Title: PBM Nutritionals, LLC v. Lexington Ins. Co.

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
PBM NUTRITIONALS, LLC 
 
 
 
 
 
 
 
 
     OPINION BY 
v.     Record No. 110669             JUSTICE S. BERNARD GOODWYN 
 
    April 20, 2012 
LEXINGTON INSURANCE COMPANY, ET AL. 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
Walter W. Stout, III, Judge 
 
In this appeal, we consider whether the circuit court 
erred in construing pollution exclusion endorsements in a 
commercial property insurance policy as precluding coverage for 
a multi-million dollar infant formula loss resulting from the 
infiltration of filter elements into the formula during the 
manufacturing process. 
Background 
 
PBM Nutritionals, LLC (PBM) filed a declaratory judgment 
action in the Circuit Court of the City of Richmond against 
Lexington Insurance Company (Lexington), Arch Insurance Company 
(Arch) and ACE American Insurance Company (ACE) (collectively 
the Insurers).  PBM sought insurance coverage for its loss 
resulting from infiltration of filter elements into the infant 
formula it manufactured between January 22 and January 30, 
2009.  The Insurers claimed that the insurance policies' 
"Pollution Exclusion Endorsements" excluded coverage for PBM's 
infant formula loss because the formula was "contaminated."  
The circuit court found that the Insurers were not liable under 
the policies for PBM's infant formula losses, and PBM appeals. 
Facts 
Infant Formula Loss 
 
PBM manufactures and produces infant formula at a facility 
located in Burlington, Vermont.  PBM manufactures its infant 
formula by mixing dry ingredients with hot, filtered water.  To 
heat the water, PBM uses a heat exchanger, a vessel in which 
steam heats water flowing through tubes.  A butterfly valve 
regulates the steam by opening or closing to allow more or less 
steam into the heat exchanger.  Once heated, the water is 
released from the heat exchanger and passes through water 
filters, to ensure its cleanliness before it enters the 
liquefying tank where it mixes the dry ingredients.  Industrial 
dryers then dry the created mixture into finished infant 
formula. 
 
On December 14, 2008, PBM conducted a routine cleaning and 
discovered a defect in the butterfly valve.  The defect allowed 
steam to leak into the steam tube when the valve was in the 
closed position.  PBM ordered a replacement valve, but it did 
not arrive until late January 2009.  Until January 20, 2009, 
PBM continued to manufacture infant formula and conduct routine 
cleanings.  PBM’s testing revealed no problems with the infant 
formula produced during this period.   
 
Between January 20 and January 22, 2009, PBM conducted an 
extensive cleaning of the system in preparation for the 
manufacture of its Profylac brand infant formula.  PBM can 
complete a routine cleaning in 4 to 6 hours, but a Profylac 
cleaning takes between 42 and 46 hours.  During this Profylac 
cleaning, water was sealed inside the heat exchanger water tube 
and in the filter housing.  Because the butterfly valve was 
leaking, steam seeped into the heat exchanger and superheated 
the water in the water tube and the filter housing.  Unable to 
withstand the superheated water, the water filters 
disintegrated into their constituent components of cellulose, 
melamine and other filter materials, which infiltrated the 
water.  
 
After the Profylac cleaning, PBM began to manufacture its 
Profylac formula, unaware that it was using superheated water 
that contained melamine and other filter materials to mix the 
formula ingredients.  When PBM tested the batches of Profylac 
made during this period, it discovered that 4 of the 25 batches 
contained levels of melamine that exceeded the Food and Drug 
Administration (FDA) limit of one part per million.  The other 
21 batches had melamine levels within the FDA limit, but PBM 
feared they contained disintegrated filter components. 
Prior to trial, the parties stipulated that the 
“[e]levated levels of melamine detected in infant formula 
batches made between January 22, 2009 and January 30, 2009 are 
evidence of the disintegration of the water filters and the 
infiltration of melamine and other filter media into the infant 
formula.”  PBM’s Executive Vice-President Scott F. Jamison 
testified that all batches manufactured during this period had 
no salvage value, were unfit for human consumption, and were 
unmarketable as a result of the infiltration. 
After notifying its insurance companies, PBM elected to 
destroy all batches manufactured after the Profylac cleaning.  
It sought insurance coverage for the formula it had to destroy. 
The Insurance Policies 
 
