1997 Winter - Insurance Newsletter
January 1, 1997

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POLLUTION EXCLUSION WIDENED BY COURT OF APPEALS

In a decision which will result in broadening the scope of the standard pollution exclusion clause, the New York Court of Appeals, in Town of Harrison v. National Union Fire Insurance Co.,___N.Y.2d___, 1996 WL 726781 (Dec. 18, 1996), held that the exclusion bars coverage without regard to whether the insured is responsible for the pollution.

The Town and Village of Harrison (“Harrison”) were the insureds under policies issued by National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”) and North River Insurance Company (“North River”). Each policy contained a version of the standard pollution exclusion clause which barred coverage for claims arising from environmental pollution. The pollution exclusion in the National Union policy provided that

The Company shall not be liable to make any payment of Loss in connection with any claim: arising from the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon the land, the atmosphere or any watercourse or body of water.

The North River policy contained a similarly worded exclusion.

The case arose when Harrison allegedly failed to prevent an excavation contractor from disposing illegal and noxious waste onto three adjacent properties. The owners of the three properties instituted separate actions in state court against Harrison. In addition, the owner of property located next to a municipal storage building and garage commenced an action in federal court claiming that Harrison unlawfully dumped and allowed others to dump pernicious waste on his property. Harrison notified its insurers of the suits and requested coverage. Relying on their respective pollution exclusions, the insurers refused to defend or indemnify Harrison. Harrison then brought a declaratory judgment action to compel the insurers to provide coverage.

The trial court held that the insurers were not liable because the pollution exclusion clauses unambiguously barred coverage for claims generated from illegal dumping. As such, the insurers had not duty to defend or indemnify.

Modifying the trial court’s decision, the Appellate Division, Second Department held that a pollution exclusion clause only applies where the insured is the polluter responsible for the illegal dumping. The court distinguished the three state court actions, where the plaintiffs therein did not allege that the insureds were responsible for the illegal dumping, from the federal court action, where the insureds were alleged to have engaged in the act of polluting. The Appellate Division held that the pollution exclusion clauses did not apply to the claims brought in the state court actions, but did apply to the claim in the federal action.

The Court of Appeals, however, adopted a much broader approach than the Appellate Division concerning the scope and meaning of the pollution exclusion clause. In so doing, the Court held that the pollution exclusion bars coverage for a pollution-related injury even where the insured is not responsible. To support its conclusion, the Court acknowledged that the terms of the exclusions and policies were clear and unambiguous. It further reasoned that in “[c]onstruing the terms of these exclusions as required, by giving the words their plain meaning, it is evident that coverage is unavailable for any claim involving the discharge or dispersal of any waste, pollutant, contaminant or irritant regardless of the cause or source of that claim.” Consequently, the Court concluded that the insurers had no duty to defend or indemnify the insureds in any of the court underlying actions.

Significantly, the Court of Appeals noted that the Appellate Division had improperly interpreted a 1993 Court of Appeals decision, Continental Cas. Co. v. Rapid-Am Corp. 80 N.Y.2d 640, 593 N.Y.S.2d 996 (1993), in determining that a pollution exclusion clause should only apply where the insured is the actual polluter. See New York Courts Hold Absolute Pollution Exclusion Inapplicable to Lead Poisoning Claims, OHRENSTEIN & BROWN INS. NEWSLETTER, Summer 1994 at 7, for a discussion of Continental. In Continental, the Court held that the pollution exclusion did not apply because it was “ambiguous with regard to whether asbestos fibers...were discharged into the ‘atmosphere’ as contemplated by the exclusion.” While the insured in Continental may not have been responsible for the pollution, the Court in Harrison noted that “responsib[ilty] was not the determinative factor.”

The impact of this decision will likely not be l imited to municipalities, Extending the scope of the pollution exclusion beyond the actual polluter will result in denying coverage to parties who purchased contaminated property or that generate toxic waste and hire others to transport and dispose of it.

COURT OF APPEALS HOLDS THAT INSURER MUST DEFEND DESPITE POLLUTION EXCLUSIONS IN POLICIES

In Incorporated Village of Cedarhurst v. Hanover Insurance Co.,___N.Y.2d___,1996 WL 726751 (Dec. 18, 1996), the New York Court of Appeals held that the application of the standard pollution exclusion depends on whether the underlying claim against the insured alleges injuries caused by the “contaminating nature” of a pollutant. Although the lower courts had ruled that the exclusion clause did not apply to sewage overflows, under the Court of Appeals ruling that question will be answered at trial. The case arose from sewage overflows in the village of Cedarhurst (“Village”). Residents sued the Village for damages caused by the flooding of their basements. In separate actions it was claimed that the damages were caused by a (1) “rush of water and sewage from the municipal sewage system which caused massive flooding” and (2) an “overflow” of sewage. In each action it was asserted that the Village was negligent in maintaining its municipal sewage system.

In denying coverage, the Village’s insurer contended that the discharge of raw sewage unambiguously fell within the pollution clauses in several policies issued to the Village. Because “waste” is included in the definition of pollutant, the insurer contended that it had no duty to defend or indemnify the Village. In response, the Village argued that the pollution exclusion was inapplicable, as the underlying complaints did not refer to the polluting, irritating or contaminating nature of the raw sewage. The Village further claimed that the exclusion did not clearly establish whether sewage is a pollutant within the meaning of the exclusion.

