Asbestos Abatement Of Buildings In Continuous Use Does Not Constitute Physical Loss Or Damage Under A First-Party Property Policy
December, 2002
Citing the principle that for purposes of a claim made against a property policy, physical loss or damage due to asbestos occurs only when the quantity and condition of the asbestos make the property unusable, the Third Circuit affirms a decision in favor of a large group of insurers in Port Authority of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002).
Facts
The Port Authority owns numerous facilities in New York and New Jersey that incorporated asbestos products in their construction. The buildings included the World Trade Center and the Newark International Airport. Alleging asbestos contamination, the insureds brought suit in New Jersey to recover the cost of asbestos abatement. Damages (estimated by some at $600 million) allegedly resulted from the presence of asbestos, the threat of release of asbestos, and the actual release of asbestos fibers from 1971 through 1991.
The manuscript policies contained an insuring clause providing that all risks of physical loss or damage occurring during the policy period are insured against, except as otherwise excluded. Plaintiffs contended that some properties contained “friable” asbestos which could easily crumble during vibrations or in response to hand pressure. Routine building maintenance operations purportedly caused release of asbestos fibers. However, air samples taken in each location did not reveal the presence of asbestos fibers exceeding EPA standards. Relying on these tests, the Port Authority continually assured its employees, tenants and prospective tenants that the buildings were safe, and within regulatory limits. Asbestos levels inside the buildings were comparable to background levels on the streets. All of plaintiffs’ structures continued in normal use.
The trial court dismissed some of the insurers on notice of loss and suit limitation grounds. The remaining insurers were dismissed because the insureds failed to prove they suffered a “physical loss or damage.”
Analysis
Preliminarily, the court noted that although the properties in question are in both New York and New Jersey, no choice of law issue arises because the law of the two states does not differ on the decisive issues. Thus, for example, plaintiffs have the burden to prove that their structures were physically damaged in order to trigger coverage.
The court discussed at length the differences between first-party property and third-party liability policies, explaining that the policies have different goals, interests, scopes of coverage, triggers, and degrees to which public interest is impacted. Following this discussion, the court stated that it would consider only first-party case law and rejected plaintiffs’ efforts to analogize the claim to case law involving third-party liability policies. The court observed that an “all-risk policy” is somewhat of a misnomer in that it is not an “every risk” policy, and it generally contains fourteen lettered exclusions. A loss which does not properly fall within the coverage clause cannot be regarded as covered thereby merely because it is not within any of the specific exceptions, said the court.
Finding no New York or New Jersey cases addressing asbestos in the first-party context, the court reviewed a number of first-party opinions from other states to predict what New Jersey law would be on this issue. The court also cited New Jersey law for the proposition that a manuscript policy negotiated and drafted by insureds possessing bargaining power equal to that of the insurer does not constitute a contract of adhesion. Thus, one should not interpret such a policy in favor of the insured, and should not write for the insured a better policy than the one purchased. In the court’s view, physical damage to a building by sources unnoticeable to the naked eye must meet a higher threshold than that applicable to damage demonstrably altering a building such as that caused by fire, smoke or water. It mentioned the frequently cited case of Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968), which found physical loss or damage where gasoline fumes seeped into a building’s structure making it unsafe and causing authorities to order the building closed. The court noted that a first-party policy is not a maintenance contract, and does not respond to repairs caused by the inevitable deterioration of materials used in the construction of a building.
Following its review of the first-party case law and insurance policy construction principles, the court held that physical loss or damage occurs only if actual release of asbestos fibers has resulted in contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable, or there exists imminent threat of the release of a quantity of asbestos fibers that would cause such loss of utility. Mere presence or the general threat of future damage from that presence is not sufficient, and will not be enough to survive a summary judgment motion brought by the insurer.
Learning Points:
The court’s discussion of differences between first-party and third-party policies and the case law construing each, constitutes a primer many courts would be wise to read. The opinion indicates that loss of use occurs for purposes of deciding whether physical loss or damage is present only when non-utility is measured by a reasonable and realistic standard. This means the subjective judgment of the insured as to when a building loses its utility (or suffers physical loss or damage) is not the correct measure. Hypothetically, the insured’s decision to unilaterally close its own building may be relevant, but it is certainly not controlling. Lastly, remediation of a building in continuous use is outside the property policy.
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