The Professional Liability and General Liability Insurance article offers answers to these and other questions, as well as court rulings on the general liability versus professional liability coverage issue.

Coal Dust as a Pollutant

Coal company's insurer brought an action seeking a declaration that its policy did not provide coverage for pollution claims brought against its insured. This case is Certain Underwriters at Lloyd's, London v. Abundance Coal, Inc., 352 S.W.3d 594 (2011).

Three plaintiffs sued Abundance alleging that the coal company's operations had tortiously caused dust to enter their real property. When the insured sought coverage from Lloyd's, the insurer denied coverage, citing the pollution exclusion (among other exclusions). The insurer filed a declaratory judgment action and the trial court ruled in favor of the insured, dismissing the complaint. Lloyd's appealed.

The Court of Appeals of Kentucky noted that the policy contained an absolute pollution exclusion. The exclusion prohibited coverage for claims that an injury “in whole or in part is caused by, results from, is attributable to, contributes to, or is aggravated by, the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, escape of, or exposure to pollutants, regardless of the source of the pollutants”. A separate exclusion provided that the insurance shall not apply to liability for the insured for contamination or pollution of land, water, air, or real or personal property for any injuries or damages resulting therefrom.

The insurer argued that coal dust necessarily constitutes pollution and is therefore, excluded from coverage. The insured disagreed. The court said that the absolute pollution exclusion can be ambiguous in its application, given certain factual situations. To determine whether the absolute pollution exclusion was ambiguous when applied to this claim, the court applied several factors.

The first of the factors was whether other judges have held alternative interpretations of the same exclusionary language to be reasonable. The second factor is the basic premise that terms used in insurance contracts should be given their ordinary meaning as persons with the ordinary and usual understanding would construe them. The final factor is considering the practical consequences of the way in which the court applies a provision; namely, consider absurd consequences that would result from a blind application of the literal terms of the pollution exclusion.

Taken as a whole, the court decided that these factors weigh strongly in favor of finding ambiguity in this insurance agreement. However, the court went on, ambiguity in an insurance policy does not justify automatic construction of the term in favor of the insured. The appeals court felt that the trial court should have ascertained whether the injury alleged in the complaint was the type contemplated for coverage in the insurance agreement. To the appeals court, it was not clear from the record what type of injury the original plaintiffs alleged. Had the dust made the plaintiffs' water undrinkable? Had it caused human or animals respiratory problems?

Or, on the other hand, are there mere complaints about physical damage to property or the accumulation of dirt without environmental consequences that would indicate injuries that do not result from pollution. In sum, the court said, the dust at issue here is not a pollutant if it does not cause the irritation, contamination, negative health or environmental effects or other types of harm contemplated in the insurance agreement.

The court concluded that there is a state of facts under which Lloyd's can prevail, at least in part, based on the policy's pollution exclusions. Abundance is not entitled to coverage for injuries suffered as a result of pollution caused by Abundance. However, if the dust and debris that entered the property do not constitute pollution as defined in the insurance policy, Abundance is entitled to coverage for any amounts for which it is liable on those claims. Therefore, the dismissal of the insurer's complaint was improper. To the extent that the court held that all claims based on entry of dust upon the original plaintiffs' property are necessarily covered by the policy, this ruling is vacated.

Editor's Note: There are two points to consider in this decision from the Court of Appeals of Kentucky .

First, the court said that the words “irritants” and “contaminants” as used in the definition of pollutant, when viewed in isolation are virtually boundless, for there is virtually no substance or chemical in existence that would not irritate or damage some person or property. Without some limiting principle, the pollution exclusion clause would extend far beyond its intended scope and lead to some absurd results.

Second, the court ruled that ambiguity in an insurance policy does not justify an automatic construction of the term in favor of the insured. Facts matter and can affect how a court views policy language.

Expenses Incurred Prior to Notifying Insurer of Claim

This case is an insurance contract dispute that involves an attempt by the insured to recover from various insurers those costs and expenses that were incurred prior to notifying the insurers of an underground storage tank leak and subsequent clean up work. This case is The Travelers Insurance Companies v. Maplehurst Farms, Inc., 953 N.E.2d 1153 (2011).

Maplehurst owned and operated a dairy from the 1930s until the late 1990s. Sometime in that period, Maplehurst installed an underground storage tank (UST) on its site. In 1997, Maplehurst sold the site to the Dean Foods Company; Dean eventually conveyed the site to Palmer. Sometime in early 2000, a release of petroleum constituents from the UST was discovered on the site and a demand was made on Maplehurst to remediate the area.