The Appellate Division, Second Department held that it was ambiguous whether raw sewage was a pollutant within the meaning of the exclusion and ordered the insurer to defend and indemnify the Village.

A sharply divided Court of Appeals, in a 4-3 decision, did not directly address whether sewage is a pollutant that should trigger the exclusion. Rather, it held that the exclusion is applicable only when the complaint alleges a pollution-related injury. The Courted stated that “in determining whether an insurer has the duty to defend, the applicability of the exclusion depends on the nature of the injury alleged in the underlying complaints, not exclusively on the nature of the substance released.”

In support of its conclusion, the Court of Appeals explained that both actions “allege an injury from a flood-like event; neither alleges an injury from the ‘polluting’, irritating or contaminating nature of the sewage.” The Court further emphasized that the underlying complaints alleged negligence and asserted that the water and sewage mixture was not a pollutant. The Court noted that “[t]hese assertions, by their very nature, included the claim that the substances released did not exert a contaminating or irritating effect since, by definition, a pollutant must be either, or both.” As such allegations fell outside of the pollution exclusion clause, the Court concluded that the insures had a duty to defend.

As for whether the insurer had a duty to indemnify, the Court stated that “[s]ince evidence of pollution-related injuries may develop at trial and absolve the insurer of its duty to indemnify under the pollution exclusions, the issue of indemnification must abide developments.”

The dissenting opinion criticized the majority for its failure to address the Appellate Division’s conclusion that the insurance policies were ambiguous as to whether raw sewage is a pollutant. The dissent vigorously argued that raw sewage was clearly a pollutant within the meaning of the pollution exclusion and the insurer should have no duty to defend the Village.

LANDLORD’S KNOWLEDGE HELD TO BE DETERMINED IN LEAD PAINT LIABILITY

A New York County jury verdict against a landlord in a lead poisoning case has been vacated by the Appellate Division, First Department, based on a recent Court of Appeals decision that limits the liability of property owners for failing to eliminate dangerous lead paint conditions from their buildings.

In Rivas v. 1340 Hudson Realty Corp., ___A.D.2d___, 650 N.Y.S.2d 732 (1st Dep’t 1996), the Appellate Division, applying Juarez v. Wavecrest Management Team Ltd., 88 N.Y.2d 628, 672 N.E.2d 135, 649 N.Y.S.2d 115 (1996), held that a jury should determine whether the landlord had actual knowledge or a reason to know (“constructive knowledge”) that a child under seven years old was living in an apartment with a dangerous lead paint condition. See Juarez Revisited: Violations of Local Law 1 Requiring Removal or Covering of Lead Paint Do Not Constitute Negligence Per Se, OHRENSTEIN & BROWN INS. NEWSLETTER, Summer 1996 at 3.

The plaintiff in Rivas was a two year old, who, in May or June 1990, moved into an apartment that allegedly had a dangerous lead paint condition. The plaintiff’s mother claimed that she complained to the superintendent about the lead paint condition after observing the child ingest paint chips. Blood tests conducted in December 1990 revealed that the plaintiff had a high level of lead in his blood. As a result, in January 1991, the Health Department sent a notice of abatement was sent to the landlord. The building owner claimed that it had no prior knowledge that the 2-year old plaintiff was living in the apartment because his mother was not named as a tenant on the lease. The building owner asserted that it first learned the child was there when the city ordered it to repair the lead paint condition.

When defendant purchased the building in December, 1988, the building was under the supervision of an administrator appointed by the Housing Court, due to its poor condition. Subsequent to the defendant’s purchase, the building underwent numerous renovations and repairs, including new plumbing, paint and electrical work. After the defendant improved the condition of the property, the administrator formally released it to the defendant in late 1989. The vice-president of the defendant corporation reported that he had been to plaintiff’s apartment three times in 1990, but that he did not realize until November or December of 1990 that children were living in the apartment. He contended that he neither knew of nor received any complaints concerning the peeling paint until the notice of abatement in January 1991. When the building owner learned of the condition in 1991, it hired a contractor to remedy it.

At trial, the jury found that the building owner had violated Section 27-2013(h) of the New York City Administrative Code (“Local Law 1”), pursuant to which a building owner is required to remove lead paint hazards from premises inhabited by children who are six years old or younger, and that the violation was a substantial cause of the plaintiff’s injuries.

Relying on Juarez, the Appellate Division ordered a new trial and said that the trial judge should have instructed the jury to determine when the building owner learned that the child was living in the apartment. In Juarez, the Court of Appeals held that Local Law 1 does not impose an affirmative duty on a landlord to investigate whether a child under seven inhabited an apartment with a hazardous lead paint condition. As we have noted in previous issues, and as determined by the Appellate Division in Rivas, because an owner retains the right of entry to inspect and repair under the Administrative Code, an owner with notice of an infant’s residence may be charged with constructive notice of a hazardous lead paint condition as of the date a jury finds the owner knew of such residence. It is at that point, noted the Appellate Division in Rivas, that compensable damages, if any, would begin to accrue. The burden of proving notice of residence lies with the plaintiff.

Finally, the Rivas court reiterated the Juarez holding that Local Law 1 does not impose a standard of absolute liability on building owners for failing to remove hazardous lead paint. Although a building owner may be found to have violated Local Law 1, it “will not be liable for damages sustained as a result of that violation if it exercised due care and acted reasonably under the circumstances.” The court held that the trial judge had improperly instructed the jury to ignore evidence that the building owner had taken previous steps to eliminate lead paint conditions elsewhere in the building..