The rationale for the revisions is discussed in this article. Also discussed is the rationale for the introduction of another blanket additional insured endorsement to cover those persons or entities that are not in privity with the named insured, but that also want to be additional insureds. Court cases are also noted here.

The Pollution Exclusion and the Duty to Defend

The insured appeals from a grant of summary judgment in favor of the insurer pertaining to the duty to defend. This case is Evanston Insurance Company v. Lapolla Industries, 2015 WL 9460301.

Lapolla Industries manufactures spray polyurethane foam (SPF) insulation. Evanston Insurance Company issued three insurance policies to Lapolla, two general liability policies and one excess liability policy. These policies carried a pollution exclusion declaring that there is no coverage for damages for bodily injury or property damage that would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of pollutants at any time.

A lawsuit was filed against Lapolla after it had installed insulation in a home. The owners of the home complained shortly after the insulation was installed about odors and they complained about respiratory distress. These symptoms forced the owners to move out and not return. Lapolla sought coverage from Evanston but the insurer filed a lawsuit seeking a declaration that it had no duty to defend or indemnify because of the pollution exclusion. The district court granted the insurer summary judgment and this appeal followed.

The United States Court of Appeals, Fifth Circuit, reviewed the pollution exclusion and said the key here is whether the allegations fall within the pollution exclusion's plain terms, that is, whether the allegations about what caused the injuries arose out of the “actual, alleged, or threatened discharge, dispersal, release, or escape of pollutants.”

The court noted that the original complaint against Lapolla alleged that vapors from the SPF insulation caused bodily injuries and property damage. According to the complaint, Lapolla failed to seal off completely areas in which vapors could be transported from the areas under construction to the other areas of the house in which the home owners lived and slept. Under a plain reading of the pollution exclusion, the court found that all of the injuries were alleged to have been caused by pollution as defined in the policies.

Lapolla argued that the allegations about the presence of the product in the home did not actually trigger the pollution exclusion. Lapolla tried to distinguish between damage from exposure to vapors resulting from the installation process and the subsequent exposure for hours to the newly-applied SPF insulation. Lapolla contended that there was harm from physical contact or the mere presence of the SPF rather than harm from the release of vapors.

The court answered that not only is Lapolla's reading factually unsupported by the complaint, but also case law supports the conclusion that the actual damages arose from the release and migration of the vapors, rather than from the presence of the insulation itself. The court concluded that all of the alleged injuries arose from pollution and so, the exclusion applies and there is no exception to counter that application.

The ruling of the district court was affirmed and Evanston owed no duty to defend Lapolla.

Editor's Note: The U.S. Fifth Circuit Court of Appeals rules that the absolute pollution exclusion unambiguously applied to the complaint against the insured and so, the insurer has no duty to defend in this instance.

Another Duty to Defend Case and the Pollution Exclusion

The insurer brought an action against the insured seeking a declaration that it had no duty to defend or indemnify the insured in an underlying action based on strict liability and negligence claims. This case is Evanston Insurance Company v. Haven South Beach, 2015 WL 9459979.

The Kaufmans attended an event at a botanical garden. Haven Beach South was a food and beverage vendor at the event and served Mrs. Kaufman an alcoholic beverage containing liquid nitrogen. Haven used the liquid nitrogen to create a smoky effect. Mrs. Kaufman suffered injuries and the Kaufmans then filed a lawsuit against Haven, asserting claims for strict liability and negligence.

Haven had a general liability policy and a liquor liability policy issued by Evanston Insurance Company. The general liability policy contained an absolute pollution exclusion and a designated premises/project limitation clause. The liquor liability policy carried an exclusion for injury arising out of the named insured's product. Evanston filed a declaratory judgment action seeking a declaration, based on the exclusions in the liability policies, that it had no duty to defend or indemnify Haven in the underlying action.

The United States District Court for the Southern District of Florida noted that Florida law applies to the dispute. The court then reviewed the pollution exclusion and the arguments put forth by Evanston and Haven. Evanston argued that the pollution exclusion applied because Haven discharged or dispensed and/or released liquid nitrogen into Kaufman's beverage. The Kaufmans countered that the exclusion is ambiguous and that even if it is not, the exclusion does not apply because liquid nitrogen is not a pollutant and the intentional placement of the liquid nitrogen in the beverage does not constitute discharging, dispensing, and/or releasing a pollutant.

