The case centered around total pollution exclusion endorsement language in a policy issued by TIG Insurance Company, an Irving, Texas-based unit of Fairfax Financial Holdings in Toronto.

TIG sold a commercial general liability policy to Brooklyn, N.Y.-based Belt Painting Corp., which specializes in stripping-and-painting subcontract work.

Under the policy, the carrier would defend and indemnify the policyholder for claims of bodily injury and property damage of up to $1 million, when the exclusion is not applied.

In the TIG policy, the exclusion applies to damages from "the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time" and pollutants are defined as "any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste."

But New York's high court found that list did not apply to paint and solvent fumes.

The issue arose after Belt Painting was sued by office workers who claimed injuries from inhaling paint and solvent fumes as a result of Belt's painting job within the office space where they were employed.

Belt Painting's claim was refused by TIG on grounds of pollution exclusion. Belt Painting then sued TIG, arguing the injuries were not caused by truly environmental pollution and that TIG should defend and indemnify the company.

"The insurance company was saying pollution exclusions bar any claim which involves any substance which could be called pollutant," said Richard Lewis, an attorney with New York-based law firm Anderson Kill & Olick P.C., which filed a brief on behalf of United Policyholders, a Mill Valley, Calif. consumer advocacy group, in support of Belt Painting Corp.

He supposed that the injuries in Belt Painting case could be covered under workers' compensation. "But that's not where the money is. Workers will look for other places where they are not bound by the workers' comp system," he said.

Mr. Lewis also observed that from policyholders' perspective, these pollution exclusions only apply to "truly environmental pollution."

"Paint fumes are not considered traditional pollutants of the type that environmental authorities like the Environmental Protection Agency are concerned about," he said. "If it's the type of pollutant release that EPA or state environmental authorities are concerned about, then it could be considered excluded."

TIG's interpretation of the exclusion initially prevailed at the trial court level. A Supreme Court judge in Brooklyn ruled for the insurer, noting that "indoor air contamination can constitute environmental pollution" and is therefore part of the exclusion endorsement. The Appellate Division Second Department in Brooklyn subsequently reversed that decision, however.

In the Court of Appeals decision, the state's highest court in Albany affirmed the Appellate Division's ruling. Chief Court of Appeals Judge Judith Kaye, in her decision for policyholder Belt Painting, found that "the exclusion at issue is ambiguous."

Judge Kaye said, "Policy exclusions are given a strict and narrow construction, with any ambiguity resolved against the insurer." Of TIG's contention that paint or solvent fumes are well within the defined pollutants in the policy, she said, "We turn to the question of whether the clause now before us unambiguously excludes coverage for injuries caused by inhalation of paint or solvent fumes in an office the insured was painting." Judge Kaye added, "We conclude that it does not."

Mr. Lewis said that, as written, these absolute pollution exclusions "could cover anything," but that common sense dictates that non-traditional pollutants or irritants shouldn't be part of the pollution exclusion.

Using an extreme theoretical example, he said that a "bullet going through your head could be called an irritant. A speeding bullet irritates your head, especially if it goes through your head. But that shouldn't be part of pollution exclusion."

In Mr. Lewis' view, the latest court decision is an extremely important victory for policyholders. The defendant could theoretically appeal to the U.S. Supreme Court, but the chance of the country's highest court taking this case is non-existent, he said.

Insurance trade groups expressed disappointment at the ruling. Patrick Watts, an attorney for the Downers Grove, Ill.-based Alliance of American Insurers, argued that New York's highest court erroneously turned to definitions "that were beyond the policy."

"This exclusion is not ambiguous at all. It is very clear that paint or solvent fumes fall within the definition of pollutants in the policy," Mr. Watts told National Underwriter, adding that such decisions would "force the insurance industry to go back to the drawing board to come up with a much-tighter language."

Mr. Watts also noted that the impact of this decision could reach far beyond the Empire State. "This could have an impact on other states. It is possible or even likely that this court decision could be brought up in cases in other states."