In 2002, Maplehurst submitted a proposed corrective action plan for remediation of the site. Dean had already incurred substantial costs in responding to the release of the petroleum and demanded that Maplehurst reimburse it. Maplehurst then negotiated a settlement and agreed to pay Dean $170,000 to reimburse Dean for the expenses that were incurred. Maplehurst gave notice to its insurers after the fact, in 2003. Travelers told Maplehurst that it reserved the right to assert that Maplehurst had violated the conditions section of the policy issued by Travelers pertaining to the duty to provide timely notice in the event of an occurrence or claim. Moreover, the insurer pointed out, to the extent that Maplehurst made any payments and/or assumed any obligations, Travelers specifically reserved the right to assert that the insured violated the conditions section pertaining to voluntary payments and the assumption of obligations.

Travelers ultimately denied coverage for the underlying claim based on the violation by the insured of the conditions clauses in the policy, the pollution exclusion, and the charge that there had been no occurrence as required and defined by the policy. Maplehurst filed a complaint against the insurer seeking to recover its expenditures and defense and indemnity costs. The trial court granted summary judgment to Maplehurst and the insurer appealed.

Travelers argued that the trial court erred in failing to enforce the voluntary payment provision in the insurance policy. Travelers maintained that Maplehurst was solely responsible for the expenses it incurred without Travelers's consent, including attorney fees and costs and other expenditures that the insured paid under the settlement. The appeals court said that it was apparent that the trial court's order directing Travelers to reimburse Maplehurst for the pre-notice costs was contrary to fundamental case law holding that such costs cannot be recovered. Granted, the court went on, when an insured is late in providing notice of a claim, prejudice to the insurer caused by the late notice is a potentially relevant consideration as to the insurer's post-notice obligations. However, regardless of the relevance that prejudice plays in the context of post-notice obligations, an insured is not entitled to recover pre-notice costs. Simply put, an insurer's duties under the policy do not arise unless and until the insurer has knowledge of the claim.

The appeals court decided that the insured cannot recover costs or expenditures that it incurred prior to giving Travelers notice of the underlying environmental claims. The court said that it is apparent that where an insured enters into a settlement agreement without the insurer's consent in violation of a voluntary payment provision, that obligation cannot be recovered from the insurer and prejudice is irrelevant. Travelers's claims and/or defenses are reasonable in this circumstance and the insured has failed to show that Travelers acted improperly. The ruling of the trial court was reversed.

Editor's Note: Standard liability policies have the conditions clause stating that no insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense without the consent of the insurer. Too often for whatever reasons, an insured violates this condition and then is surprised that the insurer objects to that action. In this instance, the insured violated one of its stated duties in the policy conditions section and the Court of Appeals of Indiana held that this violated the contractual agreement between the insured and the insurer. This meant that the money paid out by the insured prior to notifying the insurer and getting its permission could not be recovered.

Collapse Does Not Require Building to Completely Fall

The insured filed an action against its insurer for breach of contract, with the dispute centering on the question of coverage for loss caused by collapse. This case is Macheca Transport Company v. Philadelphia Indemnity Insurance Company, 649 F.3d 661 (2011).

Macheca operates a refrigerated warehouse and in 2001, an ammonia leak occurred on the sixth floor of the warehouse after a refrigeration pipe ruptured. The pipe ruptured when the ceiling support system failed; the weight of ice that had accumulated on the pipe contributed to the failure. The pipe fell and landed on pallets of product inside the warehouse, and ammonia leaked from the ruptured pipe, causing damage to the floor and walls as well as the products stored inside the warehouse.

Prior to the pipe rupture, Macheca had purchased an all risk insurance commercial property policy from Philadelphia . The insured notified the insurer of the loss and made a claim for coverage. Philadelphia denied coverage and a lawsuit followed. The trial court ruled in favor of the insurer, stating that a collapse required an entire falling or reduction of a structure to a flattened form or rubble. The court said that the refrigeration pipes had not collapsed under this definition and so, the loss was not covered. The insured appealed.

The insured argued that the policy's collapse provisions generally provided coverage for loss caused by or resulting from loss involving collapse of buildings or any part of buildings. Macheca claimed that the falling of the pipe constituted a collapse of part of the building, and in support of this claim, Macheca cited cases from a number of jurisdictions that have held that “collapse” is an ambiguous term. The appeals court said that its task is to determine whether the term “collapse” is ambiguous as used in this particular policy.

