New York Courts Continue to Deem Industry Standard Pollution Exclusion Provisions Inapplicable to Losses Occurring as a Result of the Existence of Lead Paint in Commercial Structures
December, 2004
by Mark S. Wolf
The United States District Court for the Southern District of New York recently held that a commonly utilized pollution exclusion does not operate to preclude coverage for damage caused by a release of dust that was precipitated by the removal of lead based paint from various portions of a midtown Manhattan apartment building. Herald Square Loft Corp. v. Merrimack Mutual Fire Insurance Co., 2004 WL 2580189 (S.D.N.Y.).
Plaintiff Herald Square Loft Corp. (“Herald Square”) owned and operated the ten story building in question. Defendant Merrimack Mutual Fire Insurance Company (“Merrimack”) issued a property insurance policy to Herald Square for the period from April 5, 2002 to April 5, 2003. The policy included, among other things, a clause that potentially provided for certain commercial property coverage. However, the scope of that potential coverage was limited by several exclusions that were contained in a special form endorsement to the policy. The exclusion at issue in Herald Square Loft Corp. precluded coverage for loss or damage arising out of the “[d]ischarge, dispersal, seepage, migration, release or escape of ‘pollutants’ unless the discharge, seepage, migration, release or escape is itself caused by any of the ‘specified causes of loss’.” 2004 WL 2580189 at *1. The exclusion also provided that “if the discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ results in a ‘specified cause of loss,’ we will pay for the loss or damage caused by that ‘specified cause of loss’.” Id.
The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Id. The policy also provided that “Waste includes materials to be recycled, reconditioned or reclaimed.” Id. The “specified causes of loss” referenced in the exceptions to the exclusion included: “[f]ire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; [and] water damage.” Id.
During the term of the policy (but prior to the submission of the claim that triggered the action), Merrimack issued a notice of conditional renewal to Herald Square. The notice advised Herald Square that Merrimack intended to incorporate what it referred to as a “reduction of coverage” into the contemplated successor policy. Significantly, the so called “reduction of coverage” consisted of a lead paint exclusion form. 2004 WL 2580189 at *2.
In September, 2002, Herald Square entered into a contract with Jade Scaffolding Corp. (“Jade”) to remove what turned out to be lead based paint from the exterior wood window frames and sashes at the front of the building, and from the fire escapes at the back of the building. For approximately six (6) months, Jade utilized high speed grinders to remove the paint. However, in March, 2003, Jade was instructed to discontinue its work when testing revealed that some of the children who lived in the building were exhibiting elevated levels of lead in their blood. Further investigation led to the conclusion that the grinding conducted by Jade had caused lead paint dust to enter into the building through the windows that were being refurbished. As a further result of the grinding activity, lead laden dust also fell to the ground outside of the building, which was subsequently tracked into the building from the sidewalk in front of the main entrance.
As a result of these events, Herald Square submitted a claim to Merrimack for expenses incurred in connection with: (1) the remediation of the alleged lead paint dust contamination; (2) the replacement of window air conditioning units that had allegedly been contaminated by the dust; and (3) the relocation of certain residents of the building pending the completion of the remediation. Merrimack denied coverage on the basis that the alleged loss sustained by Herald Square fell within the pollution exclusion contained in the policy. Herald Square subsequently filed a declaratory judgment action in the U.S. District Court for the Southern District of New York. Through that action, Herald Square sought a determination that the exclusion in question was inapplicable to its alleged loss. The parties stipulated to a summary trial that was to be decided pursuant to certain agreed upon facts and documentary evidence. The parties cross moved for summary judgment on the stipulated record. The court, applying New York law, held that the pollution exclusion contained in the Merrimack policy did not operate to preclude coverage for Herald Square’s alleged loss.
