Cincinnati Specialty Underwriters Ins. Co. v. Energ y Wise Homes, Inc. et. al., No. 339-9-12 Bncv (Wesl ey, J., Jan. 28, 2014).

[The text of this Vermont trial court opinion is un official. It has been reformatted from the origina l. The accuracy of the text and the accompanying data included in the Vermont trial cou rt opinion database is not guaranteed.]
VERMONT SUPERIOR COURT

SUPERIOR COURT CIVIL DIVISION Bennington Unit Docket No. 339-9-12 Bncv

Cincinnati Specialty Underwriters Insurance Company,

Plaintiff.

v.

Energy Wise Homes, Inc., Shirley A. Uhler, and, Michael D. Uhler,

Defendants.

Opinion and Order

Denying Defendant’s Motion for Summary Judgment

Background

Plaintiff brings a declaratory judgment action aga inst Defendants seeking a determination of the scope of coverage as to the commercial gener al liability policy it sold to Energy Wise. Energy Wise is a company that insulates buildings. In November or October of 2010, Energy Wise contracted to install spray insulation at the Shrewsbury Mountain School. Shirley Uhler was an employee of the Shrewsbury Mountain School w hen the spraying occurred. Ms. Uhler alleges she suffered respiratory problems due to ex posure to toxic airborne chemicals released as a result of the spraying. Together with her husband , Michael, who seeks damages for loss of consortium, Ms. Uhler brought suit against Energy W ise in Rutland County seeking personal injury damages, Uhler v. Energy Wise Homes, Inc. , Doc. No. 295-4-12 Rdcv.

As Energy Wise’s insurer, while reserving any righ ts later determined to limit the scope of its policy, Plaintiff agreed to defend Energy Wi se in the Rutland case. On September 21, 2012, Plaintiff filed its complaint in this action against Energy Wise and the Uhlers, seeking a

declaration that Plaintiff’s insurance contract wit h Energy Wise precludes coverage for this

claim. 1

On September 23, 2013, Plaintiff moved for summary judgment. Plaintiff argues it is not obligated to defend or indemnify Energy W ise on the Uhler’s claim relying on the total pollution exclusion in the policy. The co ntract does not cover “‘bodily injury’... which would not have occurred in whole or in part b ut for the actual, alleged or threatened discharge, dispersal, seepage, migration , release or escape of ‘pollutants’ at any time.” The policy further defines “pol lutants”:

1 The record indicates another insurance company, Po ulos Insurance, was a third-party defendant but Ene rgy Wise dismissed its claim against Poulos.2

‘Pollutants’ include but are not limited to, that w hich has been recognized in industry or government to be harmful or toxic to pe rsons, property or environment, regardless of whether the injury damag e, or contamination is caused directly or indirectly by the ‘pollutants’ and rega rdless of whether (a) The insured is regularly or otherwise engaged in activities whi ch taint and degrade the environment; or (b) The insured uses, generates or produces the ‘pollutant.’

The policy also lists pollutants that are specifica lly excluded, which are: respirable dust, microorganisms, fungi, bacteria, sulfuric acid, tai nted drywall, chromated copper aresante, fluorine, beryllium, benzene, formaldehyde, and man ganese. The Uhlers’ complaint does not specifically identify the toxic airborne substance allegedly responsible for the injury, but the Uhlers’ expert will testify it was most likely tert iary amine catalysts.

The Uhlers opposed the motion for summary judgment on November 22, 2013. They argue the pollution exclusion is only intended to p rotect the insurance company from liability for traditional environmental hazards, and that Plainti ff’s interpretation to exclude coverage under the circumstances presented here is so overbroad as to make the policy meaningless. Plaintiff responded to the opposition on December 20, 2013. E nergy Wise did not filed a response to the motion for summary judgment.

Standard of Review

The Court grants summary judgment “if the movant sh ows that there is no genuine dispute as to any material fact and the movant is e ntitled to judgment as a matter of law.” V.R.C.P. 56(a). The Court makes all reasonable infe rences and resolves all doubts in favor of the non-moving party. Lamay v. State , 2012 VT 49, ¶ 6, 191 Vt. 635. When interpreting an insurance policy, the Court seeks to implement the plain meaning of an insurance contract. Vt. Mut. Ins. Co. v. Parsons Hill P’ship , 2010 VT 44, ¶ 21, 188 Vt. 80. Where an ambiguity exists, the Court construes the policy in favor of the reas onable expectations of the insured. Id. Further,

it is the burden of the insurer to show an exclusio n applies. State v. CNA Ins. Cos. , 172 Vt. 318, 330 (2001).

