Pollution Exclusion

The insureds brought an action against the insurer for a declaratory judgment that the homeowners policy covered damage caused by the spraying of a pesticide in the house. This case is Whitney v. Vermont Mutual Insurance Company, 2015 WL 8540432.

The Whitneys had their home sprayed with a pesticide (chlorpyrifos) in order to eradicate bed bugs. The house was sprayed corner to corner, wall to wall. When the Whitneys returned to the house after the spraying, the walls and surfaces of the home were visibly dripping with the pesticide.

Concerned by the amount of chemicals sprayed within their home, the Whitneys had the Department of Agriculture inspect the house. The testing revealed high levels of the pesticide and the Whitneys were advised to leave the house. They have been unable to inhabit the house for over two years.

The Whitneys filed a claim with their insurer, Vermont Mutual, claiming a physical loss to their property. The insurer denied coverage, citing the pollution exclusion. The insureds filed a lawsuit and the trial court ruled in favor of the insureds, ruling that the pollution exclusion was ambiguous and applicable only to traditional environmental disasters. The insurer appealed.

The Supreme Court of Vermont noted that the material facts giving rise to the loss were not in dispute. The issue was whether the pollution exclusion in the policy applied to exclude damage to the property. The court found that courts around the country have construed the pollution exclusion in one of two ways: either the pollution exclusion is ambiguous and applies only to traditional environmental pollution; or, the exclusionary language is plain and all injuries that occur from pollutants are excluded. The court sided with the latter viewpoint.

The court said that the pollution exclusion should not be presumed to be ambiguous, but should be construed in the same way as any other insurance policy provision. In this instance, the pollution exclusion excludes from coverage any loss caused by the discharge, dispersal, seepage, release, or escape of pollutants, and the dousing of the Whitney house clearly constituted a discharge, dispersal, release, or escape of the chemical, Moreover, the undisputed fact is that chlorpyrifos is toxic to humans and its use violates EPA regulations and federal and state laws.

The ruling of the trial court was reversed and the insurer was correct in denying coverage based on the pollution exclusion.

Editor's Note: As the Vermont Supreme Court noted, there are two main judicial interpretations of the pollution exclusion. In this case, the court cited one of its previous rulings on the pollution exclusion and also cited cases from Alabama, Florida, and Indiana to arrive at its decision that the pollution exclusion as written in the policy was not ambiguous and was clearly applicable to the facts of this claim.

Faulty Workmanship and Other General Liability Exclusions

The insurer filed a declaratory judgment action against the insured to determine whether the general liability policy covered losses allegedly resulting from the insured's faulty installation of the heating, ventilation, and air conditioning (HVAC) system. This case is North Star Mutual Insurance Company v. Rose, 27 F.Supp.3d 1250 (2014).

The Quigleys hired Rose to install an HVAC unit at their home. The work was performed from January 2008 until October 2008. Beginning in late 2009, the Quigleys began experiencing heating and cooling problems, along with other deficiencies with the unit. The Quigleys sued Rose for breach of warranty and breach of contract. Rose turned to lawsuit over to its insurer.

North Star filed this declaratory judgment action and contended that the contractual liability exclusion in the general liability policy operated to deny coverage for property damage resulting from a breach of contract. The insurer also argued that the impaired property exclusion applied, as well as the exclusion pertaining to damages claimed from the withdrawal or recall from the market of the insured's work or property, and finally, the faulty workmanship exclusions.

The United States District Court for the Eastern District of Oklahoma decided that, under Oklahoma law, a breach of implied warranty claim was excluded from coverage under the commercial general liability policy; the policy stated in pertinent part that it did not apply to property damage for which the insured was obligated to pay damages by reason of the assumption of liability in a contract or agreement. As for the impaired property exclusion, the court said the exclusion did not apply to the claim of the insured where the insurer conceded that there was a potential for damage to property surrounding the HVAC installation due to removing sub-flooring to reach the ducts in order to rectify the situation. Moreover, the product/work recall exclusion did not apply to the claim because replacing a single HVAC unit was not a recall. The court then addressed the faulty workmanship exclusion and decided that the incident involved in this instance would not fit within the products-completed operations hazard as interpreted by the Tenth Circuit.

