'incident to' or 'having a connection with.'"
Proximate cause is not required, says the court. "[T]he phrase 'arising out
of' contemplates a more attenuated link than the phrase 'because of.'"
A thorough reading of the policy in this case, says the court, "shows the
breadth of the exclusion and reveals that the exclusion covers the claim
brought by Priority." With regard to the claims for damages based on the
construction debris, the court found that they are explicitly within the
exclusion and barred from coverage. As stated by the court, "Although the
alleged conduct was negligence in performing the site assessment, Priority's
claim depends upon the existence of environmental contamination."
Does the Construction Debris Fall within the Pollution Exclusion?
The argument that construction debris is not a pollutant within the
meaning of the exclusion fails for two reasons, per the court. First, the
complaint plainly alleged that the damages associated with the construction
debris "come from elevated levels of methane gas caused by the debris." The
complaint even listed the debris under the heading "environmental
contamination."
Second, the pollution exclusion is not limited just to matters normally
considered as "irritants" and "contaminants." The definition of "irritants
or contaminants" includes "waste." The definition of "waste," in turn,
includes "all … materials to be disposed of, recycled, stored,
reconditioned, or reclaimed." The court concluded, "Only a strained reading
of this language would exclude construction debris causing elevated levels
of methane gas from this definition."
Even without the methane gas, however, the court stated that the
construction debris described in the complaint "would be considered an
environmental impairment," and coverage would, therefore, be denied by the
first sentence of the exclusion that states "Pollution/environmental
impairment/contamination is not covered under this policy." For these
reasons, the court reversed the district court with instructions to the
court to enter summary judgment for James Rivers Insurance Company.
Risk Management Commentary
Firms performing environmental site assessments should carry professional
liability coverage that specifically includes pollution liability. It is
surprising to see that the engineering firm providing environmental site
assessment services did not have an insurance policy that would specifically
cover liability arising out of pollution claims since this perhaps the most
significant risk of such a firm.
This case follows the reasoning of numerous other courts in finding that
construction debris is a pollutant that falls within the pollution exclusion
of the policy. According to the reasoning of most courts (depending on state
jurisdiction), a substance does not have to be what a layperson might
normally think of as a "pollutant" to be an "irritant or contaminant" or to
create an "environmental impairment" that is subject to the pollution
exclusion. For example, we have previously reported on claims for damages
arising out of sand and dirt eroding into a stream from a construction site
being held to be "pollutants" that are not covered by the policy.1
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do 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.