At the time of the loss, PBM had insurance policies with 
four different insurance companies.  Specifically, PBM had 
property damage and business interruption policies with the 
Insurers.  PBM also had a contamination insurance policy with 
Dornoch LTD. 
PBM settled its claim with Dornoch for $2 million.  The 
Insurers denied that their policies provided coverage for the 
loss. 
 
To secure the policies from the Insurers, PBM retained an 
insurance broker to assist with purchasing sufficient insurance 
to manage the risk of owning a manufacturing plant.  PBM sought 
a commercial property, or "all risks," policy.  Such policies 
insure "against all risks of physical loss or damage to 
property described herein, . . . except as hereinafter 
excluded." 
 
PBM's broker ultimately arranged a "quota share" agreement 
whereby the three separate Insurers issued all risks policies 
to PBM and shared percentages of the risk of coverage.  Under 
this agreement, ACE afforded coverage for 50% of any loss, 
while Arch and Lexington each afforded coverage for 25%.  All 
three policies were based on a "manuscript form" or "broker's 
manuscript" prepared by PBM’s broker.  The manuscript form 
includes the insuring agreement, the terms of insurance, limits 
of liability, deductible, coverage, and perils excluded.  PBM's 
broker selected the manuscript form by retrieving it from the 
public domain. 
 
The manuscript form policy contained a provision entitled 
"Pollution."  This provision, Paragraph 9(H), states: 
 
9.  PERILS EXLUDED 
This policy does not insure: 
. . . . 
H.  Pollution.  The Insurers will not cover loss or 
damage solely and directly caused by or resulting from 
the presence, release, discharge or dispersal of 
"pollutants" unless the presence, release, discharge 
or dispersal is itself caused by a peril insured 
against. 
 
 
Definition: Wherever in this policy the word 
"pollutant(s)" occurs, it shall be held to mean any 
solid, liquid, gaseous or thermal irritant or 
contaminant, including smoke, vapor, soot, fumes, 
acids, alkalis, chemicals and waste. 
 
 
PBM's broker solicited quotes from insurance companies for 
the coverage provided in the manuscript form policy he had 
prepared.  As part of the negotiations, the Insurers asked for 
endorsements to change, alter, add, or delete coverage from 
that provided in the manuscript form policy.  Based upon 
negotiations, each of the Insurers added endorsements, 
declaration pages, and certain forms to the manuscript form to 
complete their respective negotiated policies.  Each Insurer 
added a similar pollution exclusion endorsement during this 
negotiating process.  
A.  ACE 
 
ACE added to its policy a "Contamination and/or Seepage 
and/or Pollution Exclusion" endorsement, which provides: 
This Policy does not insure against loss or damage 
caused by or resulting from any of the following 
causes . . . : 
 
 
Loss or damage caused by, resulting from, contributed 
to or made worse by actual, alleged or threatened 
release, discharge, escape or dispersal of 
CONTAMINANTS or POLLUTANTS, all whether direct or 
indirect, proximate or remote or in whole or in part 
caused by, contributed to or aggravated by any 
physical damage insured in this Policy. 
 
. . . . 
 
 
CONTAMINANTS or POLLUTANTS mean any material which 
after its release can cause or threaten damage to 
human health or human welfare or cause or threaten 
damage, deterioration, loss of value, marketability 
or loss of use to property insured hereunder, 
including, but not limited to, bacteria, fungi, 
virus, or hazardous substances as listed in the 
Federal Water Pollution Control Act, Clean Air Act, 
Resource Conservation and Recovery Act of 1976, and 
Toxic Substances Control Act, or as designated by the 
U.S. Environmental Protection Agency. 
 
