Insurance Law Hawaii

Pollution Created by Business Does Not Deprive Insured of Coverage

   The federal district court determined that coverage was properly denied under the pollution exclusion of the policies.  Headwaters Resources, Inc. v. Illinois Union Ins. Co., 2014 U.S. App. LEXIS 20060 (10th Cir. Oct. 20, 2014).

   Over 400 residents of Chesapeake, Virginia, filed two lawsuits against the insured, Headwaters, alleged property damage and bodily injury due to pollution generated in connection with the development of a golf course. The complaints alleged that between 2002 and 2007, the defendants used 1.5 million tons of toxic fly ash during construction of a golf course. The insured allegedly transported the fly ash to an open pit adjacent to residential neighborhoods. The chemicals from the fly ash leached into the ground water, damaging the private wells. The fly ash pit also released airborne contaminants that produced a strong smell of ammonia. As a result of the alleged contamination, the property values of plaintiffs' homes depreciated and members of the community faced increased risk of serious bodily injuries caused by exposure to the fly ash. 

   The insurer denied coverage and Headwaters filed suit. The district court found that the pollution exclusions unambiguously applied to bar coverage. The exclusions barred coverage for "bodily injury" and "property damage" that stemmed from "actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants." The underlying complaints alleged bodily injury and property damage arising out of the actual or threatened dispersal of pollutants from waste that was processed by Headwaters. These allegations fell within the pollution exclusions of the policies.

   Headwaters argued that the pollution exclusions were so broad that they barred from coverage events arising from the insured's regular business activities. The Tenth Circuit determined there was no rule that prohibited a normal business activity from also producing pollution, or a product from also being classified as a pollutant. 

   The language of the pollution exclusions were unmistakably plain both on their face and as applied to the facts. Because that clear language applied to the causes of action alleged in the complaints, the insurer was not required to defend the underlying lawsuits.

Defense Owed for Pollution Caused by Farmer's Manure

   The Wisconsin Court of Appeals found that a defense was owed to a farmer for pollution allegedly caused by use of manure. Wilson Mut. Ins. Co. v. Falk, 2013 Wis. App. LEXIS 1931(Wis. Ct. App. Dec. 11, 2013).

   The insured used manure from cows as fertilizer for his fields. The state Department of Natural Resources notified the insured that manure from the farm had polluted a local aquifer and contaminated the water wells of neighbors. Several neighbors demanded compensation. Wilson Mutual filed for a declaratory judgment that it had no duty to defend or indemnify. The trial court found that the pollution exclusion applied because a reasonable insured would understand manure to be waste. 

   The appellate court agreed that manure could technically fit within the language of the pollution exclusion because it was gaseous, often liquid, solid in winter, and could be both an irritant and a contaminant. Nevertheless, a reasonable interpretation of the exclusion was required because otherwise, everyday incidents could be characterized as pollution.

   Therefore, the appellate court found that the pollution exclusion did not apply to manure used as fertilizer on a farm. A reasonable farmer would not consider manure to be a "pollutant," an "irritant," a "contaminant," or "waste." To a farmer, manure was liquid gold. Further, the policy already covered the insured's manure tank, manure pump, two manure spreaders, and two manure tankers.

 

Hawaii Federal Court Addresses Ensuing Loss, Anti-Concurrent Causation Clause

   Judge Kay of the Hawaii federal district court found coverage under an all-risk policy for damage caused by arsenic. Ass'n of Apt. Owners of Imperial Plaza v. Fireman's Fund Ins. Co., 2013 U.S. Dist. LEXIS 50904 (D. Haw. April 9, 2013). 

   Plaintiff had a fourth floor constructed on top of its existing third floor roof. After a concrete slab was poured upon the existing roof, moisture was found in the insulation layer which was decomposing, causing exposure to arsenic in the insulation layer. Water carried the arsenic into the cement topping slab and concentrated, posing a health risk. A consulting engineering firm recommended removing the insulation layer and replacing the floor. 

   Plaintiff had an all-risk policy with Fireman's Fund. Coverage for the damage was denied. Subsequently, plaintiff removed the concrete slab and the decomposed insulation. Plumbing piping and an air handler were also rehabilitated. Plaintiff did not re-tender the claim to Fireman's Fund either during or after this remediation work. 