Discussion

Pollution exclusion contracts have been upheld in V ermont and the parties do not dispute enforceability. 2 However, the scope of the total pollution exclusi on has not been well defined in

Vermont. See, e.g. , Parsons Hill , 2010 VT 44, ¶¶ 1–2 (discussing coverage for a bre ach of the implied warrant of habitability); Sperling v. Allstate Indem. Co. , 2007 VT 126, ¶¶ 1–2, 182 Vt.

2 Vermont case law requiring prior regulatory approv al of pollution exclusions does not apply. Plainti ff sold Energy Wise a surplus policy and the parties do not argue surplus policies must go through the regulatory app roval requirements. See, e.g.

, State v. Onebeacon Am. Ins. Co. , 485-7-07 Wncv, 2009 WL 6557344 (Vt. Super. Ct. No v. 5, 2009) (Crawford, J.) (holding pollution exclusion e nforceable); State v. Stonington Ins. Co. , 811-12-02 Wncv, 2007 WL 3234763 (Vt. Super. Ct. July 27, 2007) (Teachout , J.) (discussing requirements for regulatory appro val of pollution exclusions); see also Maska U.S., Inc. v. Kansa Gen. Ins. Co. , 198 F.3d 74, 80 (2d Cir. 1999) (holding pollution exclusions do not violate Vermont public policy).3

521 (discussing coverage on a home owner’s policy f or a home heating fuel spill). In Parsons

Hill , a landlord’s insurer sought a declaration that th e pollution exclusion on their general comprehensive liability policy precluded coverage. 2010 VT 44, ¶¶ 1–2. The tenants sued the landlord for a breach of an implied warranty of hab itability because their water contained a toxin.

Id. The landlord had three types of coverage. Id. ¶ 4. Coverage A covered bodily injury but contained a pollution exclusion; Coverage B covered personal injury without a pollution exclusion; and, Coverage D was for bodily injury ca used by pollution. Id. The Court ruled none of the policies covered the type of claim made by t enants against landlord because they only covered property damage and personal injury, which are separate from a breach of the implied warrant of habitability. Id. ¶ 1, 15, 21–23.

Because Vermont cases do not define the scope of th e pollution exclusion in this contract, the Court looks for guidance from other jurisdictio ns. Two cases, from California and Washington, help to frame the debate. See MacKinnon v. Truck Ins. Exch. , 73 P.3d 1205 (Cal. 2003); Quadrant Corp. v. Am. States Ins. Co. , 110 P.3d 733 (Wash. 2005). California holds the pollution exclusion is limited to typical environme ntal pollution. See MacKinnon , 73 P.3d at 1216. In contrast, Washington holds the total pollu tion exclusion, by its plain language, excludes all injuries that occur from pollutants. See Quadrant , 110 P.3d at 744. There are many other cases, but these two cases frame each argument well . There is also discussion in the secondary

literature. See, e.g.

, Absolute Pollution Exclusion , 43 Am. Jur. 2d Insurance § 708; What Constitutes "Pollutant," "Contaminant," "Irritant," or "Waste" Within Meaning of Absolute or Total Pollution Exclusion in Liability Insurance Po licy

, 98 A.L.R.5th 193; Generally; Total

Pollution Exclusions , 9 Couch on Ins. § 127:13.

MacKinnon concerned a suit against a landlord for failure to properly apply pesticides to kill wasps. 73 P.3d at 1207. The landlord sought in demnification from its insurer, which disclaimed coverage due to the pollution exclusion. Id. at 1207–08. To give context to the coverage dilemma, the California Supreme Court summ arized:

To say there is a lack of unanimity as to how the c lause should be interpreted is an understatement. Although the fragmentation of opini on defies strict categorization, courts are roughly divided into two camps. One camp maintains that the exclusion applies only to traditional environmental pollution into th e air, water, and soil, but generally not to all injuries involving the negligent use or handling of toxic substances that occur in the norm al course of business. These courts generally find ambiguity in the wording of t he pollution exclusion when it is applied to such negligence and interpret such am biguity against the insurance company in favor of coverage. The other camp mainta ins that the clause applies equally to negligence involving toxic substances an d traditional environmental pollution, and that the clause is as unambiguous in excluding the former as the

latter.

Id. at 1208–09. The Court also “recognized that the ab ove categorization is an oversimplification, because the same court may fall into different camps depending on the situations presented.” Id. at 1209 n.2.4

The California Supreme Court also summarized the h istory of the pollution exclusion.