An exception is also included in this pollution exclusion 
endorsement stating that the exclusion does not apply if the 
contamination or pollution arises from direct physical loss or 
damage to insured property from "Fire, Lightning, Explosion, 
Windstorm, Hail, Smoke, Aircraft or Vehicle Impact or Leakage 
from Fire Protection Equipment."  
B.  Arch 
 
The Arch policy contained a "Pollution & Contamination 
Exclusion Endorsement," which states: 
 
This policy does not cover any loss, damage, cost or 
expense caused by, resulting from, contributed to or 
made worse by actual, alleged or threatened release, 
discharge, introduction, escape or dispersal of 
contaminants or pollutants, all whether direct or 
indirect, proximate or remote or in whole or in part 
caused by, contributed to or aggravated by any 
physical damage insured by this policy. 
 
. . . . 
 
 
Contaminants or pollutants means any material, 
whether solid, liquid, gaseous or otherwise, which, 
after its release, discharge, introduction, escape or 
dispersal, can cause or threaten damage to human 
health or human welfare or causes or threatens 
damage, deterioration, loss of value, marketability 
or loss of use to the property insured hereunder. 
 
Like the ACE policy, the Arch pollution exclusion endorsement 
contains an exception stating that the exclusion does not apply 
to "loss or damage directly caused by fire, lightning, aircraft 
impact, explosion, riot, civil commotion, vehicle impact, 
windstorm, hail, vandalism, malicious mischief or accidental 
discharge from automatic fire protective systems." 
C.  Lexington 
The Lexington policy contained a "Pollution, 
Contamination, Debris Removal Exclusion Endorsement,"1 which 
states: 
This policy does not cover loss or damage caused by, 
resulting from, contributed to or made worse by 
actual, alleged or threatened release, discharge, 
escape or dispersal of CONTAMINANTS or POLLUTANTS, all 
whether direct or indirect, proximate or remote or in 
whole or in part caused by, contributed to or 
aggravated by any physical damage insured by this 
policy. 
 
. . . . 
 
CONTAMINANTS or POLLUTANTS means any solid, liquid, 
gaseous or thermal irritant or contaminant, including 
smoke, vapor, soot, fumes, acids, alkalis, chemicals 
and waste, which after its release can cause or 
threaten damage to human health or human welfare or 
causes or threatens damage, deterioration, loss of 
value, marketability or loss of use to property 
insured hereunder, including, but not limited to, 
bacteria, virus, or hazardous substances  
. . . . 
                     
1 The ACE “Contamination and/or Seepage and/or Pollution 
Exclusion,” the Arch “Pollution & Contamination Exclusion 
Endorsement,” and the Lexington “Pollution, Contamination, 
Debris Removal Exclusion Endorsement” shall be referred to 
collectively as “the pollution exclusion endorsements.” 
 
Similar to the ACE and Arch policies, the Lexington pollution 
exclusion endorsement states that it "shall not apply when loss 
or damage is directly caused by fire, lightning, aircraft 
impact, explosion, riot, civil commotion, smoke, vehicle 
impact, windstorm, hail, vandalism, malicious mischief" or 
"leakage or accidental discharge from automatic fire protective 
systems." 
 
None of the pollution exclusion endorsements contain an 
exception for "insured perils" as contained in Paragraph 9(H) 
of the manuscript form policy.  The circuit court held that the 
pollution exclusion endorsements are clear and unambiguous and 
have the "effect of superseding Paragraph 9(H) to the extent 
that they conflict."  The final order states that “the Court 
finds no liability for coverage of the Plaintiff’s 
contamination losses.”  
Analysis 
 
PBM claims that the circuit court erred in ruling that it 
was not entitled to insurance coverage from the Insurers for 
the unsafe formula that PBM destroyed.  First, PBM argues that 
the circuit court erred by construing two directly conflicting 
policy provisions in favor of the Insurers and not the insured.  
PBM claims that when read together, the pollution exclusion in 
Paragraph 9(H), which does not exclude coverage, and the 
pollution exclusion endorsements, which do exclude coverage, 
create "coverage inconsistencies" that render the policies 
ambiguous, and that the circuit court erred in not adhering to 
the well-established principle that conflicting provisions in 
insurance policies must be construed in favor of coverage. 
 
