Case Name: Cincinnati Specialty Underwriters Insurance Company v. Energy Wise Homes, Inc., Shirley A. Uhler, Michael D. Uhler and Poulos Insurance, Inc.
Court: Vermont Supreme Court
Jurisdiction: Vermont
Decision Date: 2015-04-03
Citations: 199 Vt. 104
Docket Number: No. 14-165
Parties: Cincinnati Specialty Underwriters Insurance Company v. Energy Wise Homes, Inc., Shirley A. Uhler, Michael D. Uhler and Poulos Insurance, Inc.
Judges: Present: Dooley, Skoglund and Robinson, JJ., and Morris, Supr. J. (Ret.), Specially Assigned
Reporter: Vermont Reports
Volume: 199
Pages: 104–127

Head Matter:
2015 VT 52
Cincinnati Specialty Underwriters Insurance Company v. Energy Wise Homes, Inc., Shirley A. Uhler, Michael D. Uhler and Poulos Insurance, Inc.
[120 A.3d 1160]
No. 14-165
Present: Dooley, Skoglund and Robinson, JJ., and Morris, Supr. J. (Ret.), Specially Assigned
Opinion Filed April 3, 2015
Shapleigh Smith, Jr. and Sophie E. Zdatny of Dinse, Knapp & McAndrew, RC., Burlington, for Plaintiff-Appellant.
Joel P. Iannuzzi of Cleary Shahi & Aicher, P.C., Rutland, and Jennifer Deck Samuelson (On the Brief) of Samuelson Law Offices, Manchester Center, for Defendants-Appellees.

Opinion:
¶ 1.
Skoglund, J.
Insurer Cincinnati Specialty Underwriters Insurance Company appeals from the trial court's order granting summary judgment to defendants Energy Wise, Inc. and Michael D. and Shirley A. Uhler in this declaratory-judgment action. It argues that the court should have granted summary judgment in its favor because the "total pollution exclusion" in its policy plainly and unambiguously precludes coverage in this case. We agree with insurer, and therefore reverse the trial court's decision and remand with instructions to enter judgment in insurer's favor.
¶ 2. The facts are undisputed. Energy Wise is a Vermont corporation that specializes in insulating buildings and homes. It purchased a commercial general liability (CGL) policy from insurer, effective March 1, 2010 to March 1, 2011. As insurer notes, this was a "surplus lines" policy. See 8 V.S.A. § 5022(b)(8) (defining "surplus lines insurance" as "coverage not procurable from admitted insurers"); id. § 5022(b)(1) (defining "admitted insurer" as "an insurer possessing a certificate of authority to transact business in [Vermont] issued by the Commissioner [of Financial Regulation] pursuant to [8 V.S.A. § 3361]").
¶ 3. In late 2010, Energy Wise installed spray-foam insulation at the Shrewsbury Mountain School. A school employee, Shirley Uhler, and her husband later filed suit against Energy Wise. Ms. Uhler asserted that she was "exposed to and encountered airborne chemicals and airborne residues" from the spray-foam insulation and suffered bodily injury as a result. The Uhlers raised claims of negligence, res ipsa loquitur, and loss of consortium. Energy Wise requested coverage under its CGL policy, and insurer agreed to defend Energy Wise under a bilateral reservation of rights.
¶ 4. In September 2012, insurer filed a complaint for declaratory judgment, asserting that its policy did not cover the claims at issue. Insurer cited the "Total Pollution Exclusion Endorsement" in its policy, which excluded coverage for "[b]odily injury . . . [that] would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at any time."
¶ 5. The policy defined "pollutants" as:
any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, petroleum, petroleum products and petroleum by-products, and waste. Waste includes materials to be recycled, reconditioned or reclaimed. "Pollutants" include but are not limited to, that which has been recognized in industry or government to be harmful or toxic to per sons, property or the environment, regardless of whether the injury, damage, or contamination is caused directly or indirectly by the "pollutants" and regardless of whether: (a) The insured is regularly or otherwise engaged in activities which taint or degrade the environment; or (b) The insured uses, generates or produces the "pollutant."
