Virginia rejects attempt to limit pollution exclusions to “traditional” environmental pollution

In PBM Nutritionals, LLC v. Lexington Ins. Co., No. 110669 (Va. Apr. 20, 2012), the Virginia Supreme Court affirmed the Circuit Court's judgment that pollution exclusions barred coverage for a multi-million dollar loss resulting from a manufacturing incident that contaminated a number of lots of infant formula, which all had to be destroyed as a result. In so doing, the Court rejected the arguments that the pollution exclusions are ambiguous because they are overly broad and could exclude nearly any loss, and that the Circuit Court erred in failing to limit the scope of the pollution exclusion endorsements to traditional environmental losses in order to avoid the problem of illusory coverage.

Instead, the Court agreed with the insurers and the Circuit Court that the plain text of the endorsements should be applied.&nbnbsp; After citing to City of Chesapeake v. States Self-Insurers Risk Retention Group, 271 Va. 574, 628 S.E.2d 539 (2006), the Court reasoned that none of the pollution exclusions referenced any terms such as "environment", environmental", "industrial," or any other limiting language suggesting that the exclusions are limited to "traditional" rather than "indoor" pollution. There was no language suggesting that the discharges or dispersals of pollutants or contaminants must be into the environment or atmosphere. The Court concluded that according to their plain language, the pollution exclusions are not restricted to traditional environmental pollution, and held that the Circuit Court did not err in refusing to limit the insurers' pollution exclusion endorsements to traditional environmental contamination losses.

In PBM Nutritionals, the contamination occurred when superheated water caused water filters to disintegrate into their constituent components of cellulose, melamine, and other materials, which infiltrated the water from which the lots of infant formula were manufactured. Quality control testing discovered the contamination, and all batches manufactured during that period had to be destroyed.

This decision confirms that Virginia will not follow other jurisdictions which have limited pollution exclusions to traditional, environmental pollution.