The pollution exclusion is one of the most effective tools insurers use to deny coverage. It is also one of the most litigated. Nearly all jurisdictions have had occasion to analyze the limits of this exclusion and courts are split on its scope and application to claims.
Most recently, the Supreme Court of Nevada had occasion to analyze the limitations of this pervasive insurance exclusion in Century Surety Co. v. Casino West, Inc., 2014 WL 2396085 (Nev. May 29, 2014). In Casino West, four people died from carbon monoxide poisoning while sleeping in a room directly above a pool heater in the Casino West Motel. Casino West sought insurance coverage for the deaths. Century denied the claims based on two provisions in Casino West’s general liability policy: the absolute pollution exclusion and the indoor air quality exclusion. Century brought a declaratory judgment action in the federal district court, which held that the policy exclusions were ambiguous and interpreted them in Casino West’s favor. Thereafter, Century appealed to the Ninth Circuit Court of Appeals, who, in turn, certified the issues to the Supreme Court of Nevada after determining that existing Nevada law did not clearly resolve the issue.
Before engaging in specific analysis, the Supreme Court analyzed the basic insurance law tenants, that if an insurance policy is ambiguous – meaning it creates multiple reasonable expectations of coverage as drafted – it is interpreted in favor of coverage. Additionally, a seemingly clear policy can be rendered ambiguous when applying the policy to the facts that leads to multiple reasonable interpretations.
The Court first examined the absolute pollution exclusion, which excludes coverage for “(1) ‘bodily injury’ or ‘property damage’ arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” The policy defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.” Casino West argued that the absolute pollution exclusion only applies to traditional pollution because the exclusion contains environmental terms of art and, therefore, does not apply to carbon monoxide occurring within the building. Century asserted that the exclusion applies because carbon monoxide constitutes a “pollutant” under the definition of the policy.
The Court noted that, taken at face value, the policy’s definition of a pollutant is broad enough to exclude injury based on virtually anything – including soap, shampoo, rubbing alcohol, etc., to the extent they can be classified as “irritants.” Thus, if no limitations are applicable, the pollution exclusion would preclude coverage from virtually any accident stemming from such items. Such a result would become absurd and contrary to a policyholder’s expectation. The Court noted that the history of the pollution exclusion further supports the conclusion that the exclusion was designed to apply only to outdoor, environmental pollution. The Court held that a reasonable policyholder could construe the absolute pollution exclusion to only apply to traditional environmental pollution and, therefore, the exclusion did not presently apply to the release of carbon monoxide occurring indoors.
The Court next examined the indoor air quality exclusion – an exclusion less frequently litigated than the pollution exclusion. Under the indoor air quality exclusion, Casino West’s insurance policy does not apply to “‘Bodily injury, property damage or personal and advertising injury’ arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating, pathogenic or allergen qualities or characteristics of indoor air regardless of cause . . .”
Casino West argued that the air quality exclusion should be limited to preclude only injuries arising from inherent and continuous air quality issues. Century, however, argued that the exclusion’s language can be read to exclude coverage for any injury caused by any condition of the air, regardless of whether the condition is permanent or temporary.
The Court again noted that, as with the pollution exclusion, the indoor air quality exclusion is drafted so broadly that, if no limitations are applied, its applicability could stretch well beyond a reasonable policyholder’s expectations and lead to absurd results. The Court continued that the indoor air quality provision excludes coverage for certain types of air “qualities or characteristics.” Using dictionary-based definitions, the Court found that “quality” refers to the “peculiar and essential character” or “an inherent feature” of something, while a “characteristic” is a “distinguishing trait, quality, or property.” The Court found that such definitions evoke the idea of a permanently present trait, rather than a temporary condition. Therefore, a policyholder could reasonably expect that the indoor air quality exclusion applies only to continuously present substances that render the air harmful, and that the policy allows recovery for an unexpected condition that temporarily affects the air quality inside a building. Accordingly, the Court held that this exclusion was also inapplicable and, therefore, coverage existed for the policyholder.
While the Supreme Court of Nevada took a limited view of the pollution exclusion and the air quality exclusion, other courts take the opposite view. In fact, the pollution exclusion is one of the most widely used – and effective – exclusions invoked by insurers to effectively disavow coverage. Policyholders need to understand the scope of the exclusion in the jurisdiction where coverage may be determined. Of course, for businesses with substantial risks for these types of claims the insurance industry does market pollution and environmental insurance that would provide coverage when properly structured. In the event a policyholder is denied coverage based on the pollution and/or air quality exclusion in its general liability policy, it is critical to discuss the issue with a broker and coverage attorney to determine the true extent of the exclusions application to the claim.
Frank Cragle is a trial lawyer and a member of Hirschler Fleischer’s Insurance Recovery Team. He handles a variety of commercial business disputes, including insurance recovery and policyholder claims. Frank also devotes a substantial portion of his time to business tort litigation and intellectual property claims. For more information, contact Frank at 804.771.9515 or firstname.lastname@example.org.
Stephanie A. Hood