The following specific pollutants were expressly excluded: respi-rable dust, microorganisms, fungi, bacteria, sulfuric acid, tainted drywall, chromated copper aresante, fluorine, beryllium, benzene, formaldehyde, and manganese.
¶ 6. The policy also excluded coverage for "bodily injury" arising out of "the installation or application of any exterior insulation and finish system or any substantially similar system, including the application or use of conditioners, primers, accessories, flash-ings, coatings, caulking or sealants in connection with such system." (Quotation marks omitted.)
¶ 7. Insurer argued that given the broad language used in the exclusion, and the fact that the policy included additional exclusions for actual or alleged bodily injury arising out of or caused by other potential toxins, it was clear that the policy "d[id] not provide any coverage for bodily injuries related to toxins, chemicals, or pollutants." Thus, insurer argued, the Uhlers' underlying claim, which was based on exposure to toxic "airborne chemicals" and "airborne residues," was not covered.
¶ 8. The Uhlers opposed insurer's motion for summary judgment. They argued that the pollution exclusion was intended only to protect against liability for traditional environmental hazards, and that insurer's interpretation was so overbroad as to make the policy meaningless.
¶ 9. In a January 2014 decision, the court indicated its intent to grant summary judgment to defendants. It recognized that many other courts had interpreted total pollution exclusions like the one at issue, and it identified two cases that helped frame the debate: MacKinnon v. Truck Insurance Exchange, 73 P.3d 1205 (Cal. 2003), and Quadrant Corp. v. American States Insurance Co., 110 P.3d 733 (Wash. 2005). California holds that the total pollution exclusion is limited "to injuries arising from events commonly thought of as pollution, i.e. environmental pollution," and it is not intended to encompass "ordinary acts of negligence involving harmful substances." MacKinnon, 73 P.3d at 1216. Washington, on the other hand, holds that the total pollution exclusion, by its plain language, excludes all injuries that occur from pollutants. Quadrant Corp., 110 P.3d at 735.
¶ 10. After considering these and other cases, the court found MacKinnon persuasive. It concluded that the purpose of the total pollution exclusion was and remained to protect insurers against traditional environmental liabilities. As applied to the facts here, the court found the term "pollutants" ambiguous because it was capable of such broad interpretation as to frustrate any reasonable purpose of the policy. It found that insurer's definition admitted to no limiting principle that would provide a business such as Energy Wise with any assurance that any aspect of its business operations would be covered.
¶ 11. The court found that a similar ambiguity afflicted insurer's broad definition of the term "discharge." Energy Wise sprayed insulation into buildings as the fundamental aspect of its business operations. It did not spray the insulation into the air, water, or earth in a way that was consistent with traditional environmental liability. Under insurer's argument, the court reasoned, almost any use of the products of Energy Wise's business that harmed a third party might be excluded. Seen in this light, the court concluded that the term "discharge" was ambiguous and insurer could not rely on the exclusion to relieve it of its duty to defend and indemnify Energy Wise.
¶ 12. The court disagreed with the reasoning of the Washington Supreme Court, finding its resort to plain-language analysis facile. It concluded that the Washington decision did not sufficiently account for the historical purpose and development of the pollution exclusion, or for the reasonable expectations of an insured business that the pollution exclusion should be subject to a limiting principle that preserved the meaning and value in a CGL policy. The court considered insurer's argument an " 'opportunistic afterthought' inimical to the expectations of coverage reasonably associated with the sale of a [CGL] policy to a company engaged in the business of spraying insulation." (Quoting Quadrant Corp., 110 P.3d at 748 (Chambers, J., dissenting)).
