By ROBERT FRIEDMAN, a shareholder and head of the insurance coverage practice group at the Gunster law firm in West Palm Beach, Fla.
Since the first pollution exclusion entered the standard comprehensive general liability insurance policy in 1973, insurers and policyholders have litigated the exclusion's scope.
The passage of sweeping federal environmental legislation in the late 1970s and early 1980s led to the elimination of the "sudden and accidental" exception to the standard exclusion and the creation of the "absolute" pollution exclusion in 1985. The broadest form of the exclusion, the "total" pollution exclusion, appeared in 1988. Subsequent revisions of the pollution exclusion have done little to reduce the litigation, or to eliminate policyholder assertions that the pollution exclusion is inherently ambiguous outside of the context of traditional pollution claims.
The current version of the most common form of the absolute pollution exclusion excludes, with limited exceptions, coverage for bodily injury or property damage claims arising out of the release of "pollutants."
The most important exception for commercial policyholders is the exception for releases in many products-completed operations situations. "Pollutants" are defined broadly to include any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acid alkalis, chemicals and waste. The total pollution exclusion, which is endorsed on many comprehensive general liability policies, applies in nearly all circumstances involving the release of a "pollutant," including the products-completed operations context.
The insurance industry has had mixed success in relying on the absolute and total pollution exclusion to deny coverage for claims outside of the traditional environmental pollution context, such as claims involving exposure to asbestos and lead paint, indoor pollution events, and liabilities resulting from the use of a policyholder's product or resulting from its work. Even in cases applying the total pollution exclusion, courts across the country have split nearly evenly on whether the exclusion applies to situations not involving industrial pollution.
Those courts that apply the exclusion to such circumstances hold that the exclusion's words are clear and its impact unambiguous. Those courts that refuse to apply the exclusion typically do so for one of three reasons. First, the exclusion is on its face ambiguous as applied outside of the traditional pollution context. Second, the policyholder's reasonable expectation of coverage either creates an ambiguity in the exclusion or invalidates the exclusion to avoid eviscerating the primary purpose of the coverage. And, third, for those states that apply the doctrine of regulatory estoppel, the drafting history of the pollution exclusion demonstrates that it was intended to respond only to industrial pollution liabilities.
THE CHINESE DRYWALL LIABILITIES
Most Chinese drywall that is the subject of litigation against manufacturers, developers, contractors, and suppliers was imported to the United States between 2004 and 2007. It has been estimated that Chinese drywall was installed in 100,000 homes. According to the U.S. Consumer Product Safety Commission, the majority of the drywall was installed in homes in Florida (58 percent). Almost all of the drywall--more than 90 percent--was installed in homes in Florida, Louisiana (19 percent), Mississippi (7 percent), Alabama (5 percent), and Virginia (4 percent).
The central allegation of the Chinese drywall lawsuits is that the product emits high levels of sulfide gases, which corrode other components of a home, such as HVAC systems, metal pipes, copper wiring, coils and other electronic components. Plaintiffs have also alleged that they have suffered respiratory and other bodily injuries as a result of the gases released by the drywall. Much of the Chinese drywall litigation has been consolidated for pretrial purposes in a multidistrict litigation in the District Court for the Eastern District of Louisiana in New Orleans.
There currently is no legal guidance on the application of the pollution exclusion to Chinese drywall liabilities, under comprehensive general liability policies. Two early cases in the context of first-party homeowner claims resulted in split decisions. On March 22, a state court in Louisiana determined that the pollution exclusion did not apply to a homeowner insurance claim. A June 3 decision out of the Eastern District of Virginia held that the pollution exclusion applied.
Although not in the commercial context, the split in these homeowners' coverage cases in Louisiana and Virginia reflects the divergence of states' legal precedents on the pollution exclusion. A 2000 Louisiana Supreme Court decision determined that the total pollution exclusion is limited to liabilities faced by parties that are "active polluter[s] of the environment" and not a municipality that was negligent in allowing contaminants into its water supply. In contrast, a 2006 Virginia Supreme Court decision upheld the absolute pollution exclusion's applicability to claims relating to contaminants that entered the Chesapeake water system.
The other Chinese drywall battleground states--Alabama, Mississippi, and Florida--are similarly fractured regarding applicability of the pollution exclusion outside of the traditional pollution context.
The Alabama Supreme Court has repeatedly refused to apply the pollution exclusion to claims not involving environmental contamination. Alabama has refused to apply the exclusion in cases involving chemical discharges from strip-mining operations, mud run-off from construction operations and indoor exposure to asbestos.
The Fifth Circuit, applying Mississippi law in a 1996 opinion, held that the exclusion applied to claims asserted by a homeowner against a painter relating to fumes emanating from work done in her home.
Florida courts have repeatedly taken a broad view of the pollution exclusion, and have rejected policyholder arguments based on the exclusion's drafting history, as well as based on the reasonable expectations doctrine. In its 1998 Deni Associates decision, the Florida Supreme Court held that the exclusion was unambiguous and applied it to defeat coverage for claims in two different circumstances outside of the context of traditional pollution claims: liability faced by an architectural firm for claims related to ammonia that was accidentally spilled from a blueprint machine and liability faced by a farmer for claims related to the spraying of insecticide on a fruit grove.
The pollution exclusion case law in each of the key battleground states is well-developed, and if courts extend the existing precedents it will not be difficult to predict the outcomes. The Chinese drywall complaints are fairly uniform in their allegations regarding the release of sulfuric gas, which likely qualifies as a "pollutant." Courts that find the words of the pollution exclusion to be clear (Florida, Mississippi, Virginia) will favor insurers. Courts that consider the exclusion's original intent or the policyholder's reasonable expectations of coverage (Louisiana, Alabama) will favor policyholders.
The tense cooperation that has been maintained by many insurers and policyholders may not last long, as coverage decisions on comprehensive general liability policies, as well as settlements and judgments in the underlying cases, will continue to alter the parties' calculus on whether and when to cooperate or litigate.
Not all policyholders will fare the same, even in the same jurisdictions. Although courts generally have not drawn a distinction between differing language in the pollution exclusion--particularly differences between versions of the total and absolute pollution exclusions--it can be expected that policyholders with more favorable language in their policies will attempt to distinguish negative precedent on their specific policy language.
Many large home builders and contractors have purchased broad-form or limited pollution coverage for liabilities arising out of their work. In addition, several forms of the absolute pollution exclusion open the door to products-completed operations coverage. It may be these policy language distinctions--and not differences in the allegations of the Chinese drywall complaints-- that guide courts as they apply existing precedent to these new liabilities.
The huge stakes at play in the Chinese drywall cases, and inability of the real estate and construction industries to absorb the financial blow absent significant insurance resources, may lead to a sea change in the way some jurisdictions view the pollution exclusion. Although insurers have had success over the years obtaining approval for broad pollution exclusion forms, and expanding the scope of the pollution exclusion beyond its original intent, increasing political pressure may change the industry's fortunes.
Regulatory action in Louisiana has previously muted the impact of the pollution exclusion there, and similar regulatory or legislative action in key states--particularly Florida, under pro-policyholder Insurance Commissioner Kevin McCarty--may influence the outcome of future coverage decisions. Ironically, the industry's successes in litigating the scope of the pollution exclusion may have made the exclusion too overreaching when viewed in the context of the Chinese drywall catastrophe. Whether the pollution exclusion meets its Waterloo on the Chinese drywall-strewn battlefields of the southeast remains to be seen.
October 15, 2010
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