This article was originally posted on The Northwest Policyholder, Miller Nash Graham & Dunn’s insurance coverage blog.
Contractors, builders, real estate managers, and others should be aware of a March 9, 2017, decision by an Oregon federal judge who found that carbon monoxide is included in the plain meaning of “pollutant” as defined in a liability insurance policy. As a result, an insured contractor had no coverage for its faulty work.
In Colony Ins. Co. v. Victory Constr. LLC, U.S. District Court, Oregon, Case No. 3:16-cv-00457-HZ, Colony Insurance sought a declaratory judgment that it had no duty to defend and indemnify Victory Construction in two state court personal-injury lawsuits. The defendant, Victory, installed a pool and was alleged to have been negligent in the installation and ventilation of a gas heater, resulting in the escape of carbon monoxide into a home, causing the residents to be sick. Victory was insured by Colony, which denied coverage for the residents’ ensuing claims. Colony’s Commercial General Liability Insurance Policy contained a Hazardous Materials Exclusion, i.e., a pollution exclusion. The policy defined “hazardous materials” as: “‘pollutants’, lead, asbestos, silica and materials containing them.” The definition of “pollutants” included “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The court concluded that because carbon monoxide clearly fell within the definition of a pollutant, there was no coverage.
Victory argued that the pollution exclusion should apply only to traditional environmental pollution and not to carbon monoxide that escaped from allegedly faulty work. The court rejected this argument, stating that it was not tasked with considering alternative plausible interpretations of the pollution exclusion when the insurance policy terms’ plain meaning resolved the case.
Besides rejecting the argument that the pollution exclusion should apply only to traditional environmental pollution, this decision has some other troubling aspects. For example, the alleged exposure and injury to the “pollutant,” carbon monoxide, did not arise from the insured’s transport, handling, storage, or sale of the pollutant, but instead arose from an alleged construction defect.
Another concern arises from the court’s rejection of Victory’s argument that the existence of conflicting court decisions on the interpretation of a certain policy provision is evidence that the provision may be ambiguous. The court acknowledged that there had been conflicting judicial decisions about the pollution exclusion throughout the country, but rejected this evidence of ambiguity by concluding that the pollution exclusion before it was unambiguous. Yet if the court wanted to accurately predict what the Oregon Supreme Court might do with this pollution exclusion, it should have looked to the opinion in St. Paul Fire v. McCormick & Baxter Creosoting, 324 Or 184, 923 P2d 1200 (1996). In McCormick & Baxter, the Oregon Supreme Court, in an opinion authored by Justice Susan Graber, held that the “sudden and accidental” pollution exclusion was ambiguous. There, Justice Graber quoted with approval the text of an insurance law treatise that stated, “The very fact that a number of courts have reached conflicting conclusions as to the interpretation of a certain provision is frequently considered evidence of ambiguity.” (Footnotes omitted.) Despite acknowledging that conflicting judicial decisions are evidence, although not necessarily conclusive, that a clause is ambiguous, it appears that Justice Graber relied on that principle to find the pollution exclusion in McCormick & Baxter ambiguous, and the language was interpreted in favor of the insured.
What the Victory decision means is that in Oregon, many insureds, such as contractors, builders, landlords, and real estate managers, as well as many other businesses and individuals, who believe that they do not need to worry about the pollution exclusion because they are not handling environmentally hazardous materials should check their liability insurance policies to assess their uninsured exposures.