   The parties disagreed on the cause of the moisture that resulted in the arsenic damage. Plaintiff contended the moisture came from a broken water line or cracks in the topping slab. Fireman's Fund argued the moisture came from leakage in the roof prior to construction of the upper floor or exposure of the edge of the roof during the construction.

   Plaintiff sued and filed a motion for partial summary judgment that the arsenic damage was covered by the policy. Fireman's Fund first argued that Plaintiff failed to re-tender the claim after "new" potential sources of water infiltration were discovered during the remediation. The Court found that Fireman's Fund's denial of coverage was a breach that relieved Plaintiff of the policy's continuing duty to cooperate. Further, plaintiff needed to quickly remediate and repair the floor to prevent the spread of the arsenic contaminated water instead of waiting for Fireman's Fund to decide whether or not to investigate the damage.

   Fireman's Fund next argued that the loss was excluded by various exclusions such as gradual deterioration, wet rot, faulty, inadequate or defective design specifications or construction. An ensuing loss provision provided, however, that if a loss from a covered loss resulted, the resulting loss would be covered.

    For purposes of this motion, the court assumed that the moisture infiltration originated from an excluded peril. If, however, a series of events took place that resulted in a loss, damage resulting from an uncovered event would not be covered, but damage resulting from covered events would remain covered. Here, the moisture was a separate and independent event from a design defect in constructing the fourth floor without removing the insulation layer. The moisture was a separate agent that caused damage, even though the design defect may have allowed the agent to enter. 

   Fireman's Fund also argued the loss was excluded by the pollution exclusion. This exclusion included an anti-concurrent causation clause, which excluded a loss if it resulted from a combination of covered and excluded perils. Here, however, the pollution exclusion expressly reinstated coverage for damage that was the direct result of a covered cause of loss. The arsenic was caused by a covered cause of loss, moisture infiltration, and therefore fell within the exception to the pollution exclusion. This exception contradicted the anti-concurrent causation language. Under Hawaii law, policies must be construed broadly in favor of the insured.

   Consequently, the plain language of the exception to the pollution exclusion that allowed coverage for pollution caused by a covered cause of loss prevailed over the anti-concurrent causation clause. Because the arsenic was directly caused by the water infiltration, a covered cause of loss, the direct physical loss or damage caused by the arsenic was covered by the policy under the exception to the pollution exclusion.

   This is a significant case because it is the first decision in Hawaii to comprehensively address the ensuing loss provision and the anti-concurrent causation clause. 

   For a perspective of the case from a construction law perspective, see my colleague Anna Oshiro's summary of the case here.

Reach of Pollution Exclusion Narrowed

   The federal district court predicted the Missouri state courts would not exclude coverage for damages caused by a concrete sealant, TIAH. United Fire & Cas. Co. v. Titan Contractors Serv., 2013 U.S. Dist. LEXIS 10716 (E.D. Mo. Jan. 28, 2013).

   The insured was a construction clean up company. It supplied day labor and cleaned construction projects when they were finished. The insured also cleaned and sealed concrete floors. 

   The underlying plaintiffs sued the insured, alleging they had suffered injury based upon exposure to TIAH applied in their office space by the insured. United Fire agreed to defend, but subject to a reservation of rights because it contended damage caused by TIAH was excluded under the pollution exclusion. United Fire filed suit for a declaratory judgment on its coverage obligations.

   The federal district court reasoned that the pollution exclusion did not apply if the court found the definition of pollutant to be beyond the reasonable expectations of the insured. A reasonable policy holder in the insured's position would not expect that injury or damage arising from its use of TIAH in the course of its business would be considered pollution within the meaning of the policy's pollution exclusion. 

 

 

Meaning of "Sudden" in Pollution Exclusion Found Ambiguous

   The New Mexico Supreme Court considered whether the word "sudden" found in the pollution exclusion of a liability policy was ambiguous. See United Nuclear Corp. v. Allstate Ins. Co., No. 32,939 (N.M. Aug. 23, 2012).

   United Nuclear operated several uranium mines in New Mexico from the 1960s through the early 1980s. At Church Rock Mine, a dam breached. 94 million gallons of radioactive liquid escaped from the tailings pond and poured into nearby Rio Puerco. The spill was described as the largest accidental release of radioactive material in U.S. history.

