Contamination Clause May Not Be Used To Deny Coverage For September 11, 2001 Pollution Damage Claim
April, 2007
by Mark S. Wolf and Erik K. Lindemann
The United States Court of Appeals for the Second Circuit recently held that a contamination clause in a property insurance policy may not be used to deny coverage for pollution damage caused by the collapse of the towers at the World Trade Center on September 11, 2001. Parks Real Estate, et. al. v. St. Paul Fire and Marine Ins. Co., et. al., 472 F.3d 33 (2006). In Parks, the Second Circuit found the term “contamination” ambiguous in the context of the property insurance policy in question. Id.
In Parks, Plaintiffs owned a building located at 90-100 John Street in downtown Manhattan (“John Street building”). Id. at 37. The John Street building is located a few short blocks from the World Trade Center. On January 15, 2001, St. Paul issued a property policy to Plaintiffs that provided potential coverage “…against risks of direct physical loss or damage…” subject to certain exclusions. Id. The policy contained a contamination exclusion that stated, in pertinent part: “[St. Paul] will not cover any loss or damage caused by or made worse by any kind of contamination” (“Contamination Exclusion”). Id.
Plaintiffs claimed that as a result of the collapse of the World Trade Center on September 11, 2001, certain airborne particulate matter (i.e., the pulverized components and contents of the fallen towers) caused damage to both the interior and exterior of the John Street building -- including damage to the façade, elevators and mechanical and electrical systems. Id.
On September 18, 2001, Plaintiffs filed a claim for the alleged property damage in question. Parks, 472 F.3d at 38. St. Paul subsequently provided Plaintiffs with payment for undisputed damages in the amount of $1,915,914.00. Id. Nevertheless, Plaintiffs claimed that the $1,915,914.00 payment did not cover the full scope of damage that had been sustained at the John Street building. Id. Accordingly, they filed suit in the United States District Court for the Southern District of New York. Id. St. Paul subsequently moved for summary judgment on the grounds that coverage for the disputed damages in question was precluded, pursuant to the operation of the Contamination Exclusion contained in the policy. Id. Plaintiffs contended that three factors served to bar entry of summary judgment in favor of St. Paul: (1) that the Contamination Exclusion was ambiguous; (2) that the damage sustained at the John Street building could not reasonably be deemed to be “contamination”; and (3) that the efficient (proximate) cause of the damage was the collapse of the World Trade Center (a covered event under the policy) rather than the introduction of the airborne particulate to the John Street building. Id. The trial court rejected all of Plaintiffs’ arguments and granted St. Paul’s motion. Parks Real Estate, et. a.l v. St. Paul Fire and Marine Ins. Co., et. al., 2005 U.S. Dist. LEXIS 21872.
The District Court found that two basic definitions of the term “contamination” (as it is utilized in exclusionary clauses) had been established. First, “contamination” has been defined as “. . . to render unfit for use by the introduction of unwholesome or undesirable elements.” Parks, 2005 U.S. Dist. LEXIS at *8 (citing J.L. French Automotive Castings, Inc. v. Factory Mutual Ins. Co., 2003 U.S. Dist. LEXIS 13060 at *6-7 (N.D.Ill. July 23, 2003)). The District Court also relied upon Hi-G, Inc. v. St. Paul Fire and Marine Ins. Co., 391 F.2d 924, 925 (1st Cir. 1968) (wherein the First Circuit Court of Appeals defined “contamination” as the introduction of a foreign substance that injures the usefulness of [a given] object). Moreover, the District Court went on to state that the term “contamination” has also been defined as “…a condition of impurity resulting from the mixture or contact with a foreign substance.” 2005 U.S. Dist. LEXIS 21872 at *8-9 (citing American Casualty Co. of Reading, PA v. Myrick, 304 F.2d 179, 183 (5th Cir. 1962)).
The District Court held that the disputed damages allegedly sustained by Plaintiffs clearly fell within the scope of both of the definitions of the term “contamination” as are described above. Parks, 2005 U.S. Dist. LEXIS 21872 at *8-9. The District Court went on to conclude that the efficient cause of Plaintiffs’ loss was contamination. Id. at *14. The court stated that pursuant to well-established New York law, “[o]nly the most direct and obvious [efficient] cause should be looked to for purposes of [analyzing the applicability] of [an] exclusionary clause.” Id. at *14 (citing Kula v. State Farm Fire and Casualty Co., 212 A.D.2d 16, 628 N.Y.S.2d 988, 991 (N.Y. App. Div. 1995); Album Realty Corp. v. American Home Assur. Co., 80 N.Y.2d 1008, 592 N.Y.S.2d 657, 607 N.E.2d 804 (N.Y. 1992)). Guided by that principle, the court flatly rejected Plaintiffs’ argument that the efficient cause of the loss was the collapse of the World Trade Center. Id. at *14-15. The court articulated its view that Plaintiffs’ contention inherently served to improperly attenuate the efficient cause analysis itself. Specifically, the District Court concluded that once the inquiry extends beyond the introduction of the airborne particulate to the John Street building, the issue of the efficient cause of the loss essentially becomes an open-ended question. Id. at *19-20. The court noted that pursuant to the (flawed) reasoning espoused by Plaintiffs, the cause of the loss could variously be deemed to be (amongst other things) the prevailing winds on the morning of September 11, 2001, the fires that occurred in the towers of the World Trade Center, the explosions of the fuel tanks within the hijacked airplanes and/or the actual hijacking of the airplanes themselves. Parks, 2005 U.S. Dist. LEXIS 21872 at *20. Accordingly, the District Court held that pursuant to New York law, the efficient (proximate) cause of Plaintiffs’ loss was the contamination that was precipitated by the introduction of the airborne particulate to the John Street building. Id.