The court noted that the collapse provisions in this policy extended coverage to buildings or any part of buildings, and the definition of building covered a plethora of items, including fixtures, appliances, underground pipes and patios. The court said that when collapse is used in this context, the average lay person would not understand the term to be limited in scope. Rather, the average person could reasonably understand, for example, the collapse of an awning to occur without ever envisioning the awning being flattened or reduced to rubble. So, in this context, defining a collapse as any serious impairment of a building or part of a building's structural integrity is clearly more consistent with what the average lay person would reasonably understand the term “collapse” to mean when viewed in conjunction with items included in this policy's definition of buildings.

Therefore, the court decided, the district court erred in adopting a restrictive definition of collapse. The court found that the policy's collapse provisions did not require a structure or building to completely fall, that the refrigerated pipe did indeed collapse, and the provisions covered the damages claimed in this loss.

Editor's Note: The United States Court of Appeals, Eighth Circuit, in its opinion chose to emphasize what it saw as the average lay person's understanding of what a collapse is. The court said that the average man in the street would say a collapse occurs when something falls down; an entire building does not have to fall down into rubble, just something has to fall down. In this instance, the refrigerated pipe fell down and the court saw this as a collapse.

This view was supported, according to the court, by the fact that the pipe was part of the building, and the collapse coverage applied to the building or any part of the building.

Employee Theft or Forgery and Loss of Performance Bonus

The insured sought coverage from its insurer for failure to receive a performance bonus. The claim was brought under the insured's crime policy. This case is Jack Daniels Motors, Inc. v. Universal Underwriters Insurance Company, 2011 WL 346500 (U.S.D.C, New Jersey ). Note that this is a slip copy.

Jack Daniels, an auto dealership and service center, sold Audi autos and there was a customer-based bonus program in place. After a customer buys or services an Audi at the dealership, Audi mails the customer a satisfaction survey, the volume and results of which determine whether the dealership qualifies for a performance bonus. In 2010, Audi informed the insured that in the last quarter it had received 47 service surveys and 22 sales surveys fro the same two e-mail addresses. It was later determined that one of the insured's sales managers and a service advisor had been substituting their own personal e-mail addresses for the customers and had been submitting surveys on the behalf of the customers. These phone surveys created the appearance that Jack Daniels had earned a high enough score to qualify it for a performance bonus from Audi. Upon learning of this scheme, Audi recalculated the customer satisfaction rate and the insured then fell below the level that would have qualified for the bonus.

Jack Daniels then applied to its insurer for the unpaid bonus, contending that the crime policy covered the claim. The insured said that the former employees committed forgery and this was a covered loss under the crime policy. The insurer denied coverage and filed a motion to dismiss for failure to state a claim.

The district court said that the issue before it was a narrow one: does the performance bonus qualify as covered property under the employee theft or forgery coverage provision of the crime policy issued by Universal to Jack Daniels? The court noted that the policy did apply to the loss of money, securities, and other property resulting from theft or forgery committed by an employee.

As defined by the policy, the court found that securities means instruments or contracts representing monetary value to others who are not a party to the instrument or contract, and includes revenue and other stamps in current use, but not money. The insured interpreted this definition by reading the words in isolation, contending that the policy covers lost revenue, which encompasses the lost performance bonus. However, the court decided that the term “revenue” does not stand alone but rather is included within a broader set of similar instruments representing monetary value to others who are not a party to the instrument or contract. The performance based bonus system clearly does not fall within such a definition according to the court.

As for money, the court found that the policy defined money, as currency, coins, bank notes, bullion, travelers checks, registered checks and money orders held for sale to the public. Such money is valued at face value and must be owned by or held by the insured.

The court said that a contractual right to obtain money at some future time is not the same thing as money itself. The insured's lost opportunity to potentially receive a performance bonus does not equate to a loss of currency actually owned or held by the insured.

While the insured had an expectancy interest in the performance bonus, an anticipated profit is not money. Therefore, the court ruled, the insured has not lost any covered property under the policy.

The insurer's motion to dismiss was granted by the court.

Editor's Note: The insured offered a unique interpretation of the theft or forgery coverage in the crime policy. The insured contended that its former employees committed forgery by improperly impersonating customers and submitting online surveys to Audi that were used to qualify it for a performance bonus. However, U.S. District Court chose instead to emphasize the definitions of money and securities as written in the policy, and decided that a potential performance based bonus was not money and was not a security. The loss of the performance bonus just did not equate with a loss of money or securities as required by the crime policy insuring agreement.