¶ 13. Thus, given the ambiguities in the policy, and the rule that all ambiguities must be read in favor of the insured, Vt. Mut. Ins. Co. v. Parsons Hill P'ship, 2010 VT 44, ¶21, 188 Vt. 80, 1 A.3d 1016, the trial court rejected insurer's argument that coverage was excluded. The court indicated that it would enter summary judgment in defendants' favor absent a persuasive demonstration that such relief was unwarranted. Insurer submitted a response, which the court found unpersuasive. This appeal followed.
¶ 14. Insurer argues on appeal that its policy plainly bars coverage. According to insurer, its policy goes beyond excluding coverage for traditional environmental risks because its definition of "pollutants" includes "that which has been recognized in industry or government to be harmful or toxic to persons, property or the environment." (Emphasis added and quotation marks omitted.) Insurer asserts that this language broadens the scope of the pollution exemption beyond traditional environmental claims and distinguishes this case from the cases relied upon by the trial court. Insurer maintains that it is entitled to have the policy enforced as written, that the reasonable expectations doctrine is irrelevant given the plain language of the policy, and that enforcement of the exclusion does not render coverage illusory.
¶ 15. We review the trial court's decision "de novo, applying the same standard as the trial court." Progressive Cas. Ins. Co. v. MMG Ins. Co., 2014 VT 70, ¶10, 197 Vt. 253, 103 A.3d 899. "Summary judgment is appropriate if the material facts are undisputed and any party is entitled to judgment as a matter of law." Id.; see also V.R.C.P. 56.
¶ 16. We apply well-established legal principles to this dispute. An insurance policy is construed according to "its terms and the evident intent of the parties as expressed in the policy language." Sperling v. Allstate Indem. Co., 2007 VT 126, ¶8, 182 Vt. 521, 944 A.2d 210 (quotation omitted). We interpret policy terms "according to their plain, ordinary and popular meaning." Id. (quotation omitted). Ambiguity exists "[i]f a term is subject to more than one reasonable interpretation," and all ambiguities "must be resolved in favor of the insured." Id. (quotation omitted). Policies that "specifically and unambiguously exclude coverage are effective to preclude the insurer's liability," and "we cannot deny the insurer the benefit of unambiguous provisions inserted into the policy for its benefit." Id. ¶ 14 (quotation omitted). While we are mindful of "the reasonable expectation of the insured in interpreting insurance coverage policy provisions," "apart from circumstances where an agent of the insurance carrier promises specific coverage, we have not held that the expectations of an insured can control over unambiguous policy language." Parsons Hill, 2010 VT 44, ¶ 28.
¶ 17. We begin with the "well-documented and relatively uncontroverted" events that led to the insurance industry's adoption of the pollution exclusion. Am. States Ins. Co. v. Koloms, 687 N.E.2d 72, 79 (Ill. 1997) (quotation omitted). "Pollution exclusions originated from insurers' efforts to avoid sweeping liability for long-term release of hazardous waste." Quadrant, 110 P.3d at 737. "Prior to 1966, the standard-form CGL policy provided coverage for bodily injury or property damage caused by an 'accident.' " Koloms, 687 N.E.2d at 79 (quotation omitted). The term "accident" was not defined and courts frequently interpreted the term "to encompass pollution-related injuries." Id. The insurance industry changed to an "occurrence"-based policy, but courts continued to construe the policies "to cover damages resulting from long-term, gradual exposure to environmental pollution." Id. at 79-80.
¶ 18. Meanwhile, changes in federal environmental protection laws and a series of high-profile environmental disasters "imposed greater economic burdens on insurance underwriters, particularly those drafting standard-form CGL policies." Id. at 80. Following these events, the insurance industry drafted what eventually became the pollution exclusion. Id.
¶ 19. In 1970, an endorsement to the standard-form CGL policy provided in relevant part that:
[This policy shall not apply to bodily injury or property damage] arising out of 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 land, the atmosphere or any watercourse or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.