See id. at 1209–10. The exclusion started as a qualified pollution exclusion, which was designed to shield insurers from liability when the insureds violated federal law, such as the Clean Air

Act. See id. After years of litigation about the meaning of som e of the words in the qualified pollution exclusion, insurance companies adopted th e so-called total pollution exclusion in 1985.

Id. Nevertheless, the purpose remained to protect insu rers against exposure to substantial environmental clean-up costs resulting from their i nsureds’ activities in violation of environmental laws and regulations. See id. at 1210. “Even commentators who represent the insurance industry recognize that the broadening of the pollution exclusion was intended primarily to exclude traditional environmental poll ution rather than all injuries from toxic

substances.” Id.

The California Supreme Court then discussed the st rengths and weaknesses of each argument and held the pollution exclusion did not a pply to improper use of pesticides that harmed a single tenant. See id. at 1211–13. The insurance company’s argument was based on a fallacy that the meaning can be discovered by inter preting words such as “irritant” or “discharge.” Id. at 1214. The court found this argument unreasonab le because it lacked a limiting principle allowing the insured to determin e what, if any, perils were covered. Id. Therefore, the insurance company’s argument was rej ected as overly broad. Id. at 1215. Hence, the pollution exclusion only applied to traditional environmental liabilities, not to a standard suit for negligence in which a toxic substance was the a gent of the harm. See id. at 1216–18.

The Washington Supreme Court conducted a similar a nalysis but reached the opposite

conclusion. See Quadrant , 110 P.3d at 744. Quadrant concerned a suit by a tenant who became ill from the fumes coming off a sealant on a deck. Id. at 735. As in MacKinnon , the defendant had a commercial general liability policy that cont ained an absolute pollution exclusion. See id. at 736. The insureds filed a suit against the insur ance company for denying coverage. Id.

The court started its analysis by reciting the sta ndard for interpreting insurance contracts.

See id. at 736–37. Insurance policies are contracts. Id. at 737. The Court considers the policy as

a whole. Id. The court strives to apply the plain language of a policy. Id. “[A] clause is ambiguous only when, on its face, it is fairly susc eptible to two different interpretations, both of

which are reasonable.” Id. (internal quotations omitted).

The court discussed the history and purpose of pol lution exclusions. See id. “Pollution exclusions originated from insurers' efforts to avo id sweeping liability for long-term release of

hazardous waste.” Id. After litigation in the 1970s, insurance companies started using the current pollution exclusion in the mid-1980s. See id. The court also summarized the split between courts on the scope of the exclusion:

Many courts have interpreted absolute pollution exc lusions specifically in the context of claims for bodily injuries arising out o f the release of toxic fumes. Some have concluded that the absolute pollution exc lusion does not apply where personal injury has resulted from the negligent rel ease of fumes during the ordinary course of the insured's business. See, e.g., Nautilus Ins. Co. v. Jabar, 188 F.3d 27, 29–31 (1st Cir.1999); Am. States Ins. Co. v. Koloms, 177 Ill.2d 473, 6875

N.E.2d 72, 82, 227 Ill.Dec. 149 (1997) (“[T]he excl usion applies only to those injuries caused by traditional environmental pollut ion.”). These courts have relied

on several different theories. Some have concluded that the terms “discharge,” “dispersal,” “irritant,” and “contaminant” are term s of art in environmental law, thus rendering the exclusion ambiguous. See Belt Painting, 763 N.Y.S.2d 790, 795 N.E.2d at 19 (citing Nautilus Ins. Co., 188 F.3d at 30). Others have concluded that because the historical purpose of the prior qu alified pollution exclusion was to shield insurers from sweeping liability for envi ronmental cleanups, the absolute pollution exclusion clause could be reasonably inte rpreted to apply only to

traditional environmental harms. See id.; Koloms, 227 Ill.Dec. 149, 687 N.E.2d at 81. Finally, some courts have concluded that a “com monsense approach” is necessary and the pollution exclusion should not be read to apply to “injuries resulting from everyday activities gone slightly, b ut not surprisingly, awry.” Pipefitters Welfare Educ. Fund v. Westchester Fire Ins. Co., 976 F.2d 1037, 1043–44 (7th Cir.1992).

Id. at 737–38.