The Insurers respond that the policies do not contain 
directly conflicting provisions.  The Insurers note that the 
exclusion in Paragraph 9(H) does not "provide" coverage even if 
an exception to the exclusion prevents it from being operative.  
They also claim that the pollution exclusion endorsements do 
not conflict with Paragraph 9(H), but rather are separate 
additional exclusions that modify the manuscript form policy by 
expanding the exclusion of pollution and contamination.  
Further, the Insurers contend that, if there were a conflict, 
the endorsements supersede and override conflicting provisions 
of the policies' manuscript form. 
 
The interpretation of a contract presents a question of 
law subject to de novo review.  Copp v. Nationwide Mut. Ins. 
Co., 279 Va. 675, 681, 692 S.E.2d 220, 223 (2010).  "[O]n 
appeal [this Court is not] bound by the trial court's 
interpretation of the contract provision at issue; rather, 
[this Court has] an equal opportunity to consider the words of 
the contract within the four corners of the instrument itself."  
Eure v. Norfolk Shipbuilding & Drydock Corp., 263 Va. 624, 631, 
561 S.E.2d 663, 667 (2002).  "Each phrase and clause of an 
insurance contract should be considered and construed together 
and seemingly conflicting provisions harmonized when that can 
be reasonably done, so as to effectuate the intention of the 
parties as expressed therein."  Seals v. Erie Ins. Exch., 277 
Va. 558, 562, 674 S.E.2d 860, 862 (2009) (internal quotation 
marks omitted).  Additionally,  
 
[i]nsurance policies are contracts whose language is 
ordinarily selected by insurers rather than by policy-
holders.  The courts, accordingly, have been 
consistent in construing the language of such 
policies, where there is doubt as to their meaning, in 
favor of that interpretation which grants coverage, 
rather than that which withholds it.  Where two 
constructions are equally possible, that most 
favorable to the insured will be adopted. Language in 
a policy purporting to exclude certain events from 
coverage will be construed mostly strongly against the 
insurer.  
 
Copp, 279 Va. at 681, 692 S.E.2d at 223 (quoting Seals, 277 Va. 
at 562, 674 S.E.2d at 862). 
 
"When an insurer drafts policy language setting forth 
exclusions that limit coverage under a policy, the insurer is 
required to use language that clearly and unambiguously defines 
the scope of the exclusions."  Lower Chesapeake Assocs. v. 
Valley Forge Ins. Co., 260 Va. 77, 88, 532 S.E.2d 325, 331 
(2000).  Exclusionary language in an insurance policy will be 
construed most strongly against the insurer and the burden is 
upon the insurer to prove that an exception applies.  Johnson 
v. Insurance Co. of N. Am., 232 Va. 340, 345, 350 S.E.2d 616, 
619 (1986). 
 
Under Virginia law, an insurance policy is not ambiguous 
merely because courts of varying jurisdictions differ with 
respect to the construction of policy language.  See Nationwide 
Mut. Ins. Co. v. Wenger, 222 Va. 263, 268, 278 S.E.2d 874, 877 
(1981). Additionally, "where the exclusion is not ambiguous, 
there is no reason for applying the rules of contra proferentem 
or liberal construction for the insured."  2 Eric M. Holmes, 
Appleman on Insurance 2d § 7.2 (1996 & Supp. 2009). 
 