Id. (alteration in original) (quotation omitted). "[I]n 1973, the insurance industry incorporated [this] endorsement directly into the body of the policy as exclusion 'f.' " Id. This exclusion is referred to as the total pollution exclusion.
¶ 20. Over "the next 13 years, various courts labored over the exact meaning of the words 'sudden and accidental.' " Id. "Not surprisingly, insurance companies responded by drafting a new version of the exclusion, which, first appearing in 1985, is now commonly known as the 'absolute pollution exclusion.' " Id. at 81. As one court explained:
The two most notable features of this latest version are (i) the lack of any exception for the "sudden and accidental" release of pollution, and (ii) the elimination of the requirement that the pollution be discharged "into or upon land, the atmosphere or any watercourse or body of water." Significantly, the purpose of the current exclusion, like its predecessor, is "to exclude governmental clean up costs from the scope of coverage."
Id. (alteration omitted).
¶ 21. Many courts have considered this historical background significant in deciding the circumstances under which the exclusion should bar coverage. In Koloms, for example, the court held:
Our review of the history of the pollution exclusion amply demonstrates that the predominate motivation in drafting an exclusion for pollution-related injuries was the avoidance of the enormous expense and exposure resulting from the explosion of environmental litigation. Similarly, the 1986 amendment to the exclusion was wrought, not to broaden the provision's scope beyond its original purpose of excluding coverage for environmental pollution, but rather to remove the sudden and accidental exception to coverage which, as noted above, resulted in a costly onslaught of litigation. We would be remiss, therefore, if we were to simply look to the bare words of the exclusion, ignore its raison d'etre, and apply it to situations which do not remotely resemble traditional environmental contamination. The pollution exclusion has been, and should continue to be, the appropriate means of avoiding the yawning extent of potential liability arising from the gradual or repeated discharge of hazardous substances into the environment.
Id. (citation and quotations omitted). The Koloms court found "it improper to extend the exclusion beyond that arena." Id. Thus, it held that the accidental release of carbon monoxide due to a broken furnace did not constitute the type of environmental pollution contemplated by the exclusion. Id. at 82.
¶ 22. Other courts have found the historical background of this exclusion less significant. The Quadrant court held that it could not look to the drafting history to find the exclusion ambiguous; the drafting history was relevant only in determining a reasonable construction after the court had found an ambiguity. 110 P.3d at 738, 742. In Quadrant, the insured sought coverage for injuries suffered by a tenant when fumes from a waterproofing material entered the tenant's unit. The court concluded that the absolute pollution exclusion "unambiguously applies to the facts of the case at hand," and that "the plain language must be applied without reference to extrinsic evidence regarding the intent of the parties." Id. at 742. 'Where the exclusion specifically includes releases or discharges occurring on the owner's property," the court continued, "or as the result of materials brought onto the property at the behest of the insured, and a reasonable person would recognize the offending substance as a pollutant, the policy is subject to only one reasonable interpretation and the exclusion must not be limited." Id. at 743.
¶23. As noted, insurer here argues that its pollution exclusion is even broader than the "absolute" or "total" pollution exclusion. At least one court has credited this argument. See Cincinnati Ins. Co. v. Becker Warehouse, Inc., 635 N.W.2d 112, 118-21 (Neb. 2001) (concluding that, where definition of "pollutant" included substances that were "harmful or toxic to persons, property or the environment," the inclusion of "the environment" as a separate entity that could suffer harm from a pollutant demonstrated that pollution exclusion's scope was not limited to environmental pollution); see also Clipper Mill Fed., LLC v. Cincinnati Ins. Co., No. JFM-10-1647, 2010 WL 4117273, at *7 (D. Md. Oct. 20, 2010) (unpub.) (reaching similar conclusion). But cf. Belt Painting Corp. v. TIG Ins. Co., 795 N.E.2d 15, 20-21 (N.Y. 2003) (rejecting argument that omission of requirement that pollutants be discharged or dispersed "into or upon land, the atmosphere or any water course or body of water" indicated intent to extend exclusion to indoor, as well as outdoor, pollution, and explaining that omission of such language merely removed redundancy, as "any pollution will necessarily involve discharge or release into land, atmosphere or water" and omission of such language did not overcome environmental implications of terms "discharge, dispersal, seepage, migration, release or escape").