The court held that the claims brought by the homeowners against the insured alleging problems and deficiencies with the HVAC unit were excluded from coverage under the general liability policy. The motion for summary judgment by the insurer was granted.

Editor's Note: The U.S. District Court for the Eastern District of Oklahoma discusses several exclusions in the general liability policy and finds that the policy will not apply to the claims made against the insured.

More important to the general dispute over whether faulty workmanship can constitute an occurrence that triggers coverage under a commercial general liability policy, the court noted that faulty workmanship can constitute an occurrence that triggers coverage under a commercial general liability policy if: the property damage was not caused by purposeful neglect or knowingly poor workmanship; and, the damage as to non-defective portions of the contractor's or subcontractor's work or to third-party property.

Additional Insured and the Duty to Defend

The general contractor brought an action against the subcontractor's liability insurer for a declaratory judgment that it owed a duty to defend the general contractor as an additional insured. This case is West Hills Development Company v. Chartis Claims, 273 Or.App. 155 (2015).

West Hills Development was the general contractor for the construction of the Arbor Terrace townhomes. West Hills hired L&T Enterprises as a subcontractor to install porch columns. L&T was insured under a general liability policy issued by Oregon Automobile Insurance Company, and West Hills was listed as an additional insured. The additional insured endorsement read that West Hills was an additional insured with respect to liability arising out of L&T's ongoing operations performed for West Hills.

The Arbor Terrace Homeowners Association filed a complaint against West Hills alleging a number of defects that caused extensive weather-related damages. The association identified specific deficiencies in the construction of the townhomes due to faulty workmanship, improper or defective materials, noncompliance with applicable building codes and industry standards. West Hills tendered the defense to Oregon Auto, asserting that West Hills was an additional insured under the L&T policy. The insurer refused to defend West Hills because the insurer read the complaint to mean that the damages had occurred after L&T had completed its work, not during L&T's ongoing operations as the endorsement required.

While the homeowners association action was being litigated, West Hills filed a lawsuit against Oregon Auto, seeking a declaration that it had breached its contractual obligation to defend West Hills. The circuit court entered summary judgment in favor of West Hills and the insurer appealed.

The Court of Appeals of Oregon noted that the determination of the duty to defend is confined to the complaint and the policy, but the rule has an exception. In this instance, the court declined to apply a rigid application of the four-corners rule, and said that to trigger the duty to defend, a complaint needs only to make allegations with which a claim covered by the policy may be proven. The original complaint alleged that West Hills negligently supervised its contractors. It alleged that defects resulted from negligent supervision and thus, said the court, alleged facts that, if proved, could subject West Hills to liability for work by a subcontractor.

The court continued that the more serious question was whether the complaint alleged damage for which L&T was responsible. The original complaint did allege that there were defects in the building envelope and other components of each building that have resulted in water intrusion and property damage to, among other things, siding, trims, sheathing, framing, and interior finishes. Taken together, said the court, the allegations fairly apprised Oregon Auto that the columns constructed by L&T could become a basis for the liability of West Hills. So, unless a policy limitation ruled out coverage, the complaint posed a duty to defend West Hills.

The insurer argued that its duty to defend did not arise because the coverage is limited to coverage for ongoing operations. The court noted that the involved parties disputed whether the ongoing operations phrase required damages to have occurred while L&T was still on the job. The insurer said it did, and West Hills countered that the phrase “ongoing operations” means simply operations. In the view of West Hills, coverage is provided for liability that arises from or because of the subcontractor's operations that were at the time ongoing, even if the damage occurs after the subcontractor's work is done.