Assuming arguendo that PBM is correct that the exception 
to the exclusion in Paragraph 9(H) applies to its infant 
formula loss and negates the pollution exclusion in Paragraph 
9(H), PBM has not established that Paragraph 9(H) "conflicts" 
with the pollution exclusion endorsements.  Paragraph 9(H) is 
an exclusion and not a coverage grant.  If the exception 
operates to render it inapplicable, then Paragraph 9(H) does 
not operate to bar coverage.  However, Paragraph 9(H) does not 
“provide” any coverage and has no bearing on whether the 
pollution exclusion endorsements bar coverage in this instance. 
An exception that serves to negate the applicability of 
one particular exclusion does not create a "conflict" with 
another policy exclusion that operates to bar coverage.  An 
exception to an exclusion only has bearing on that exclusion's 
applicability—it is without force with respect to other 
provisions of the policy.  See Nationwide Mut. Ins. Co. v. The 
Overlook, LLC, 785 F.Supp.2d 502, 530 (E.D. Va. 2011).  In 
other words, an exception to an exclusion does not create 
coverage where none exists.  Wenger, 222 Va. at 267, 278 S.E.2d 
at 876.  "The exception remains subject to and limited by all 
other related exclusions contained in the policy."  Id. 
(quoting Haugan v. Home Indem. Co., 197 N.W.2d 18, 22 (S.D. 
1972)). 
 
Applying these principles to the instant case, the 
exception to the pollution exclusion in Paragraph 9(H) does not 
in and of itself provide coverage.  If coverage is excluded 
under the pollution exclusion endorsements, the exception to 
exclusion in Paragraph 9(H) does not restore that coverage.  As 
a result, Paragraph 9(H) has no application to the pollution 
exclusion endorsements and the provisions of the policies do 
not conflict. 
 
The circuit court did not err in concluding that the 
provisions of the policies do not conflict.  The circuit 
court's conclusion that the pollution exclusion endorsements 
modify "the manuscript policy to expand the exclusion of 
pollution and contamination" is consistent with established 
principles of insurance law.  "In legally construing an 
endorsement to an insurance policy, the endorsement and policy 
must be read together, and the policy remains in full force and 
effect except as altered by the words of the endorsement."  2 
Holmes, Appleman on Insurance 2d § 5.1.  "Where the language of 
endorsement is clear and unambiguous, it must be given 
recognition if the endorsement has been effectively made a part 
of the policy."  Id.  In the instant case, the unambiguous 
pollution exclusion endorsements must be recognized and applied 
in determining insurance coverage for the loss. 
 
PBM also argues that, even if applicable, the pollution 
exclusion endorsements are ambiguous because they are all 
overly broad and could exclude nearly any loss.  It claims that 
the circuit court erred in failing to limit the scope of the 
pollution exclusion endorsements to traditional environmental 
losses in order to avoid the problem of illusory coverage and 
to give some reasonable meaning to the ambiguous endorsements.  
The Insurers respond that the circuit court did not err by 
rejecting PBM's assertion that the pollution exclusion 
endorsements are ambiguous and should only apply to traditional 
environmental pollution.  The Insurers contend that because the 
endorsements are not ambiguous, the circuit court properly 
interpreted and applied the plain text of the endorsements.  We 
agree. 
 
In City of Chesapeake v. States Self-Insurers Risk 
Retention Group, 271 Va. 574, 628 S.E.2d 539 (2006), this Court 
considered a certified question asking whether claims by women 
who alleged that they all suffered miscarriages resulting from 
exposure to trihalomethanes in the City of Chesapeake's water 
supply were precluded by the pollution exclusion in the 
relevant insurance policy.  Id. at 576, 628 S.E.2d at 540.  
This Court held that the pollution exclusions operated to 
preclude coverage.  Id. at 578, 628 S.E.2d at 541.  This Court 
stated that when determining the meaning and application of a 
pollution exclusion in a liability policy, "the law of this 
Commonwealth and the plain language of the insurance policy 
provide the answer."  Id. at 579, 628 S.E.2d at 542. 
 
It is a basic tenet of Virginia law that the courts, when 
interpreting a contract, "construe it as written" and do "not 
add terms the parties themselves did not include."  Landmark 
HHH, LLC v. Gi Hwa Park, 277 Va. 50, 57, 671 S.E.2d 143, 147 
(2009).  This Court "will not insert by construction, for the 
benefit of a party, a term not express in the contract."  
Lansdowne Dev. Co., L.L.C. v. Xerox Realty Corp., 257 Va. 392, 
400, 514 S.E.2d 157, 161 (1999). 
 