The Second Circuit vacated the District Court’s ruling regarding the definition of “contamination.” Parks, 472 F.3d at 36. The Second Circuit recognized that some courts, including Hi-G, Inc., supra and American Cas. Co. of Reading, Pa., supra, have used the same definitions as the District Court in applying contamination exclusions. Id. at 43-44. However, it stated that other courts have eschewed those definitions, opting to define the term “contamination” contextually. Id. at 44. Accordingly, the Second Circuit, following the Ninth and Seventh Circuits’ decisions in Enron Oil Trading & Transp. Co. v. Walbrook Ins. Co., 132 F.3d 526 (9th Cir. 1997) and Pipefitters Wellfare Educ. Fund v. Westchester Fire Ins. Co., 976 F.2d 1037 (7th Cir. 1992), defined “contamination” contextually and found the term ambiguous. Parks, 472 F.3d at 45.
In Enron, the Ninth Circuit, construing the terms of a “pollution exclusion” in a commercial general liability policy, stated that an insurance policy clause is ambiguous “when different persons looking at the clause in light of its purpose cannot agree upon its meaning.” Enron, 132 F.3d at 530. The court explained that the term contamination is an environmental term of art and applies only to discharges of pollutants into the environment. Id. Rejecting the insurers’ “common-sense” approach to defining “contamination,” the court noted that said approach would render an interpretation that was “virtually boundless” and would reach “far beyond the reasonable expectations of the insured.” Id. Ultimately, the Ninth Circuit concluded that the use of the words “‘seepage, pollution and contamination,’ together with the specific exclusion of ‘the cost of removing, nullifying or cleaning-up seeping polluting or contaminating substances,’ sends an unmistakable message to the reasonable reader that the exclusion deals with environmental-type harms.” Id. The Ninth Circuit thus opted for a contextual definition of “contamination.”
Similarly, in Pipefitters, the Seventh Circuit examined an insurance policy’s pollution exclusion clause that defined pollutant as “any . . . thermal irritant or contaminant.” Pipefitters, 976 F.2d at 1043. The court held that the terms “‘irritant’ and ‘contaminant’ when viewed in isolation, are virtually boundless, for there is virtually no substance or chemical in existence that would not irritate or damage some person or property.” Id. (quoting Westchester Fire Ins. Co. v. City of Pittsburgh, 768 F.Supp. 1463, 1470 (D. Kan. 1991)).
Following Enron and Pipefitters, the Second Circuit found the term “contamination” ambiguous in the context of the St. Paul Policy because “the common definition of the term that the District Court employed - the ‘introduction of a foreign substance that injures the usefulness of the object’ or ‘a condition of impurity resulting from the mixture or contact with a foreign substance’ - would allow the contamination exclusion in the Policy to be applied in a limitless variety of situations.” Parks, 472 F.3d at 47-48. Further, the Second Circuit stated that under an all-risk policy, almost any unintended damage to a building or its contents could be considered contamination within these broad definitions of the term. “Under such a construction, the all-risk policy would insure against virtually nothing.” Id. at 48.
Finally, the Second Circuit upheld the District Court’s holding with regard to the efficient proximate cause of the loss. Id. at 40. “We agree with the District Court to the extent that it found that ‘the actual contact of the airborne particulate matter with the Property,’ was the efficient cause of damage to the insured Building. The cloud of particulate matter was capable of producing damage only upon contact with the insured Property.” Id. at 42. Ultimately, the Second Circuit concluded that coverage will depend upon whether the damage was “contamination” within the meaning of the Policy. Id. at 42-43.
Learning Point: As a result of the Second Circuit’s decision in Parks Real Estate, insurers should pay particular attention to the definition of “contamination” in all-risk insurance policies. “Contamination” should be narrowly defined in the policy. If “contamination” is not narrowly defined in the policy, or if it is not defined in the policy at all, then courts will find the term ambiguous.
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