   United Nuclear was insured by a number of carriers. Policies issued by Allstate and in effect between August 1, 1977 and June 1, 1981, were at issue in this appeal. When sued, United Nuclear tendered to Allstate. Coverage was denied and United Nuclear filed a third-party complaint in the underlying suit, seeking a declaration that Allstate was required to defend and indemnify United Nuclear.

   Allstate moved for summary judgment based upon the pollution exclusion which removed from coverage all claims for damages caused by pollution or contamination unless the discharges were "sudden and accidental." The trial court granted the motion, which was upheld by the Court of Appeals.

   The Supreme Court first looked at dictionary definitions of the word "sudden." Dictionaries defined "sudden" as either synonymous with "unexpected," or as the temporal descriptor of a brief occurrence, or both. Other courts had found definitions of "sudden" to be so distinct as to render the term ambiguous.

   The New Mexico Supreme Court further noticed that courts across the country were evenly divided on the meaning of the term "sudden," with nearly half concluding the term is ambiguous.

   Therefore, in the absence of a definition of the term in the policies, finding diverging definitions in standard dictionaries and the lack of an consensus among courts nationwide, the court determined that the meaning of the term "sudden" as used in the policies was ambiguous. The case was remanded to allow United Nuclear to prove that its operations led to discharges that were in fact "sudden and accidental."

Ninth Circuit Certifies Question on Reach of Pollution Exclusion

   The case before the Ninth Circuit asked whether the pollution exclusion applied to carbon monoxide poisoning.  See Cent. Sur. Co. v. Casino West., Inc., 2012 U.S. App. LEXIS 56958 (9th Cir. April 6, 2012). The accident occurred in a Nevada casino and hotel owed by Casino West.

   The fumes were created by a hotel's heater room which permeated into the deceaseds' rooms. Century issued a CGL policy to Casino West with a pollution exclusion, barring coverage for bodily injury arising out of the release or escape of "pollutants." The policy defined pollutants as "any solid, liquid, gaseous or thermal irritant contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste."

   When Casino West was sued for wrongful death, Century refused to defend based upon the pollution exclusion. Century filed suit for a declaratory judgment. The district court denied Century's motion for summary judgment, determining the pollution exclusion was ambiguous. The district court reasoned that an ordinary policyholder may not reasonably characterize carbon monoxide from a motel pool heater as pollution.

   The Ninth Circuit surveyed the different interpretations of the pollution exclusion. Some courts applied the exclusion literally because the terms were found to be clear and unambiguous when applied to carbon monoxide poisoning. Other courts limited the exclusion to situations involving traditional environmental pollution, either because they found the terms of the exclusion to be ambiguous or because they found that the exclusion contradicted policyholders' reasonable expectations.

   Nevada had never decided the scope of the pollution exclusion. Therefore, the Ninth Circuit certified the following question to the Nevada Supreme Court: "Does the pollution exclusion in Century's insurance policy exclude coverage of claims arising from carbon monoxide exposure?"

Pollution Exclusion Precludes Coverage For City's Alleged Contamination of Drinking Water

   In an entertaining decision authored by Judge Posner, the Seventh Circuit affirmed the district court's denial of coverage based upon the pollution exclusion. Scottsdale Indem. Co. v. Village of Crestwood, 2012 U.S. App. LEXIS 5069 (7th Cir. March 12, 2012).

   In 1985, Crestwood's mayor and other Village officials learned from state environmental authorities that one of the wells was contaminated by perc. Perc is a solvent widely used in dry cleaning and a carcinogen. Perc used by a nearby dry-cleaning establishment leaked into the groundwater tapped by the well. Although the Village officials promised the state they would close the well, use of the well continued until 2007 without disclosure to the Village residents.

   Hundreds of Crestwood residents sued the Village and Village officials. Defendants turned to their insurers, who denied coverage based upon the pollution exclusion. The exclusion barred coverage for damages arising out of "actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time."

   The insurers sued for a declaration that there was no coverage under their policies. The district court, relying upon the pollution exclusion, granted summary judgment to the insurers.

   The Seventh Circuit affirmed. The court agreed that a literal reading of the pollution exclusion would exclude coverage for acts not commonly understood to arise from pollution. For example, suppose a tanker truck filled with perc spilled its liquid cargo, another vehicle skidded on the wet surface of the highway and collided into an abutment, injuring the driver. Perc would be a contaminant under the pollution exclusion and the cause of the injuries. No one would argue, however, that a claim arising from such an accident would be barred by the pollution exclusion. But this was not such a case.