The court said that Florida courts have routinely held that the absolute pollution exclusion is unambiguous. The court also said that the liquid nitrogen is an irritant, which is included in the definition of a pollutant in the policy. Moreover, OSHA considers liquid nitrogen to be hazardous. Accordingly, the court ruled that liquid nitrogen is a pollutant within the definition in the policy. As for the Kaufmans' claim that the liquid nitrogen was not discharged or dispensed, the court said that the standard dictionary defines discharge as pouring forth fluid, and the allegations against Haven clearly support a finding that Haven poured forth the liquid nitrogen (a pollutant) into the beverage.

The court ruled that the pollution exclusion applied and bars coverage for the Kaufman claim. As for the other exclusions put forth by the insurer, the court did not fully address the exclusions since the applicability of the pollution exclusion meant that Evanston had no duty to defend or indemnify Haven in the underlying action.

Editor's Note: Evanston Insurance Company wins another insurance coverage dispute based on the absolute pollution exclusion. The U.S. District Court finds that the liquid nitrogen used by the insured is a pollutant and it was dispensed into the Kaufman drink and this caused injury to Kaufman.

Owned Property Exclusion

A ski resort operator brought an action against the insurer to recover under a commercial general liability policy for costs it incurred in abating hydrocarbon contamination of its property. This case is Taos Ski Valley v. Nova Casualty Company, 2015 WL 9597908.

Taos Ski Valley used an oil and water separator in its business and the separator allegedly released hydrocarbons onto the insured's premises. An environmental contractor determined that due to subsurface conditions, the contamination of Taos Ski Valley's premises measurably threatened the underlying groundwater and the nearby Rio Hondo. So, Taos Ski Valley, in coordination with the New Mexico Environment Department, voluntarily and successfully abated the contamination, preventing the pollution of the groundwater and the river. The insured spent over a million dollars in abating the contamination.

The insured had four successive general liability policies issued by Nova Casualty and notified the insurer of its actions. The insurer denied coverage, citing the owned/occupied property exclusion in the liability policies. Taos Ski Valley then filed this lawsuit.

The United States District Court, New Mexico, said that the plain meaning of the owned property exclusion precludes coverage because the cleanup expenses for restoring the damaged property were made for the reason of preventing damage to another's property. This exclusionary language was in accordance with New Mexico law and it supports the denial of coverage.

The insured argued that the enforcement of the owned property exclusion would encourage insured polluters to delay remediation efforts. The court rejected this argument since it ignored another exclusion, that is, the exclusion for property damage expected or intended from the standpoint of the insured. Had the insured ignored the findings of its pollution contractor and stood by as known pollution inevitably migrated into the groundwater and the river, the insured would have invited application of the expected or intended exclusion.

The court ruled that the owned property exclusion supports the denial of coverage in this instance and the insured's complaint failed to assert a claim upon which relief can be granted. The action was dismissed.

Editor's Note: The U.S. District Court, New Mexico rules that the insured's claim falls within the scope of the owned property exclusion. The insured voluntarily abated the contamination on its own property, thereby sparing future damage to groundwater and a nearby river. The insurer denied any coverage for the cleanup expenses due to the owned property exclusion and this stance was upheld by the court. No good deed goes unpunished.

The Business Exclusion and the Renters Policy

The insured filed a lawsuit seeking coverage under the renters policy and the personal umbrella policy for an underlying lawsuit. This case is Griggs v. Allstate Insurance Company, 2013 WL 840175.

HDMC Group and Advanced Travel Systems are hotel room wholesalers that purchase rooms in bulk and re-sell them at a profit. Harrington is president of the business. Griggs started work for HDMC in October 2008 and became CFO in June 2009. Griggs sometimes used his personal credit card to make payments while buying blocks of hotel rooms and the company would then reimburse him. In October 2010, the relationship between Harrington and Griggs began to deteriorate and in November, Griggs was fired.

After the termination, Griggs began to challenge several of his personal credit card charges as unauthorized. In response to these challenges, HDMC and Advanced Travel Systems filed a lawsuit against Griggs, alleging that after Griggs was reimbursed for certain credit card charges made on their behalf, he either wrongfully disputed the authorized charges or failed to make them at all. Griggs tendered the lawsuit to his insurer, Allstate. The insurer denied coverage and this lawsuit commenced.