¶ 24. We recognize that courts are split on the question of whether the absolute pollution exclusion bars coverage for all injuries caused by pollutants or whether the exclusion applies only to injuries caused by traditional environmental pollution. Compare Becker Warehouse, 635 N.W.2d at 118 (recognizing split and concluding that "[a] majority of state and federal jurisdictions have held that absolute pollution exclusions are unambiguous as a matter of law and, thus, exclude coverage for all claims alleging damage caused by pollutants" (citing cases)), and Quadrant, 110 P.3d at 738 (finding that "a majority of courts has concluded that absolute pollution exclusions unambiguously exclude coverage for damages caused by the release of toxic fumes" (citing cases)) with MacKinnon, 73 P.3d at 1209 n.2 (concluding that, "[cjonsidering those jurisdictions that have taken a definitive position, as represented by a published opinion of the state supreme court, the narrower interpretations of the pollution exclusion appears to be in the majority" (citing cases)), and Midwest Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628, 635, 635 n.2 (Minn. 2013) (concluding that "a majority of jurisdictions limit the [pollution] exclusion to situations involving traditional environmental pollution," although it is a slim majority (citing cases)). As the MacKinnon court emphasized, and as is evident from the case law, "[t]o say there is a lack of unanimity as to how the clause should be interpreted is an understatement." 73 P.3d at 1208; see also Porterfield v. Audubon Indem. Co., 856 So. 2d 789, 800 (Ala. 2002) ("[TJhere exists not just a split of authority, but an absolute fragmentation of authority"). We need not address the question of whether the "absolute exclusion" set forth above would exclude the risk at issue here.
¶ 25. The policy here excludes coverage for "[bjodily injury . . . [that] would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at any time." The term "pollutants" includes gaseous irritants or contaminants, including chemicals, vapor, and fumes. It encompasses "that which has been recognized in industry or government to be harmful or toxic to persons, property or the environment, regardless of whether . . . the insured uses, generates or produces the 'pollutant.' "
¶ 26. The Uhlers claimed in their complaint that Ms. Uhler suffered bodily injury after being exposed to and encountering "airborne chemicals and airborne residue." They alleged that, as-part of its work at the school, Energy Wise "would be using products and materials that were known to be severely toxic with significant risk of injury and/or illness to humans who may be exposed to them." There appears to be no dispute that the airborne chemicals and residues at issue "ha[ve] been recognized in industry or government to be harmful or toxic to persons, property or the environment." Insurer cites numerous authorities in support of this contention, and defendants do not argue otherwise. These toxic chemicals allegedly became airborne, and were inhaled, as a result of Energy Wise's application of spray-foam insulation. This represents a "dispersal" or "release" of such chemicals under a common-sense reading of those terms. See Becker Warehouse, 635 N.W.2d at 122 (similarly concluding that where fumes from floor sealant allegedly contaminated food stored in warehouse, "the only logical explanation for the alleged damage is that the . . . fumes 'discharged, dispersed, released or escaped' " from their original location to the place where the food was stored). But see Belt Painting Corp., 795 N.E.2d at 20 (reaching opposite conclusion, and holding that terms such as "discharge" and "dispersal" are "terms of art in environmental law used with reference to damage or injury caused by disposal or containment of hazardous waste," and agreeing that "it strains the plain meaning, and obvious intent, of the language to suggest that . . . fumes, as they went from the container to [the injured party's] lungs, had somehow been discharged, dispersed, released or escaped" (alteration in original) (quotations omitted)).