   Here, the Village caused the contamination of its water supply by not sealing the well, even though it did not introduce the contamination into the soil or groundwater. The pollution exclusion would mean little if the insured were required to be the original creator of the pollution in order to be within the exclusion.

   What mattered in a coverage suit was that the underlying suit was premised on a claim that the perc caused injuries for which plaintiffs were seeking damages, and that claim triggered the pollution exclusion.

No Coverage For Damage Caused by Chinese Drywall

   The pollution exclusion barred coverage for alleged property damage and bodily injury in Evanston Ins. Co. v. Harbor Walk Dev., LLC, No. 2:10cv312 (E.D. Va. Sept. 9, 2011) [Evanston Decision here].

   Homeowners sued the insured, Harbor Walk, in three lawsuits, alleging the Chinese drywall installed in their homes emitted sulfides and other noxious gases. This caused corrosion and damage to the air-conditioning and ventilation units, refrigeration coils, copper tubing, faucets, metal surfaces, electrical appliances and other personal items. The homeowners also alleged the compounds emitted by the drywall caused bodily injury, such as allergic reactions, headaches, etc.

   Harbor Walk's insurer, Evanston, filed for a declaratory judgment that the pollution exclusion precluded coverage. The exclusion stated there was no coverage for "bodily injury" or "property damage" that would not have occurred but for the discharge, dispersal, release or escape of pollutants. Pollutants included solid, liquid gaseous or thermal irritant or contaminant, chemicals, etc.

   The homeowners argued the use of environmental terms in the exclusion meant it was limited to excluding damages caused by "traditional pollution events," and not the emission of gas from building material occurring inside a home. Because their reading of the exclusion was reasonable, the exclusion was ambiguous. After surveying case law in Virginia, however, the court disagreed. The pollution exclusion unambiguously applied to injuries caused by both traditional and non-traditional pollution.

   Further, each of the causes of action (including negligence, breach of express and/or implied warranties, breach of contract, private nuisance, unjust enrichment, etc.) implicated the emission of sulfides and noxious gases from the Chinese drywall as either the basis for the claim, or the cause of the resulting damage. Thus, every cause of action fell within the reach of the pollution exclusion, barring all claims made by the homeowners. Consequently, Evanston was entitled to summary judgment.

First Party Policy's Pollution Exclusion Given Narrow Interpretation

   The California Court of Appeals considered the reach of a pollution exclusion in a first party property policy. See The Villa Los Alamos Homeowners Assoc. v. State Farm Gen. Ins. Co., 2011 Cal. App. LEXIS 1079 (Cal. Ct. App. Aug. 17, 2011).

   A prior case from the California Supreme Court was instructive. In MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003), the court determined that a standard pollution exclusion in a CGL policy was intended to exclude coverage for injuries resulting from events commonly regarded as environmental pollution. As a result, the court rejected a broader, literal interpretation,thereby foreclosing coverage for any injures arising from various harmful substances. Here, the court of appeals determined a similar interpretation should apply to pollution exclusions in first party policies.

   In 2006 the Association contracted with Cal Coast Construction to scrape the acoustical ceilings and stairways to search for possible asbestos. Cal Coast disturbed asbestos contained in the ceilings, releasing asbestos fibers into the air. Cal Coast was cited by the County and removed from the project. The County ordered the Association to perform a comprehensive abatement of the building. A contractor was hired to perform cleanup.

   Cal Coast refused to help pay for the cleanup. The Association tendered claims to State Farm. The Association's all risk property policy included a pollution exclusion as follows:

2. We do not insure under any coverage for any loss caused by one or more of the items below:

. . . 1. the presence, release, discharge or dispersal of pollutants, meaning any solid, liquid, gaseous, or thermal irritant or contaminant, including vapor, soot, fumes, acids, alkalis, chemicals and waste . . . ."

State Farm denied coverage and the Association paid $650,000 to fully clean and abate the building. The Association sued and the trial court granted summary judgment to State Farm.