In the instant case, none of the pollution exclusion 
endorsements reference any terms such as “environment,” 
“environmental,” “industrial,” or any other limiting language 
suggesting that the exclusions are limited to “traditional” 
rather than “indoor” pollution.  No language in any of the 
relevant endorsements suggests the discharges or dispersals of 
pollutants or contaminants must be into the environment or 
atmosphere.  The endorsements are broad, but not unlimited.  
Moreover, if the pollution exclusion endorsements were intended 
to be limited to traditional environmental pollution scenarios, 
the included exceptions to the pollution exclusion endorsements 
would not be necessary.  According to their plain language, the 
pollution exclusions are not restricted to traditional 
environmental pollution.  The circuit court did not err in 
refusing to limit the Insurers’ pollution exclusion 
endorsements to traditional environmental contamination losses.2 
                     
2 The Fourth Circuit Court of Appeals and the Eastern 
District of Virginia have construed similar pollution exclusion 
endorsements and reached the same conclusion.  National Elec. 
Mfrs. Ass'n v. Gulf Underwriters Ins. Co., 162 F.3d 821, 825-26 
(4th Cir. 1998) (concluding pollution exclusion was "plain," 
"unambiguous," and "not limited to atmospheric or environmental 
pollution"); Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d 
997, 1006 (4th Cir. 1998) (finding pollution exclusion 
unambiguous and applying it to non-traditional environmental 
harm); Evanston Ins. Co. v. Harbor Walk Dev., LLC, 814 
F.Supp.2d 635, 646-47 (E.D. Va. 2011) (finding pollution 
exclusions unambiguous and not limited to traditional 
environmental pollution); Dragas Mgmt. Corp. v. Hanover Ins. 
Co., 798 F.Supp.2d 766, 774 (E.D. Va. 2011) ("The court will 
not break with the weight of precedent on this point and holds 
that the pollution exclusion in the instant policies is not 
limited to traditional environmental pollution, as the 
definition of 'pollutant' evinces no such intent on the part of 
the parties."); Firemen's Ins. Co. v. Kline & Son Cement 
Repair, Inc., 474 F.Supp.2d 779, 797 (E.D. Va. 2007)(holding 
pollution exclusion is "sweeping, excepting both environmental 
and indoor pollution occurrences from coverage"). 
Finally, PBM argues that the circuit court erred in 
failing to order insurance coverage for PBM’s loss because the 
Insurers never presented any evidence that the infant formula 
was "contaminated," and the circuit court never made an express 
finding that the infant formula was contaminated.  The Insurers 
respond that the circuit court's final order evidences a 
finding of contamination and that evidence was presented 
through stipulations and testimony to support this finding.  We 
agree with the Insurers. 
 
The parties stipulated that the "[e]levated levels of 
melamine detected in infant formula batches made between 
January 22, 2009 and January 30, 2009 are evidence of the 
disintegration of the water filters and the infiltration of 
melamine and other filter materials into the infant formula."  
PBM's Executive Vice-President Scott F. Jamison testified that 
all batches manufactured during this period had no salvage 
value, were unfit for human consumption, and were unmarketable 
as a result of the infiltration.  As a result, the evidence 
established that the formula was "contaminated" as defined in 
the policies because disintegrated filter components caused a 
loss of value or marketability of the formula.  The final order 
states "the Court finds no liability for coverage of the 
Plaintiff's contamination losses."  The circuit court's finding 
with respect to contamination is not against the weight of the 
evidence, and is not erroneous.  See, e.g., Code § 8.01-680; 
Weedon v. Weedon, 283 Va. 241, 253, 720 S.E.2d 552, 558 (2012). 
Conclusion 
For the reasons stated in this opinion, we find no error 
in the judgment of the circuit court that the Insurers are not 
liable to provide insurance coverage for PBM’s loss of infant 
formula product.  Therefore, we will affirm the judgment of the 
circuit court. 
Affirmed.