In its opinion, the court methodically articulated the basis for its decision. First, the court noted that the operative language of the pollution exclusion was rendered ambiguous by virtue of the fact that it was overly broad. Specifically, the court held that the term “pollutant” -- as defined in the Merrimack policy -- was inherently overbroad in light of the fact that essentially all substances or chemicals in existence can conceivably be viewed as “irritants” or “contaminants.” In order to illustrate its reasoning, the court referenced a decision wherein the Seventh Circuit Court of Appeals surmised that a literal reading of the language quoted directly above would operate to preclude coverage in scenarios where an individual slips and falls on a bottle of spilled Drano or where he or she sustains injuries as a result of being exposed to chlorine in a swimming pool. See Pipefitters Welfare Education Fund v. Westchester Fire Ins. Co., 976 F.2d 1037, 1043 (7th Cir. 1992); Herald Square, 2004 WL 2580189 at *3. In light of the broad spectrum of potential interpretations of the language at issue, the Herald Square court concluded that the term “pollutants” -- as defined by the policy and utilized in the exclusion in question -- was indisputably ambiguous. Moreover, the Herald Square court also found that the words “discharge, dispersal, seepage, migration, release or escape” (as used in the pollution exclusion) are “terms of art in environmental law, generally used to describe the improper disposal or containment of hazardous waste.” 2004 WL 2580189 at *4 (quoting Sphere Drake Ins. Co. v. Y.L. Realty Co., 990 F.Supp. 240, 243 (S.D.N.Y. 1997)). Accordingly, the court concluded that the terms quoted directly above were overly broad in that they could be interpreted pursuant to either their perceived legal meanings or their literal (and inherently expansive) meanings (i.e., in a manner that could potentially operate to bar coverage for the hypothetical Drano incident discussed above). Based upon that conclusion, the court held that such language was, by definition, ambiguous. Accordingly, the court construed the perceived ambiguities in question against Merrimack and consequently held that the exclusion at issue pertained to large scale environmental pollution rather than to relatively discrete damage caused by routine repair work at an apartment building.
The court’s holding was also predicated upon its conclusion that a reasonable policyholder would not have expected that the pollution exclusion contained in the Merrimack policy was intended to bar coverage for damages resulting from routine repairs. Simply put, the court determined that in light of both the common sense meaning of the policy language in question and the nature of the alleged damage at the building, Herald Square had a reasonable expectation of coverage. Accordingly, in order for Merrimack to meet its burden of demonstrating that the pollution exclusion operated to preclude coverage, the “exclusion must have been ‘stated in clear and unmistakable language, [and have been] subject to no other reasonable interpretation’.” 2004 WL 2580189 at *4 (quoting Continental Ins. Co. v. Rapid American Corp., 80 N.Y.2d 640, 652, 609 N.E.2d 506, 593 N.Y.S.2d 966 (1993)). Moreover, the court made it clear that the applicable interpretation of the exclusion was to be formulated pursuant to the reasonable expectations of a business person. Utilizing that perspective, the court found that the exclusion in the Merrimack policy could justifiably be interpreted as applying to large scale environmental pollution rather than to the dispersal of lead paint dust within certain limited areas of an apartment building. Thus, the court held that Herald Square simply could not reasonably have been expected to anticipate that coverage for the alleged loss would be precluded pursuant to the operation of the pollution exclusion contained in the Merrimack policy.
The Herald Square court also relied upon prior New York case law in rendering its holding. The court noted that the pollution exclusion language contained in the Merrimack policy was “industry standard” and has been periodically interpreted by New York courts for several years. 2004 WL 2580189 at * 5. Furthermore, the court pointed out that other New York courts have questioned, and even rejected, the applicability of the industry standard pollution exclusion to losses involving various forms of lead paint contamination. 2004 WL 2580189 at * 5-6 (citing, e.g., Sphere Drake Ins. Co., supra.). Indeed, the Herald Square court found it to be highly significant that despite the existence of authorities such as Sphere Drake Ins. Co. “the insurance industry has left the relevant language in pollution exclusion clauses unchanged….” 2004 WL 2580189 at * 5-6. According to the Herald Square court, such inaction on the part of insurers issuing policies in New York “leaves but one conclusion: pollution exclusion clauses are inapplicable to losses resulting from lead paint unless such losses are specifically excluded.” Id.
Finally, in rendering its holding, the court also relied upon the fact that the notice of conditional renewal issued by Merrimack to Herald Square advised the latter that the inclusion of a lead paint exclusion form in the contemplated successor policy constituted a “reduction of coverage.” Id. at *7. The court pointedly stated that because Merrimack characterized the incorporation of the lead paint exclusion form as a “reduction in coverage,” it either recognized the existence of ambiguity in the pollution exclusion or simply considered damages caused by or resulting from lead paint to be covered under the policy. The court found that under either interpretation of Merrimack’s perceived motive for the inclusion of the lead paint exclusion, its stated position that the pollution exclusion precluded coverage for Herald Square’s claim was simply “not tenable.” Id.
Learning Point:
New York courts continue to demonstrate a strong propensity toward interpreting pollution exclusion provisions in a markedly narrow manner. Because the courts tend to view the language presently utilized in industry standard pollution exclusion provisions as inherently ambiguous, those provisions are likely to be deemed primarily -- if not exclusively -- applicable to losses involving large scale environmental contamination. Accordingly, until the operative language is infused with a higher degree of specificity, it is likely that New York courts will continue to hold that industry standard pollution exclusion clauses do not operate to preclude coverage for losses that occur as a result of the existence of lead paint in residential and commercial structures. •
Back to New York CM Report of Recent Decisions (2004v4) 2004 Volume 4 Table of Contents
