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Insurance Law

Environmental Coverage Summary: 2013 – Cases Interpreting the "Absolute" Pollution Exclusion

By Ellen J. Zabinski and Adam H. Fleischer

Even a small sampling of 2013's leading insurance coverage decisions in the environmental realm clearly demonstrates the stark differences from state to state as to: whether injury from contaminants is really considered "pollution"; whether total and absolute pollution exclusions are just "kind of total and absolute"; how insurers spread the risk among consecutively triggered policies, and; what type of pollution a reasonable policyholder would expect to be insured. The answers to these questions, and more, are explored below in a synopsis of the leading environmental coverage cases of 2013, and a quick foreshadowing of what to look for in 2014.

I. Cases Interpreting The "Absolute" Pollution Exclusion

In 2013, courts continued to interpret the "absolute" - or "total" - pollution exclusion, often with inconsistent results. Two types of claims resulted in contradictory rulings under the absolute pollution exclusion: carbon monoxide exposure and Chinese drywall.

The differing approaches and outcomes for these claims serve as a cautionary tale as to how unpredictable a landscape insureds and insurers face when dealing with "non-traditional" - but increasingly common - pollution or contamination claims.

A. Carbon Monoxide Is Not A Pollutant When It Comes From A Car, But It Is A Pollutant When It Comes From A Boiler

In Am. Nat. Prop. & Cas. Co. v. Wyatt, 400 S.W.3d 417 (Mo. App. 2013) [enhanced version available to subscribers], the Missouri Court of Appeals concluded that carbon monoxide is not a "pollutant" for purposes of the total pollution exclusion.

In Wyatt, the insured left a car running in her garage, resulting in her home filling with carbon monoxide, ultimately killing the insured and her granddaughter, and injuring her granddaughter's friend. The granddaughter's father filed a wrongful death suit against the insured and insurer, who issued a "Missouri Tenant's Homeowner's Policy." The injured friend's father also filed a negligence claim against the insured and insurer. In response, the insurer filed a declaratory judgment action seeking a declaration that its policy excluded coverage for such claims arising from injury caused by a "pollutant".

The court rejected the insurer's argument that the pollution exclusion applied. The court reasoned that a reasonable insured would not believe that carbon monoxide is a pollutant when it is present in typical residential-use settings. The court believed that a reasonable insured would understand the exclusion to apply only to injury caused by an irritant or contaminant in "an industrial or environmental setting." Wyatt, 400 S.W.3d at 426.

By contrast, the Minnesota Supreme Court held in Midwest Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628 (Minn. 2013) [enhanced version available to subscribers] that an insured's "reasonable expectations" did not apply, and that a plain interpretation of the pollution exclusion meant that carbon monoxide released in a home from a negligently-installed boiler constitutes a "pollutant" under the absolute pollution exclusion, and there is no coverage for such a claim.

In Wolters, the insured, a general contractor, connected a boiler to a liquid propane line in a home even though the boiler specifications were that it should operate solely on natural gas. The home's residents suffered carbon monoxide exposure and sued the insured. The trial court ruled that the pollution exclusion did not apply because no "traditional environmental pollution" occurred. However, the appellate court reversed, holding that Minnesota courts take a "non-technical, plain-meaning approach" in interpreting the pollution exclusion and, under this approach, carbon monoxide would be considered a "pollutant," thereby excluding the claim under the pollution exclusion.

On appeal, the Supreme Court of Minnesota affirmed the appellate court's decision and held that under a "plain-meaning" reading of the pollution exclusion, carbon monoxide is a "pollutant" and that the exclusion applies to the indoor release of carbon monoxide. Wolters, 831 N.W. 2d at 638. The court specifically refused to base its decision on whether the underlying injuries resulted from "traditional environmental pollution," stating that this approach would yield inconsistent results in determining when (or whether) the absolute pollution exclusion applies. The court further concluded that the "reasonable expectations" test did not apply here because the policy plainly designated the pollution exclusion as an exclusion and was not hidden in another part of the policy, i.e., within a definition. Id. at 638-39. See also Church Mut. Ins. Co. v. Clay Center Christian Church, No. 8:11CV304, [enhanced version available to subscribers], (D. Neb. Feb. 25, 2013) (absolute pollution exclusion unambiguous and extends beyond traditional environmental damage under Nebraska law; carbon monoxide is therefore a "pollutant" and the absolute pollution exclusion applies to bodily injury claim, arising from exposure to carbon monoxide through home heating system.)

