Coverage Issues in Review:  E.D. of Virginia Tackles Pollution Exclusion in Chinese Drywall case

Most liability insurance policies include what is commonly referred to as a "pollution exclusion" provision, which essentially excludes insurance coverage for bodily injury or property damage arising out of the discharge of "pollutants." The inception of the pollution exclusion provision in liability insurance policies dates back to the 1970s, at which time the insurance industry was becoming increasingly concerned about pollution claims resulting from environmental catastrophes that occurred during the 1960s, including specifically the Torrey Canyon disaster and the Santa Barbara off-shore drilling oil spills in 1969. Many insurance companies used the adoption of the pollution exclusion provision as an opportunity to address public concerns regarding environmental pollution and to clarify and publicize the position that commercial general liability insurance policies did not indemnify companies that were knowingly polluting the environment.

Initially, most policies were drafted to include a "sudden and accidental" pollution exclusion provision, which denied coverage for bodily injury arising out of the discharge, dispersal, release, or escape of irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; unless the discharge, dispersal, release, or escape was "sudden and accidental." In light of controversy over the interpretation of the "sudden and accidental" pollution exclusion provision by the courts with respect to whether the language of the provision was clear and unambiguous, and in an effort to limit coverage for pollution related claims, an "absolute pollution exclusion" was adopted in 1985. Pursuant to the absolute pollution exclusion, "bodily injury or property damage arising out of the actual, alleged or threatened discharge, release, or escape of pollutants" was excluded from coverage; the term "pollutant" being defined as "any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalies, chemicals and waste." The revision of the pollution exclusion did little to resolve issues of the scope and application of the provision, which was one of the most heavily litigated insurance coverage questions in the late 1980s and early 1990s.

Although these issues are not as hotly contested today, there continues to be a split of opinions by state and federal courts nationwide. Specifically, "[n]umerous courts have held that a pollution exclusion bars coverage for all injuries caused by the release of pollutants, even where the pollutant is dispersed into a confined or indoor area." However, "other courts have held that the exclusion does not apply if the facts show that the discharge, dispersal, release or escape was a localized toxic accident occurring within the vicinity of the pollutant's intended use." Firemen's Ins. Co. v. Kline & Son Cement Repair, Inc., 474 F. Supp. 2d 779, 792-793 (2007)(collecting cases) (citation omitted). For example, case law from Maryland and the District of Columbia suggests that the pollution exclusion applies only to environmental pollution. See Clendenin Bros. v. U.S. Fire Ins. Co., 390 Md. 449, 458, 889 A.2d 387, 393 (2006)(Pollution exclusions were intended to apply only to environmental pollution and insurer had a duty to defend and/or indemnify insured against claims for bodily injury caused by harmful localized, non-environmental fumes containing manganese produced from an insured's proper use of welding equipment); Richardson v. Nationwide Mut. Ins. Co., 826 A.2d 310 (D.C. 2003)(vacated as moot)(Pollution exclusions refer to the types of pollutants that were ordinarily understood in the context of federal environmental legislation; its purpose was to protect insurers from liability in the billions of dollars for environmental cleanups of hazardous waste sites and industrial facilities. Accordingly, the pollution exclusion did not apply to claim for bodily injury from exposure to carbon monoxide fumes that leaked from a defective furnace in an apartment building.)

Most recently, the United States District Court for the Eastern District of Virginia, applying Virginia law, addressed this issue in a declaratory judgment action in the context of the applicability of a pollution exclusion to claims for bodily injury and property damage related to the installation of defective drywall imported from China, which allegedly "emits various sulfide gases and/or other toxic chemicals through 'off-gassing' that created noxious odors, and caused damage . . . [and] dangerous health consequences . . . " Nationwide Mut. Ins. Co. v. Overlook, LLC, 2011 U.S. Dist. LEXIS 55282 (2011). The Court analyzed the policy at issue and concluded that, because the policy did not reference the word "environment," "environmental," "industrial," or any other limiting language to suggest that the pollution exclusion was not equally applicable to both traditional and indoor pollution scenarios; accordingly, construing the policy to apply only to environmental pollution would require the Court to interject words into the policy, contrary to the elemental rule that the function of the Court is to construe the contract made by the parties, and not to reformulate a contract for them. The Court further explained that it was unnecessary to evaluate the manner in which other jurisdictions analyzed or resolved similar contract disputes, because the Supreme Court of Virginia has explained that the law of the Commonwealth of Virginia and the plain language of the insurance policy provided the answer to this coverage question.

Finally, pursuant to what is often referred to as the "Eight Corners Rule," the Court compared the four corners of the complaint to the terms contained within the four corners of the insurance policy and determined that the insurer owed no duty to defend. Specifically, the Court explained that, because the bodily injury and property damage claimed were caused by a harmful gas that was released in a manner contemplated by the pollution exclusion provision, and the harmful gas, which allegedly necessitated a repair or replacement of various parts of the house as well as medical care, was a "pollutant" (i.e., an irritant or contaminant), and every claim in the underlying complaint referred to the defective drywall as either the basis for each claim or the cause of the resulting damage, the pollution exclusion was implicated and there as therefore no duty to defend.

Ultimately, in analyzing coverage issues that may implicate the pollution exclusion of a liability insurance policy, the applicable state law may be as important as the particular facts of the case in determining how the exclusion will be interpreted and whether it will be applied by the court. This often means that the choice of law analysis for a particular claim may be dispositive of the question. For further assistance on Virginia insurance coverage matters, call Jordan Coyne & Savits partners John H. Carstens, Esq. or Carol T. Stone, Esq., at 703-246-0900.
Categories: Insurance, Virginia