By Barry Zalma, Attorney and Consultant
The Colorado Court of Appeal was called upon to determine whether an "absolute pollution" exclusion (APE) applied to a suit for bodily injuries exposed to raw sewage. Plaintiffs, Shadi Figuli, Joshua Figuli, and Jean Chu, appealed the district court's summary judgment in favor of defendant, State Farm Insurance Companies, concluding that raw sewage was a pollutant excluded from coverage by State Farm policies' absolute pollution exclusion in Shadi Figuli, Joshua Figuli, and Jean Chu v. State Farm Mutual Fire & Casualty, D/B/A State Farm Insurance, 12 COA 53 (Colo.App. 03/29/2012).
In 2004, the Figulis became ill while living in a rental property owned by Chu. The property was covered by a rental dwelling policy with State Farm, and Chu also had a personal liability umbrella policy.
After testing on the property revealed the presence of toxic mold and raw sewage, the Figulis filed suit against Chu for their injuries. Specifically, the Figulis alleged Chu "did not disclose to [them] (at any time) that the property had, in the past, been contaminated by raw sewage and/or other hazardous materials, and had not been properly remediated before it was re-rented." They further claimed that Chu "failed to disclose and/or concealed other serious problems with the property, including several water leaks" which resulted in toxic mold.
Chu advised State Farm of the Figulis' claims and requested State Farm defend and indemnify her. State Farm denied Chu's claim, citing three separate coverage exclusions in the policies. First, both the rental and umbrella policies included an endorsement excluding coverage for fungus, including mold.
Second, the umbrella policy excluded coverage "for any loss caused by [the insured's] business pursuits or arising out of business property." Third, the exclusion at issue here, the absolute pollution exclusion (APE) included in the rental policy, stated in pertinent part:
1. Coverage L - Business Liability and Coverage M - Premises Medical Payments do not apply to:
i. bodily injury or property damages arising out of the actual, alleged or threatened discharge, dispersal, spill, release or escape of pollutants:
(1) at or from premises owned, rented or occupied by the named insured;
As used in this exclusion: "pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. "waste" includes materials to be recycled, reconditioned or reclaimed.
Based upon this exclusion, State Farm concluded the Figulis' claimed injuries from "raw sewage and/or other hazardous materials" were injuries arising from the "discharge, dispersal, spill, release or escape of pollutants" and, therefore, were not covered by the policies.
Chu and the Figulis agreed to arbitrate their dispute. At the completion of arbitration, the Figulis were awarded $130,000 plus costs and interest, for a total of $178,500, confirmed by order of the district court. Plaintiffs then filed the current action against State Farm alleging breach of contract based upon the denial of coverage. The district court granted summary judgment in favor of State Farm.
An insurance policy is a contract, the interpretation of which is a legal matter that appellate courts review de novo (as if it was first presented to the appellate court).
The Absolute Pollution Exclusion
Plaintiffs asked the court to determine whether water and sewage, which overflowed from a residential toilet or sewer, and the bacteria and parasites that it carried, were "pollutants" for the purposes of Ms. Chu's insurance coverage, and the standard pollution exclusion, contained in her policies.
The Court of Appeal concluded the APE was unambiguous when applied to raw sewage and therefore State Farm properly denied Chu's claim.
In contract interpretation courts of appeal begin by giving words used their plain and ordinary meaning unless the intent of the parties, as expressed in the contract, indicates that an alternative interpretation is intended. In Colorado, the plain language of the APE is not limited solely to environmental or industrial contexts.
Finding that the APE was unambiguous when applied to raw sewage, the court of appeal relied on the policy definition of "pollutants" as "any solid, liquid, gaseous or thermal irritant or contaminant, including . . . waste." "Waste" was defined in the policy as including, but not limited to, materials to be recycled, reconditioned, or reclaimed. Referring to basic dictionary definitions, the Court of Appeal noted that the plain meaning of the term "sewage" was waste, and waste was clearly included in the definition of "pollutants" under the policy.
The Court of Appeal noted that raw sewage was considered a pollutant under both the Clean Water Act and the Colorado Water Quality Control Act. Additionally, the definition of "waste" included both "excrement" and "sewage." A pollutant must also be an irritant or contaminant. These were the essential characteristics of a pollutant under the policy. The policy didnot define "irritant" or "contaminant", yet the sewage that backed-up was a contaminant and the tenant's bodily injury arose from its discharge, dispersal, spill, release, or escape of the sewage.
Raw sewage, therefore, constituted a pollutant under the APE and the movement of the raw sewage which overflowed from a residential toilet or sewer constituted a discharge, dispersal, spill, release or escape of pollutants within the meaning of the APE.
Based upon this conclusion the district court correctly held that State Farm had no duty to defend or indemnify Chu and properly granted summary judgment in State Farm's favor.
Also note our report on bat guano as a pollutant, at Holy Bat Trap, Batman! - Guano & Insurance, where the Supreme Court of Wisconsin held: "[t]hat bat guano falls unambiguously within the policy's definition of "pollutants" was not enough to resolve the dispute. The court needed to determine whether the Hirschhorns' alleged loss resulted from the "discharge, release, escape, seepage, migration or dispersal" of bat guano under the plain terms of the policy's pollution exclusion clause." Since human excrement is no less toxic than bad guano, which the plaintiffs in the Wisconsin case stipulated was true, there should be no surprise by this decision.
Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," "Murder and Insurance Fraud Don't Mix" and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.
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