In summary, the two recent cases emphasize the point that even the absolute pollution exclusion is not very "absolute" in states where the application of the exclusion is measured by the reasonable expectations of an insured. See also United Fire & Cas. Co. v. Titan Contractors Service, Inc., No. 4:10-CV-2076 CAS, [enhanced version available to subscribers], (E.D. Mo. Jan 28, 2013) (pollution exclusion did not bar coverage for exposure to a chemical concrete sealant under Missouri law; reasonable insured would not expect that fumes from sealant constitute the type of "pollution" intended to be excluded.) However, in states that seek a more uniform and straightforward application of the exclusion - such as Minnesota - the absolute pollution exclusion provides a much broader protection to insurers against claims of contamination, injury, nuisance or property damage arising from "pollutants."

B. Chinese Drywall's Noxious "Off-Gassing" Is Usually Excluded "Pollution," Unless Perhaps The Insured Expected Otherwise

In Pro-Build Holdings, Inc. v. Travelers Prop. Cas. Co., No. 10-378 (Colo. Dist. Ct., Boulder Co., Oct. 4, 2013) (Massachusetts law), a Colorado trial judge applying Massachusetts law denied summary judgment to an insurer, refusing to strictly interpret the absolute pollution exclusion and instead found a question of fact as to whether an insured reasonably expected that the gasses emitted from defective Chinese drywall constitute "pollution."

In, Pro-Build Holdings, Pro-Build was the successor-in-interest to the insured, who was named as a defendant in underlying lawsuits for property damage and physical injuries following the installation of defective Chinese drywall in Florida homes built by Pulte Homes, Inc. Pro-Build eventually settled with Pulte Homes and, as the successor to the insured, filed suit against the insured's excess insurer, seeking coverage for the underlying Chinese drywall claims.

In analyzing the absolute pollution exclusion under Massachusetts law, the court noted that Massachusetts law requires a fact-intensive analysis to determine whether a substance, such as the gasses emitted from Chinese drywall, constitute a "pollutant." The court concluded that, whether a substance is a "pollutant" (thereby bringing resulting damages within the pollution exclusion) is not dependent on the substance itself, but rather upon how the substance causes damage or injury and whether a reasonable insured would classify the substance as a "pollutant." In this case, the court held that disputed issues of material fact included whether the Chinese drywall was the "pollutant" or if the "pollutant" was the gas emitted from the drywall (or both), which prevented the court from granting summary judgment in the insurer's favor.

Just six days later, in Prestige Properties, Inc. v. National Builders and Contractors Ins. Co., No. 1:12-CV-205-HSO-RHW, [enhanced version available to subscribers], (S.D. Miss. Oct. 10, 2013), the United States District Court for the Southern District of Mississippi ruled that the "total" pollution exclusion barred coverage for claims arising from the insured's installation of Chinese drywall in a home, thereby relieving an insurer's duty to defend and indemnify.

In Prestige Properties, the insured was a drywall installer who was sued in 2009 by over 2,000 plaintiffs in a Louisiana class action. The homeowners alleged that the drywall was defective because the chemical components broke down and produced sulfide and noxious gases, causing corrosion and damage to personal property. The homeowners also alleged injuries from exposure to this sulfide and noxious gases, including eye irritation, sore throat, nausea, fatigue, shortness of breath, fluid in lungs and neurological harm. The insurer denied coverage, arguing that the total pollution exclusion applied to preclude coverage for injuries resulting from the drywall "off gassing."

In ruling in the insurer's favor, the court found that the sulfide and noxious gases emitted from the defective drywall were the source of damages, and that these were indeed contaminants excluded from coverage. Thus, the court held that the insurer had no duty to defend or indemnify the insured for these claims. Prestige Properties Inc., 2013 WL 552453 at *7. See also Evanston Ins. Co. v. Germano, 514 Fed. App'x. 362 (4th Cir. 2013) [enhanced version available to subscribers] (Virginia law) (sulfuric gases released from Chinese drywall were "pollutants" under insurance policy and pollution exclusion applied); Granite State Ins. Co. v. American Bldg. Materials, Inc., 504 Fed. App'x. 815 (11th Cir. 2013) [enhanced version available to subscribers] (Massachusetts and Florida law) (sulfide gas released from Chinese drywall fell within definition of "pollutant" because it was a "gaseous. . .irritant or contaminant"); Penn. Nat. Mut. Cas. Ins. Co. v. Snead Door, LLC, No. 4:12-CV-3731-VEH, [enhanced version available to subscribers], (N.D. Ala. Feb. 12, 2013) (Chinese drywall claims excluded under pollution exclusion).