The court agreed with West Hills in reading the allegations to permit proof at trial that the possibility that damages occurred before one or more of the homeowners purchased units and before L&T had finished its work. The complaint does not rule out the possibility that damage occurred before L&T finished. The lawsuit by the association dis not allege when the property damage occurred, but it does indicate that when the homeowners bought their units, the alleged deficiencies existed and had already started to cause property damage. Given the ambiguity of that statement, the court concluded that the ambiguity had to be resolved against the insurer and so, the duty to defend did exist.

The court affirmed the circuit court ruling and held that the insurer owed a duty to defend.

Editor's Note: The Court of Appeals of Oregon finds the phrase “ongoing operations” to be ambiguous. Any ambiguity in the complaint with respect to whether allegations could be covered is resolved by the court in favor of the insured when the court determines whether the liability insurer owed a duty to defend. In this instance, the original complaint made allegations that could be covered by the policy and so, the insurer owed a duty to defend the additional insured.

Claims-Made Policy

Alaska Interstate Construction filed a lawsuit against Crum & Forster as a result of the insurer's refusal to provide liability insurance coverage. This case is Alaska Interstate Construction v. Crum & Forster Specialty Insurance Company, 2015 WL 7253673.

Alaska Interstate is a company providing engineering and construction-related services throughout Alaska. It was approached by Restoration Science and Engineering to provide thermal soil remediation services. The project was completed on September 19, 2010, but a dispute arose. Alaska Interstate was sued and it tendered the claim to Crum & Forster. The insurer disclaimed any liability, indicating that the claim was not reported during the policy period, and because certain wrongful acts were committed prior to the retroactive coverage, and because Alaska Interstate knew of and failed to report the wrongful acts prior to the renewal of the policy.

The United States District Court, Alaska, noted that the parties are in agreement that coverage under the policy would exist only if a claim is made and the claim is reported during the policy period. Moreover, there is no dispute over the following facts: there was an initial policy beginning December 1, 2011; this policy was expanded to extend until May 1, 2013; coverage was subsequently renewed with a new policy period of May 1, 2013 until May 1, 2014; and that the policy was then renewed until May 1, 2015. The court said that the disputed issue is the meaning of the term “policy period”.

The insured argued that a reasonable interpretation of the policy would be that the policy period begins with the inception date and lasts until the final period of the last policy where there has been consecutive renewals. The insurer countered that the policy period is the specific dates of each policy and that each policy is distinct even where a subsequent policy is identical to its predecessor.

The court said that for claims-made policies, giving notice within the policy period is what actually creates coverage in the first instance; that is, a claim-made policy only protects the insured for claims made against it and reported to the insurer during the policy period. In this case, the court said, Alaska Interstate appears to have taken a gamble by choosing to not report the claim against it to the insurer before the policy was renewed. Had the insured reported the claim soon after it was made on January 10, 2013, or any time before the explicit policy end date of May 1, 2013, there would be no question of coverage. However, Alaska Interstate undeniably made the decision to delay reporting the claim during the first policy period and benefitted from having no claims reported when it negotiated the terms for the renewal policy. Allowing the policy period to span beyond the initial policy to include every subsequent renewal is neither equitable nor a reasonable interpretation, according to the court.

Accordingly, the court found that the policy period for claims to be both made and reported refers distinctively to December 1, 2011 to May 1, 2013, and from May 1, 2013 to May 1, 2014, and is therefore, not enlarged with each renewal. Because of the insured's failure to meet the policy requirement that the claim be both made and reported during the policy period, the court held that there is no possibility of coverage and the insurer has no duty to defend or indemnify the insured in the underlying lawsuit. The insurer's motion for summary judgment was granted.

Editor's Note: The U.S. District Court, Alaska, analyzed the claims-made policy and the clear language required that a claim against the insured be made and reported during the policy language. The insured failed to do this and so, there was no coverage for the claim.