Excluding Pollution: New Jersey and Florida Courts Conflict
Two recent opinions illustrate the on-going conflict with respect to whether pollution exclusions should apply to companies that do not cause pollution but nonetheless face pollution-related liabilities. At the heart of these cases is the question whether the literal wording of the policy should control or the insured’s expectation of coverage.
In Sealed Air Corp. v. Royal Indemnity Co., No. A-5951-06T3 (App. Div. August 15, 2008), the corporation sought coverage under its Directors & Officers policy for suits by shareholders who complained that the insured had failed to disclose its liability for environmental problems facing a corporate subsidiary. The Appellate Division of the New Jersey Superior Court ruled that a pollution exclusion in Royal’s D&O policy did not apply because the insured’s liability was the result of allegedly misleading financial statements, not as the result of airborne asbestos or other pollutants. The court declared that, “The gravamen of the securities holders’ complaint has its roots in securities fraud and misrepresentation, not pollution.”
The Appellate Division declined to adopt the insured’s argument that the New Jersey Supreme Court’s analysis of pollution exclusions in Navits was not limited to CGL policies and should bar such an expansive interpretation of a pollution exclusion in a D&O policy. The court held that it need not reach the applicability of Navits to D&O policies because it found that the wording in the policy at issue precluded Royal from disclaiming.
Although the Appellate Division refused to disregard the wording of the policy as a whole, as the insured had proposed based upon the Navits regulatory estoppel paradigm, it held that in this case “arising out of” should not be given the broad meaning proposed by Royal as in this case the words “arising out of” were included with a series of limiting clauses such as “based on” or “in any way involving” that required that there be a more direct causal relationship between the pollution and the excluded harm. In a case such as this, where the injuries were far too attenuated, the court held that giving effect to the exclusion would be unfair and contrary to the reasonably expectations of the insured.
In contrast to the New Jersey court’s approach, the Eleventh Circuit has recently declared in James River Ins. Co. v. Ground Down Engineering, Inc., No. 07-13207 (11th Cir. August 20, 2008) that such exclusions do apply to non-polluters. Ground Down Engineering sought coverage for a lawsuit brought against it by a client for its alleged negligence in failing to discover construction debris and fuel tanks during an environmental site assessment. Although its professional liability insurer disputed coverage on the basis of an absolute pollution exclusion in the policy, the Florida district court declared in 2007 that the customer’s claims arose out of the insured’s failure to carry out professional responsibilities, not out of pollution and that it would be “unconscionable at best” to interpret the policy as excluding from coverage claims relating to any form of pollution, regardless of causation. Since the insured had not caused the pollution, the district court found that the exclusion should not apply and that James River had therefore erred in failing to provide a defense.
This finding was reversed on appeal by the Eleventh Circuit on August 20, 2008. Unlike the District Court, the Eleventh Circuit held that the application of the exclusion did not depend on whether the insured itself had negligently caused pollution but rather applied to all losses arising out of pollution. In this case, the Eleventh Circuit observed that the Florida Supreme Court had given the term “arising out of” a broad and unambiguous meaning as applying to all losses that have some causal connection or relationship to something such that “arising out of” contemplates a more attenuated link than the phrase “because of.” Finally, the Eleventh Circuit rejected the insured’s contention that construction debris was not an excluded “pollutant.” In this case, the Eleventh Circuit found that the underlying complaint alleged that the construction debris had caused “environmental contamination.” Furthermore, the court ruled that the exclusion was not limited to “irritants” or “contaminants” but also included “waste which clearly encompassed construction debris.
The key distinction in these cases is the manner in which the courts interpreted the phrase “arising out of.” The Eleventh Circuit adopted the traditional view that “arising out of” has a far broader meaning than “because” or “caused by” and merely requires that a loss be connected to or somehow related to pollution in order to be excluded. Contrariwise, the New Jersey Appellate Division held that policies need not be given a literal reading if to do so would result in something “unfair and contrary to the reasonable expectations of the insured.”
As these opinions make clear, courts continue to be sharply divided on the crucial issue of whether an insured’s expectations (or hopes?) of coverage should trump otherwise clear and unambiguous policy exclusions.
