Standard Pollution Exclusion Provision Limited to Traditional Environmental Pollution Claims in New Jersey
April, 2005
The Supreme Court of New Jersey recently held that a standard pollution exclusion clause in a commercial general liability insurance policy was limited to traditional environmental pollution claims, and therefore did not apply to fumes emanating from floor coatings and sealants in a shopping center. Nav-Its, Inc. v. Selective Ins. Co. of America, 183 N.J. 110 (2005).
Facts
Plaintiff Nav-Its is a construction contractor specializing in tenant “fit out” work, including the application of finishes such as paint, sealants and coatings. Defendant Selective issued a property insurance policy to Nav-Its which provided commercial general liability (“CGL”) coverage from May 7, 1998, through May 7, 1999. The policy contained a standard pollution exclusion endorsement which precluded coverage for loss or damage arising out of a “pollution hazard.” Nav-Its at 115. The policy defined “Pollution Hazard” to mean “an actual exposure or threat of exposure to the corrosive, toxic or other harmful properties of any ‘pollutants’ arising out of the discharge, dispersal, seepage, migration, release or escape of such ‘pollutants.’” 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.
In April 1998, Nav-Its contracted with the Parkway Shopping Center in Allentown, Pennsylvania to perform painting, coating and floor sealant work. A subcontractor of Nav-Its performed the work from July 27, 1998 through August 5, 1998. During that time, Dr. Roy Scalia, a physician with office space in the Center, was exposed to fumes that were released during the floor coating and sealant work. As a result of that exposure, Dr. Scalia suffered from nausea, vomiting, lightheadedness, loss of equilibrium and headaches.
In December 2000, Dr. Scalia filed a complaint against Nav-Its and several others for personal injuries arising out of his exposure to fumes at his office during the period the floor coating and sealant work was performed. Nav-Its forwarded the complaint to Selective, which refused to provide coverage to Nav-Its based on the pollution exclusion in its policy. Selective claimed that the pollution exclusion clause by its plain terms was not limited to traditional environmental claims and therefore excluded coverage for the injuries sustained from the chemicals in this case. After Dr. Scalia’s case against Nav-Its was resolved through binding arbitration, Nav-Its sought a declaratory judgment that Selective was obligated to defend and indemnify Nav-Its for the personal injury action.
Early in the litigation, the trial court partially granted Nav-Its’ summary judgment motion, finding that Selective had an obligation to defend and indemnify Nav-Its under its policy. The trial court held that “the pollution exclusion in the policy applied only to traditional environmental pollution claims,” and that Nav-Its had a “reasonable expectation that liability arising out of normal painting operations would be covered under the policy.” Id. at 114. On appeal, the New Jersey Appellate Division reversed, finding that “the pollution exclusion clauses are not necessarily limited to the clean up of traditional environmental damage.” Id. The Supreme Court of New Jersey granted each party’s petition for certification and reversed the Appellate Division, holding that “the pollution exclusion clause as presently approved should be limited to traditional environmental pollution.”
Analysis
In making its decision, the New Jersey Supreme Court relied on the regulatory history and case law surrounding the pollution exclusion clause. The Court first looked to its decision in Morton Int'l, Inc. v. General Accident Ins. Co. of America, 134 N.J. 1 (1993). Morton evaluated claims of coverage for environmental pollution from a mercury processing plant under a CGL insurance policy during the period of 1961 to 1976. The policy at issue in Morton contained a standard pollution-exclusion clause, which provided that the policy did not apply “to bodily injury or property damage arising out of the discharge, dispersal, release or escape” of pollutants “into or upon land, the atmosphere or any water course or body of water.” Morton at 11. However, the exclusion in Morton did not apply “if such discharge, dispersal, release or escape” of pollutants was “sudden and accidental.” Id. This standard exclusion was known as the “sudden and accidental” pollution exclusion and was used in standard CGL policies from 1973 to 1986. The Morton court refused to give effect to the literal meaning of the “sudden and accidental” pollution exclusion, which would drastically reduce coverage previously available for property damage caused by pollution. The Morton court chastised the insurance industry, claiming that it misled insurance regulators who approved the clause into believing that the “overriding purpose of the clause was to deny coverage to intentional polluters.” Morton at 121. The court held that the insurance industry must “bear the burden of its omission” to disclose the intended effect of the clause “by providing coverage at a level consistent with its representation to regulatory authorities.” Id.
The Nav-Its Court then examined the regulatory history surrounding the absolute pollution exclusion, which was incorporated into the standard form CGL in 1986 and replaced the “sudden and accidental” pollution exclusion. Insurance regulators were hesitant to approve the absolute pollution exclusion clause because they feared that the exclusion would be too broad and would encompass non-environmental liabilities. The Nav-Its Court found that in order to allay the fears of regulators, the insurance industry represented that the new exclusion was “designed to serve the twin purposes of eliminating coverage for gradual environmental degradation and government-mandated cleanup such as Superfund response cost reimbursement,” not to “preclude coverage for liability for a policyholder’s products and completed operations.” Nav-Its at 122.
After reviewing the development of the pollution exclusion clause, the Nav-Its Court held that the “history of the pollution-exclusion clause in its various forms demonstrates that its purpose was to have a broad exclusion for traditional environmentally related damages.” Id. at 123. The Court rejected Selective’s interpretation of the pollution exclusion as “overly broad, unfair, and contrary to the objectively reasonable expectations of the New Jersey and other state regulatory authorities that were presented with an opportunity to disapprove the clause.” Id. As in Morton, the Court chastised the insurance industry for seeking approval of a pollution exclusion clause for the alleged reason of avoiding catastrophic environmental pollution claims, and then using that same clause to “exclude coverage for claims that a reasonable policyholder would believe were covered by the policy.” Id. at 124. As a warning to the insurance industry, the Court stated that it would review each new industry-wide policy provision that excluded coverage for risks that affect the public interest, such as the risk of damage from pollution, environmental or otherwise, to determine if the intended effects of the provision were “fully and unambiguously” disclosed to regulators and the public. Id. at 127.
Learning Point:
New Jersey courts will narrowly construe any standard policy provision that excludes coverage for risks that affect the public interest. In doing so, the courts will look to the representations made by the insurance industry to the regulatory authorities that approved the clause. Even if the language of an exclusionary clause is unambiguous, New Jersey courts will not give effect to the literal meaning of the clause if it does not meet the reasonable expectations of the regulators that approved the clause. •
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