Second Circuit Holds Undefined Term "Contamination" Ambiguous Within "Context" Of First-Party Property Insurance Policy
April, 2007
by Kirk M. Zapp
In Parks Real Estate Purchasing Grp. v. St. Paul Fire and Marine Ins. Co., 472 F.3d 33, the Second Circuit held that the contact of airborne particulate matter dispersed from the collapse of the World Trade Center towers on September 11, 2001 with the insured’s building in lower Manhattan was the efficient proximate cause of the alleged damage to the building but that a question of fact exists as to whether the alleged damage was excluded “contamination” in the context of an all-risk property insurance policy.
Facts
After the terrorist attacks of September 11, 2001, the World Trade Center towers collapsed, causing a cloud of particulate matter -- pulverized contents of the fallen towers -- to envelop much of lower Manhattan. The insured claimed that the particulate matter infiltrated the interior and exterior of its building, located a few blocks from the World Trade Center, and damaged the building’s architectural façade, structure, and electrical and mechanical systems.
The insurer moved for summary judgment on a contamination exclusion providing that the all-risk property policy at issue excluded “loss or damage caused by or made worse by any kind of contamination.” Because the policy did not define “contamination,” the insured argued that the exclusion was ambiguous, and that its damages were not caused by contamination, but rather by the collapse of the World Trade Center towers, a covered event.
The district court granted the insurer’s motion, finding that the exclusion was unambiguous and that the particulate matter was a properly excluded contaminant. In so doing, the district court defined “contamination” as “the introduction of a foreign substance that injures the usefulness of the object.” The district court rejected the insured’s argument that the collapse of the World Trade Center towers was the efficient proximate cause of the loss, finding instead that “the actual contact of the airborne particulate matter with the Property” -- i.e., the “contamination” -- was the efficient proximate cause of the loss.
Analysis
The Second Circuit affirmed the district court’s holding that the efficient proximate cause of the insured’s loss was “the actual contact of the airborne particulate matter” with the building. However, it reversed the court’s grant of summary judgment to the insurer, finding a question of fact as to what “contamination” means within the context of this specific policy.
To interpret the undefined word “contamination” in the exclusion, the Second Circuit rejected the definition applied by the district court and the First and Fifth Circuits when addressing contamination exclusions in first-party property insurance policies. The Second Circuit reasoned that this definition was too broad and “would allow the contamination exclusion in the Policy to be applied in a limitless variety of situations.”
Instead, the Second Circuit adopted a “contextual” approach set forth by the Seventh and Ninth Circuits when addressing pollution exclusions in third-party liability insurance policies. Under this approach, the court analyzes the policy term in question within the context of the entire policy. Here, the Second Circuit found that the term “contamination,” when viewed within the context of an all-risk property policy, was ambiguous:
Without doubt, there are many situations where an insured’s property is rendered “impure” or is damaged by “the introduction of a foreign substance.” 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. Accordingly, we find that the term “contamination” is ambiguous in the context of the all-risk policy that we are considering.
The court thus remanded the case and directed the parties to submit evidence regarding what was intended by the use of the term “contamination” in the all-risk policy:
The district court concluded “whether the airborne substance at issue is considered pulverized, abrasive, corrosive, erosive, particulate or contaminant, the effect on the property was contamination.” We are not so sure that the damage caused by the settling of airborne matter into Parks’ Building, machinery, and equipment was intended by the parties to constitute contamination excluded from the policy’s coverage. Because of the virtually boundless array of possible applications of the term contamination in the contamination exclusion provision, we think that the parties should be allowed to introduce evidence of what was intended by the use of this ambiguous term. Opting for the contextual approach, we think that questions of material fact pertaining to the meaning of the term contamination under this all-risk policy remain for resolution by the trier of fact.
Learning Point
Beware of attorneys for insureds who advocate the application of third-party liability insurance case law to define undefined words in first-party property insurance policies. It was not very long ago that a separate panel of the Second Circuit rejected the use of third-party liability insurance case law to construe the meaning of the word “occurrence” in first-party property insurance policies in the Silverstein World Trade Center litigation. World Trade Ctr. Properties, LLC. v. Hartford Fire Ins. Co., 345 F.3d 154, 186-188 (2nd Cir. 2003). When necessary, courts must be educated about the different interests and public policy concerns involved in the two types of coverage; otherwise, bad law can be made.
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