The United States District Court, Oregon, noted that the insurer's duty defend turns on two questions: whether any initial grant of coverage on either the renters policy or the personal umbrella issued to Griggs by Allstate purports to cover the allegations of the underlying complaint; and whether any exclusion applies.

Allstate argued that any grant of coverage under the terms of the policy did not reach the allegations of the underlying complaint because no bank or credit card company has sued Griggs for enforcement of payment. Instead, HDMC and Advanced have sued Griggs for alleged misconduct. As a result, Allstate contends that Griggs failed to show that the allegations of the underlying complaint fall within the grant of coverage. The court reviewed the wording in the policy and the underlying complaint and said that the seventh claim for relief seeks an injunction to stop Griggs from disputing any credit card charges related to payments made to HDMC vendors and so, the policy phrase “enforcement of payment” in the insuring agreement, construed liberally, means that seventh claim does fall within the renters policy first grant of coverage.

The court then reviewed the exclusions. The policy contained an exclusion for loss arising from any business of an insured person. Business is defined in the policy as any full or part-time activity of any kind engaged in for economic gain. Griggs acknowledged that he made some personal credit card charges on behalf of HDMC and Advanced Travel but these were not for economic gains for two reasons: HDMC and Advanced were to reimburse Griggs for the exact amount of the credit card charges and so, there was no economic gain; and, any reward points gained by Griggs for using his credit cards should not be considered economic gain since the IRS did not assert that an individual has understated his federal tax liability by reason of the receipt or personal use of such reward points that are attributable to business travel. The court did not buy this argument.

The court said that the underlying complaint does allege losses arising from business, that is, losses arising from activities engaged in for economic gain. The court noted that the underlying complaint alleges that Griggs agreed to make personal credit card charges on behalf of his employer in exchange for reward points. The court decided that the purpose of this agreement was obviously economic gain. Moreover, whether or not the transactions involved economic gains, the court said that they were engaged in as part of a business that existed to make money. And the losses arose out of that business. Therefore, the business exclusion applies and precludes coverage for all losses alleged in the underlying complaint.

The court ruled that Allstate had no duty to defend and granted summary judgment to the insurer.

Editor's Note: The U.S. District Court rules that the activities of the insured fall within the business exclusion of the renters policy and so, the insurer had no duty to defend.

Bad Faith Discussion

The insurer presents a motion to dismiss. This case is Soldrich v. State Farm Fire and Casualty Company, 2015 WL 7568442.

The insured owned three residential properties in Pennsylvania and covered these properties under policies written by State Farm. The policies include coverage for the risk of direct physical loss, including collapse. Two of the properties suffered catastrophic losses due to collapse. The municipal authorities condemned all three properties for foundation collapse and potential danger until required repairs were made. The insured submitted a claim to the insurer for the damage to the properties.

The insurer denied all coverage and the insured filed a lawsuit. The insurer filed a motion to dismiss.

The United States District Court for the Eastern District of Pennsylvania noted that the insured alleged that State Farm breached the implied covenant of good faith and fair dealing, which includes the duties to honestly, promptly, and fairly investigate facts of coverage, evaluate damages, adjust the loss, communicate and cooperate with the insured, and promptly pay the full amount of covered loss. The court said that Pennsylvania courts have defined bad faith as any frivolous or unfounded refusal to pay proceeds of a policy, and moreover, for purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.

Thus, said the court, to recover for a bad faith claim, the insured must show by clear and convincing evidence that the insurer did not have a reasonable basis for denying benefits under the policy and that the insurer knew or recklessly disregarded its lack of reasonable basis in denying the claim. The court noted that other courts have repeatedly dismissed bad faith claims where the complaint set forth only bare-bones conclusory allegations that did not provide a factual basis for an award of bad faith damages.

In this instance the court found that the insured did not set forth any facts to support his allegations. The court thus could not make a plausible inference that the insurer knew or recklessly disregarded its lack of a reasonable basis for denying the claim. Accordingly, the court dismissed the bad faith claim without prejudice.

Editor's Note: This case is presented mainly for the analysis of bad faith claims put forth by the U.S. District Court, relying on Pennsylvania law.