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.
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:
1. the injury or damage is the result of an exposure which takes place entirely within a building or structure; and
2. the injury or damage results from an actual discharge or release beginning and ending within a single forty-eight (48) hour period; and
3. the exposure occurs within the same forty-eight (48) hour period referred to in 2. above; and
4. within thirty (30) days of the actual discharge or release:
a. the company or its agent is notified of the injury or damage in writing; or
b. 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. See Stempel, 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 insurers 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)
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 insurer's intent from the previous language. The exclusion was, as the insurer here claimed, intended to merely clarify what had already been excluded in the previous language. It was to restate what insurers 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 insurers that led to the new language was that earlier courts interpreted the language contrary to their intent. In response to those decisions the insurers felt erroneous, care had to be taken in how to proceed with new policies. If the insurer did nothing to revise its language in response, the court might conclude the insurer 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 insurer 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 insurers), 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 insurers by finding mere clarifications to be reductions in coverage.
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