¶ 27. We recognize that the "broad nature of the pollution exclusion may cause a commercial client to question the value of portions of its commercial general liability policy." Becker Warehouse, 635 N.W.2d at 120. Our role on review, however, is not to rewrite the policy. Where, as here, the language used "is clear and susceptible of only one possible interpretation," it must be enforced as written. Id. at 120-21; see also Sperling, 2007 VT 126, ¶ 14 (stating that, where policy "specifically and unambiguously exclude[s] coverage," exclusion is "effective to preclude the insurer's liability" (quotation omitted)). This interpretation does not render the policy illusory. As insurer points out, the policy does provide coverage for other liability risks, such as slip-and-fall injuries. See also Quadrant, 110 P.3d at 744 (rejecting argument that pollution exclusion rendered CGL policy illusory, explaining that although policy excluded from coverage some claims that would arise out of typical type of work conducted by insured, it did not preclude coverage for many accidents that could otherwise occur, such as slip-and-fall injuries). That the policy does not cover the type of claims that one might reasonably expect to arise in the course of Energy Wise's business does not render the policy unenforceable. As indicated above, an insured's "reasonable expectations" cannot trump "unambiguous policy language." Parsons Hill, 2010 VT 44, ¶ 28; see also Wolters, 831 N.W.2d at 638-39 & 639 n.4 (reaching similar conclusion, and stating that "[t]he reasonable expectation test is not a license to ignore the pollution exclusion . . . nor to rewrite the exclusion solely to conform to a result that the insured might prefer").
¶ 28. Finally, we note the limited nature of our holding. As indicated above, the Vermont Department of Financial Regulation requires all insurers issuing liability policies in Vermont to provide coverage for pollution by endorsement unless the Department approves a "Consent to Rate" application. Thus, our decision today applies only to surplus lines insurers.
Reversed and remanded.
¶ 29.
Vermont law provides that insurance coverage "shall not be placed with a non-admitted insurer unless the full amount of insurance required is not reasonably procurable from admitted insurers actually transacting that kind and class of insurance in [Vermont]; and the amount of insurance exported shall be only the excess over the amount procurable from admitted insurers actually transacting and insuring that kind and class of insurance." 8 V.S.A. § 5024(a); see also DeBartolo v. Underwriters at Lloyd's of London, 2007 VT 31, ¶ 3, 181 Vt. 609, 925 A.2d 1018 (mem.) (recognizing that a surplus lines insurer "can issue coverage only if it is not reasonably available from other sources"). According to insurer, the terms of a surplus lines policy are not subject to approval by the State of Vermont, citing 8 V.S.A. § 5021 et seq. Defendants do not argue otherwise.
This is significant because the Vermont Department of Financial Regulation requires all insurers issuing liability policies in Vermont to provide coverage for pollution by endorsement, although the Department will consider a "Consent to Rate" application "from licensed insurance companies or their agents seeking to attach a pollution exclusion to liability coverage when there is a high probability of a pollution claim." See Insurance Bulletin No. Ill (Oct. 18, 1996), available at http://www.dfr.vermont.gov/reg-bul-ord/pollution-coverage.
Vermont regulators have disapproved of such exclusions since their inception based on a "determination that the exclusions were 'unfair and discriminatory to some[J and indeed most[,] risks' and inconsistent with the 'public expectation of the level of coverage or the degree of coverage that is supposed to be available when one purchased a general liability policy. . . . That practice continues today, although VDBI [(now DFR)] now has a mechanism for approving pollution exclusions on a risk-by-risk basis in cases where, for example, the insured's operations involve a particularly high risk of environmental liability and the insured would otherwise be unable to obtain coverage." Maska U.S., Inc. v. Kansa, Gen. Ins. Co., 198 F.3d 74, 80 (2d Cir. 1999) (alteration omitted).
While the Uhlers' complaint did not specifically identify the airborne substance allegedly responsible for Ms. Uhler's injury, the Uhlers' expert opined that it was most likely tertiary amine catalysts.