After discussing the history of interpretations of pollution exclusions in Washington, and based on its reading of the plain language of the i nsurance contract, the court found the pollution exclusion covered all torts in which pollutants, br oadly defined, had a causal role in the injury for which coverage was sought. See id. at 738–41. Unambiguous contracts must be interpret ed on

their face. Id. at 741. Courts should not create an ambiguity wher e none exists. Id. The policy language, but its plain language, excluded coverage for bodily injury caused by the discharge of pollutants. Id. Fumes from sealant coming off of a deck is the dis charge of a pollutant. Id. at 744. Thus, the exclusion barred the suit. See id. A dissent characterized the majority’s interpretat ion of the contract too broad and inconsistent with pre cedent in Washington. See id. at 744–45, 748 (Chambers, J. dissenting).

The current case confronts this Court with the sam e analytic quandary represented by the California and Washington cases just discussed. Th e Court finds the reasoning of the California Supreme Court more persuasive. See MacKinnon, 73 P.3d at 1209–10, 1214–18.The purpose of the total pollution exclusion was and remains to pr otect insurance companies against traditional

environmental liabilities. See id. at 1210. As applied to the facts here, ambiguity arises as to the meaning of pollutant and discharge, both of which a re capable of such broad interpretations as to frustrate any reasonable purpose of the policy. As described by the Uhlers’ expert, the foam insulation is not any of the listed pollutants. Al though the list of pollutants is likely broader tha n those explicitly defined, the insurance company’s d efinition admits to no limiting principle which would leave an insured conducting a business such as Energy Wise’s with any assurance that any aspect of its business operations was not excluded by the policy Plaintiff sold.

Similar ambiguity afflicts Plaintiff’s broad defin ition of discharge for the purpose of applying the total pollution exclusion. Energy Wise sprays insulation into buildings as the fundamental aspect of its business operations. By c ontrast, Energy Wise did not spray the insulation into the air, water, or earth in a manne r that is consistent with traditional environmental liability. For example, Energy Wise d id not spray the insulation into the air6

around a public park, or allow it to run through a pipe into a water supply, or bury it in the ground. Under Plaintiff’s argument almost any use o f the products of Energy Wise’s business that harmed a third party might be excluded. Seen i n this light, the term discharge is rendered ambiguous and does not support resort to the exclus ion for discharge of pollutants to relieve Cincinnati of its duty to defend and indemnify Ener gy Wise.

The Court disagrees with the reasoning of the Wash ington Supreme Court, finding its resort to plain language analysis overly facile. See Quadrant , 110 P.3d at 744. The opinion does not sufficiently account for the historical purpose and development of the pollution exclusion, nor for the reasonable expectations of an insured b usiness that the pollution exclusion should be subject to a limiting principle that preserves the meaning and value in the general commercial liability policy. As suggested by Justice Chambers , applying the pollution exclusion in the circumstances presented by this type of case makes the exclusion so broad as to render the insurance policy almost meaningless. See id. at 748 (Chambers, J. dissenting). Similar to the rationale deemed insubstantial by the Quadrant dissent, Cincinnati’s argument here for excluding coverage represents “an ‘opportunistic af terthought,’” inimical to the expectations of coverage reasonably associated with the sale of a g eneral commercial liability policy to a company engaged in the business of spraying insulat ion. Id.

Adopting the reasoning of MacKinnon, this Court concludes the meanings of pollutant discharge are ambiguous as applied to this case. T he Court must interpret all ambiguities in

favor of the insured and therefore does not read th e policy to exclude coverage in this case. See

Parsons Hill , 2010 VT 44, ¶ 21. Moreover, Plaintiff has not met its burden of showing an exclusion applies. See CNA , 172 Vt. at 330. The Court denies summary judgment to Plaintiff because Plaintiff is not entitled to judgment as a matter of law. See V.R.C.P. 56(a).

Although the Uhlers request a judgment declaring P laintiff is obligated to indemnify Energy Wise, Defendants have not moved for summary judgment. Nevertheless, it appears there are no disputed facts and the Court’s analysis in t his order suggests Defendants are entitled to judgment as a matter of law. Thus, the Court will e nter summary judgment in favor of Defendants in ten days unless Plaintiff responds wi th a persuasive demonstration as to why such

relief is unwarranted. See V.R.C.P. 56(f)(3).

Order

The Court DENIES Plaintiff’s motion for summary judgment. The Cour t will enter summary judgment for Defendants unless Plaintiff co nvinces the Court otherwise within ten days.7

Dated and signed electronically at Bennington, Ver mont on January 23, 2014.

John P. Wesley Superior Court Judge