California Appellate Court Applies MacKinnon–For The First Time–To A Property Insurance Dispute, And Limits The Pollution Exclusion To Environmental Pollution
October, 2011
Introduction
The California Supreme Court held back in 2003 that the standard pollution exclusion in a comprehensive general liability policy applied only to events "commonly regarded as environmental pollution" and not "ordinary acts of negligence involving harmful substances." MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635 (2003). Based on this distinction, the Court held that the ordinary but negligent application of pesticides around an apartment building did not constitute an act of pollution.
Following MacKinnon, the issue became whether the Court's limitation of liability pollution exclusions to environmental pollution applied to first-party property pollution exclusions.
A California Court of Appeal addressed this issue for the first time in Villa Los Alamos Homeowners Ass'n v. State Farm Gen. Ins. Co., 198 Cal. App. 4th 522, 2011 WL 3586475 (Cal. App. 1 Dist. 2011). The appellate court held that the MacKinnon distinction between environmental pollution and ordinary acts of negligence involving harmful substances governs the interpretation of a pollution exclusion in a first-party property insurance policy. The appellate court also held that asbestos was a "pollutant" within the meaning of, and excluded from coverage by, the first-party pollution exclusion.
Facts
The Villa Los Alamos Homeowners Association ("Association") hired Cal Coast Construction ("Cal Coast") to remove the acoustical ceilings and stairways of a three story, 18-unit condominium building. The Association was aware that the acoustical ceilings contained asbestos material.
During the course of its work, Cal Coast disturbed the asbestos contained in the acoustical ceilings. As a result, asbestos fibers were released into the air, the common area hallways and stairwells, individual condominium units within the building, and outside of the building.
The Bay Area Air Quality Management District ("District") cited and removed Cal Coast from the project. The District also ordered the Association to perform a comprehensive abatement of the building.
The Association incurred $650,000 in asbestos abatement costs, and submitted a claim for those costs to State Farm under a policy that provided both property and liability coverage. The liability coverage portion of the policy was not at issue.
The property coverage portion of the policy consisted of an "open peril" form (i.e., analogous to an "all-risk" policy) which provided coverage "for accidental direct physical loss" caused by an insured loss to buildings and personal property, unless specifically excluded by the policy. The property coverage form included an exclusion that eliminated coverage for "any loss caused by one or more of the items below: . . . 1. the presence, release, discharge or dispersal of pollutants, meaning any solid, liquid, gaseous or thermal irritant or contaminant, including vapor, soot, fumes, acids, alkalis, chemicals and waste . . . ."
Analysis
The Association alleged that MacKinnon, a liability coverage case, applied to its first-party claim, and that under that authority, the pollution exclusion in the State Farm policy did not eliminate coverage for the single, negligent, and localized asbestos release at its building. State Farm countered that MacKinnon's restriction of the pollution exclusion to traditional environmental pollution had no application to losses arising under a first-party property policy.
The appellate court acknowledged the existence of analytical differences between first-party property and third-party liability policies, but held that "the general principles announced in MacKinnon . . . also pertain in the context of a coverage dispute over first party property insurance." Thus, the appellate court agreed with the Association that the pollution exclusion of a first-party policy, like the pollution exclusion of a liability policy, applies only to environmental pollution and not ordinary acts of negligence involving harmful substances.
The appellate court was evidently swayed by the fact that the pollution exclusion in the property coverage portion of the policy was identical in all material respects to the pollution exclusion in the liability coverage portion of the policy. According to the appellate court, a reasonable insured purchasing one policy containing both kinds of coverage, each with a pollution exclusion identical in all material respects, would not expect that the words in the two exclusions would be interpreted differently, and with different legal outcomes, depending on where they appeared in the policy.
The appellate court also held that under California law asbestos is a "pollutant" within the meaning of the exclusion, and addressed whether the contamination of the building constituted environmental pollution or merely negligent handling of harmful substances.
The Association alleged that the single, unintentional, localized asbestos release was a mere ordinary act of negligence and not environmental pollution under MacKinnon. The Association further alleged that a layperson would not regard the release of asbestos as environmental "dispersal" within the meaning of the exclusion.
The appellate court rejected the Association's argument that the asbestos release was a mere ordinary act of negligence. According to the appellate court, the release of the asbestos constituted environmental pollution because asbestos removal is stringently regulated under various statutes and regulations, entails highly technical protocols, imposes strict licensing requirements of contractors who engage in asbestos related work, and calls for heavy penalties for protocol and license violations. The appellate court distinguished MacKinnon on the grounds that a homeowner may purchase and apply pesticides in a residential setting to kill insects, but a homeowner could not, on his or her own, remove an acoustical ceiling containing asbestos without violating a myriad of laws.
The appellate court also rejected the Association's argument that the release of asbestos in the building did not constitute an environmental "dispersal" subject to the exclusion. According to the appellate court, a reasonable insured would understand that the scraping of the acoustical ceiling freed asbestos fibers from containment and allowed them to spread throughout the building corridors, stairwells, residential units, HVAC system, and exterior grounds.
The appellate court further rejected the Association's argument that a one-time release of asbestos was not environmental pollution within the meaning of the exclusion. According to the appellate court, the number of releases is immaterial to the determination of what constitutes environmental pollution. A one-time event may constitute environmental pollution and trigger the pollution exclusion.
Learning Point: We have long suspected that California courts would, at some point in the future, extend MacKinnon to first-party property pollution exclusions. Hence, the holding in Villa Los Alamos Homeowners Ass'n comes as no surprise.
The basic determination of what falls within a first-party policy exclusion will now be driven by the distinction between "events commonly regarded as environmental pollution" and "ordinary acts of negligence involving harmful substances." As MacKinnon acknowledged, and Villa Los Alamos Homeowners Ass'n reiterated, these terms are "not paragons of precision, and further clarification may be required."
The court in Villa Los Alamos Homeowners Ass'n delineated certain factors to assist with the analysis, but there is no bright-line rule to distinguish between environmental pollution and ordinary acts of negligence involving harmful substances.
Going forward, we expect future disputes to arise over what constitutes ordinary acts of negligence involving harmful substances. The question will be whether the facts of a particular claim are akin to the pesticides scenario which was not excluded from coverage in MacKinnon, or the asbestos scenario in Villa Los Alamos Homeowners Ass'n which was excluded from coverage. Interesting questions may also arise as a result of the appellate court's somewhat counter-intuitive holding that excluded "environmental" "pollution" can evidently occur within the physical confines of an apartment building. The holding suggests the possibility that the longer-term effect of Villa Los Alamos Homeowners Ass'n may be to limit the scope of MacKinnon to chemicals and substances which are readily available to the public.
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