- Another "Chinese Drywall" Case Demonstrates the Danger of the Pollution Exclusion
- November 22, 2012 | Author: Collin J. Hite
- Law Firm: Hirschler Fleischer A Professional Corporation - Richmond Office
When someone hears the term "pollution" they think of the scene described in A Civil Action where trucks roll into the night unloading barrels of toxic waste into a field, or the movie Erin Brockovich where the utility company pumped waste into the local aquifer. What you do not think of is a building component off-gassing inside your home or office. Yet, as courts around the country grapple with the scope of the pollution exclusion in insurance policies it is clear that "pollution" is a very broad term indeed. As one commentator has noted with respect to the definition of a pollutant, if applied literally the term would apply to virtually all substances.
Virginia federal district courts have been tackling this issue in the "Chinese Drywall" cases. However, at the request of the Fourth Circuit Court of Appeals the Supreme Court of Virginia has weighed in on the question with a definitive answer. TravCo Ins. Co. v. Ward, No. 120347, 2012 WL 5358705 (Nov. 1, 2012). The federal appellate court punted the question by noting that it was uncertain if the Supreme Court of Virginia would find the four exclusions at issue "unambiguous and reasonable in its form, scope, and application in light of the unusual nature of the losses . . ." The Court was then presented with a certified question from the Fourth Circuit stating:
For purposes of interpreting an "all risk" homeowners insurance policy, is any damage resulting from this drywall unambiguously excluded from coverage under the policy because it is loss caused by:
(a) "mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage itself";
(b) "faulty, inadequate, or defective materials";
(c) "rust or other corrosion"; or
(d) "pollutants," where pollutant is defined as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste?
The Virginia Supreme Court wasted no time in finding that each exclusion barred coverage for the Chinese drywall based claims.
It appears from the opinion that Mr. Ward's insurance policy had standard pollution exclusion language. The Court cited the language, which most will recognize:
Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by peril insured against under Coverage C.
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or claimed.
The policyholder argued that language in the exclusion was ambiguous, overbroad and unreasonable. He also went on to argue that the off-gassing of the sulfur from the drywall did not constitute a "discharge" of "pollutants" as a reasonable person would understand the scope of the exclusion. The policyholder falls back on the generally accepted idea of pollution- an introduction of toxic chemicals or substances into the general environment. Unfortunately, like more and more courts across the country the Supreme Court of Virginia did not buy this interpretation.
The Court did note that the factual scenario of off-gassing from a common building component is not "traditional environmental pollution," but asserted that Virginia does not construe such exclusions so narrowly. If the endorsement is broad, but not unlimited in scope, then it can be enforceable. Thus, the pollution exclusion in TravCo was found to be reasonable and not overly broad. The Court then went on to define "irritant," and conclude that the sulfuric gas from the drywall fit the definition. The Court even went so far as to cite federal and Virginia regulations that referenced sulfur gas as a pollutant in support of its finding. The Court fails to inform the reader that the federal regulation deals with performance of petroleum refineries, or that the state regulation addresses air quality programs. Both regulations are clearly aimed at traditional pollution issues.
While this outcome may not surprise many coverage lawyers who have been watching the broad interpretation of pollution exclusions become the majority trend in the country, this continues to come as a surprise to many home and small business owners. It may even come as a shock to larger companies that also view the exclusion to be aimed at tradition environmental pollution. The problem is that the broad application of the exclusion is not limited to Virginia, and the TravCo opinion only helps solidify this trend as the majority view.
The fact that the insurance industry will not specifically address the absolute pollution exclusion by redrafting the language to more clearly delineate the scope of the exclusion remains highly problematic for both sides- insurers and insureds. Many policyholders do not adequately understand the scope of their standard insurance program's coverage for environmental matters. No doubt the insurance brokers have not done a thorough job in educating their customers in this area. The proof is in the number of lawsuits continually being filed concerning the absolute pollution exclusion and asking courts to weigh in on the scope of coverage. Unfortunately, as this case demonstrates, the trend is in favor of insurers that the exclusion is not merely applicable to what a person would normally think of as traditional pollution.
One other interesting side note from this case. The Court was able to use the policyholder's own words against him in several instances- ouch! First, in a separate lawsuit against the developer, builder and drywall contractor the policyholder alleged that the drywall "emitted various sulfide gases and/or toxic chemicals through off-gassing" that created noxious odors and caused health issues, damages and corrosion." The owner also called the drywall "defective." TravCo, and then the Court, used this against the insured to find that even he viewed the off-gassing as a pollutant. But it gets worse. The owner also hired an environmental expert to help determine that his problems were caused by Chinese drywall. TravCo obtained the expert's report, which used phrases such as, "The corrosion of metal in the Ward . . . residence results from exposure to reduced sulfur gases being emitted from the Chinese drywall and interacting with metal." The Court specifically cites to language from both the policyholder and expert to find that the sulfur gas fit the definition of "irritant or contaminant." This demonstrates the need to carefully coordinate and plan litigation strategy when there will be an underlying case against wrongdoers, and a separate coverage case. If using different counsel for the two cases, as makes sense in many circumstances, then coordination is critical to prevent this kinds of problem. Supporting evidence in one case may bite you in the other when there is not consistency strategy between the various lawsuits. Many policyholders start litigating the underlying case to recovery their loss, not understanding the long-term insurance issues at play. Insurance coverage issues can never be relegated to the back burner in these circumstances.
There is little doubt that the insurance industry will continue to litigate environmental coverage and the absolute pollution exclusion in 2013 based on the industry's success this past year. This is an unfortunate trend since insurers could more carefully draft the exclusion to clearly describe the scope of coverage. This contention over environmental coverage and the impact of the absolute pollution exclusion is an ongoing dispute, and we are probably only in the middle of the fight at this point without the insurance industry altering the endorsement to make it more clear.
Coverage counsel and corporate lawyers should continue to carefully advise their clients concerning the impact of the absolute pollution exclusion on their insurance program and the availability of specialty products in the market place to provide appropriate coverage. In 2013, it is anticipated that the insurance industry will continue marketing specialty environmental insurance products to fill the gap in insurance programs. The impact of the Chinese Drywall cases provides stark examples to policyholders about the need to fully understand their insurance program and the types of coverage they are looking for based on their business and industry sector. Insurance audits by coverage counsel remain a vital service to risk management and in-house legal departments. An insurance audit, serving as a second opinion to the insurance broker, can save the policyholder time, trouble and expense by proactively ensuring gaps in coverage do not exist in an insurance program. Now is the time to act before the next run of "pollution" claims catches more policyholders off guard.
 George M. Plews, The Pollution Exclusion: Understanding the Limits of the Principal Barrier to Insurance Recovery in Contamination Cases, in Environmental Liability and Insurance Recovery 367 (Am. Bar Ass'n ed., 2012).