There are a few lessons to be learned from the cases above. As demonstrated in Pro-Build, choice of law should not be taken for granted in pollution cases, because what may be deemed a certain case of pollution in one court could be subject to the fact-intensive "reasonable expectations" inquiry in another court. In instances where the "reasonable expectations" doctrine is afoot, insurers may find themselves defending matters they intended not to cover, while simultaneously seeking the protection of a declaratory judgment that the claim is indeed rooted in pollution that is precluded from coverage.

C. Cases In 2013 Addressing Whether Pollution Exclusion Is Limited To Only "Traditional Pollution"

A number of other cases addressed and interpreted the "absolute" or "total" pollution exclusion in 2013, including: Mountain States Mut. Cas. Co. v. Roinestad, 296 P.3d 1020 (Colo. Feb. 25, 2013) [enhanced version available to subscribers], (cooking grease constitutes "contaminant" and is therefore a "pollutant" under absolute pollution exclusion; exclusion clause in policy is in no way limited to "traditional" pollution"); Lapolla Industries, Inc. v. Aspen Specialty Ins. Co., No. CV-12-5910, [enhanced version available to subscribers], (S.D.N.Y. Aug. 29. 2013) (Texas law) (injuries arising out of installation of spray foam insulation excluded under pollution exclusion; Texas courts construe absolute pollution exclusions "clear and unambiguous in their application to exclude coverage"); Farm Family Cas. Co. v. Cumberland Ins. Co., Inc., No. K11C-07-006, [enhanced version available to subscribers], ** 1, 8 (Del. Super. Oct. 2, 2013) (lead paint considered a "pollutant" under total pollution exclusion for personal injuries from lead poisoning; "the plain language of the Policy does not expressly limit the application of the policy's total pollution exclusion to situations involving environmental pollution"); Village of Crestwood v. Ironshore Specialty Ins. Co., 986 N.E.2d 678 (Ill. App. Feb. 22, 2013) [enhanced version available to subscribers] (absolute pollution exclusion applied to water contamination claims; the insured's "knowing contamination of the Crestwood water supply. . .and subsequent distribution of that contaminated combination to the community is a textbook example of 'traditional environmental pollution'"); but see 120 Greenwich Development Associates, LLC v. Admiral Indem. Co., No. 1:08-cv-06491 (S.D.N.Y. Sept. 25, 2013) (underlying bodily injury claims from workers remediating World Trade Center site following September 11 attacks not precluded under pollution exclusion; claims are not environmental pollution, but instead "sound in labor law violations and negligence" and "arguably trigger Admiral's duty to defend").

D. Other Types Of Pollution Exclusions Still Alive In 2013

Not all pollution decisions center on the "total" or "absolute" exclusions. Some policies still present courts with the time-honored question of whether "sudden" means abrupt, or whether "sudden" means unexpected. This issue resides within the exception to many pollution exclusions, which provide that damages arising from pollution are not covered, unless they arise from a "sudden and accidental" discharge.

For example, in Narragansett Electric Co. v. American Home Assur. Co., 921 F. Supp. 2d 166, 184-85 (S.D.N.Y. 2013) (Massachusetts law) [enhanced version available to subscribers], the underlying complaint alleged that residential excavation in 1984 released hazardous chemicals given rise to the claim. The court found that the releases during excavation "adequately and plausibly" alleged a "sudden and accidental" release to come within the exception to pollution exclusion under Massachusetts law, and therefore the exception to the exclusion applied and primary insurer thus had duty to defend. See also Colonial Oil Industries, Inc. v. Indian Harbor Ins. Co., 528 Fed. App'x. 71 (2d Cir. 2013) (New York law)v[enhanced version available to subscribers] (fuel oil seller's claim from contaminated oil in storage tank not within scope of pollution and remedial legal liability policy; coverage limited to "discharge, dispersal, release, seepage migration or escape of pollutants," and pollutants were never released into environment); but see Ross Development Corp. v. PCS Nitrogen Inc., 526 Fed. App'x. 299 (4th Cir. June 6, 2013) [enhanced version available to subscribers] (South Carolina law) (pollution exclusion applied where phosphate fertilizer facility that generated by-products high in lead and arsenic due to the ordinary and routine business operations; in such an instance of routine contamination in the course of operations, the "sudden and accidental" exception to the exclusion did not apply).

Ellen J. Zabinski is a partner of Bates Carey Nicolaides LLP who focuses her practice on insurance coverage matters. She has defended numerous insurers involved in complex insurance coverage litigation pending throughout the country in both state and federal courts. Adam H. Fleischer is a partner of Bates Carey Nicolaides LLP with a national reputation for innovative advocacy in complex insurance and reinsurance coverage issues with respect to the pre-litigation, litigation and appellate stages. Copyright (c) 2013 by Ellen J. Zabinski and Adam H. Fleischer. Responses are welcome.

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