   On appeal, the court first looked to the drafting history of the pollution exclusion and its interpretation in the CGL context. The exclusions in first and third party policies were virtually identical. Accordingly, there was no reason to reject MacKinnon's holding that the pollution exclusion was aimed at environmental pollution, and instead adopt a dictionary-based, literal language approach to deciding whether there was coverage.

   Moreover, State Farm's policy included both first and third party coverage with pollution exclusions in each. To interpret the pollution exclusion differently depending on whether first party or third party coverage was implicated under a claim that could trigger either section of the policy did not make sense. Therefore, the court determined that a reasonable insured would expect both exclusions to apply to environmental pollution.

   Nevertheless, the accidental release and airborne dissemination of asbestos fibers amounted to what was commonly regarded as "environmental" pollution. Damage to the Association's property was caused by a "release" of asbestos into the air. "Release" was a defined mechanism within the terms of the pollution exclusion. Consequently, judgment was properly entered in favor of State Farm.

   Thanks to Robert Thomas (www.inversecondemnation.com), my Damon Key blogging colleague, for forwarding this case.

Allocation Issues Addressed

   A thoughtful opinion concerning the allocation of indemnity obligations between an insurance company and a policyholder was rendered in Peabody Essex Museum, Inc. v. United States Fire Ins. Co., 2010 U.S. Dist. LEXIS 106275 (D. Mass. Sept. 30, 2010).

   At some point over the last several decades, an oil tank on the insured Museum's property ruptured, and oil seeped over to the neighbor's property.  The oil was discovered in May 2003.  An investigation showed that the oil originated from the Museum's property.  The neighbor submitted a demand letter for $400,000.  

    U.S. Fire issued a policy to the Museum in effect from December 19, 1983 to December 19, 1985.  Although the policy was effective for another year, it had an absolute pollution exclusion precluding coverage, as did all subsequent policies.  U.S. Fire refused to defend the Museum.  The Museum settled with the neighbor for $300,000.  U.S. Fire refused to indemnify for the settlement.  The Museum then sued U.S. Fire for declaratory relief.

      A prior ruling in the case determined that U.S. Fire breached its duty to defend.  As a result, U.S. Fire now carried the burden of proof on the indemnity issue to show the oil damage was not covered.  In a June 2009 trial, a jury found U.S. Fire had not met its burden to show damage only occurred after December 19, 1985, or subsequent to its policy period.  Nor did U.S. Fire meet its burden to show the date on which the release of oil first caused property damage. 

    The current opinion addressed the impact of a recent case decided by the Massachusetts Supreme Judicial Court (SJC), Boston Gas v. Century Indemn. Co., 454 Mass. 337 (2009).  There, the SJC held that liability among  several insurers with triggered policies should be prorated where the insured incurs covered costs as a result of ongoing environmental contamination occurring over more than one year and the insurer provided coverage for less than the full period of years in which the contamination occurred. Further, the court held that a "time-on-the-risk" method for allocation of pro rated liability was applicable when available evidence did not allow a more accurate allocation of losses. 

   The court noted that Boston Gas presented the typical situation in which the insured must prove coverage. Here, the breach of the duty to defend shifted the burden of proof, which meant U.S. Fire had to prove noncoverage.  At trial, U.S. Fire was unable to meet its burden as to when the property damage began.  Therefore, the current dispute was whether U.S. Fire was responsible for paying the full indemnity pursuant to Boston Gas.

   Since U.S. Fire failed to meet its burden, the court construed the jury's findings to mean that the allocation period began on the first day of U.S. Fire's policy.   If the allocation period extended beyond U.S. Fire's coverage into periods when the Museum was uninsured, indemnity would be divided between the insured and uninsured periods in accordance with Boston Gas. 

    The appropriate end date was more difficult to determine, however.  The issue was not addressed in the jury trial and U.S. Fire never had an opportunity to present evidence on when the oil stopped causing damage. Therefore, a new trial was ordered to determine when the spilled oil stopped causing additional property damage which would mark the end of the allocation period.  The Museum could present evidence that the spilled oil stopped spreading at some point prior to 2003, and U.S. Fire could present evidence that it continued to spread after the discovery date.

   Finally, the court could not determine whether the "time-on-the-risk" method of allocation was applicable.  The ideal method of allocation was a "fact-based" allocation, in which loss was allocated based on the precise injury that took place during each policy or uninsured period.  Therefore, at the trial, the Museum could present evidence for a "fact-based" allocation.