Opinion ID: 3015793
Heading Depth: 2
Heading Rank: 1

Heading: Physical Loss

Text: A prerequisite for coverage under the homeowner’s policy is “direct physical loss or risk of a direct physical loss.” The policy does not define the term “physical loss to property.” 2 Holding that there was no genuine issue on whether there was a physical loss, the District Court granted summary judgment to Motorists.3 While the bacteria allegedly made the house uninhabitable, the court deemed this a “constructive loss,” and held it insufficient to satisfy the policy’s requirement of “physical loss.” We look to Pennsylvania law in this diversity action and predict how the Supreme Court of Pennsylvania would decide the case. See Debiec v. Cabot Corp., 352 F.3d 117, 128 (3d Cir. 2003) (citing Bohus v. Beloff, 950 F.2d 919, 924 (3d Cir. 1991)). No Pennsylvania Supreme Court case, however, directly addresses whether loss of use may 2 In the definition section, the policy does, however, define the term “property damage” as “physical injury to, destruction of, or loss of use of tangible property.” 3 We agree with the District Court that Motorists did not waive its ability to deny coverage on the basis that there was no physical loss. 5 constitute a physical loss. Decisions of lower Pennsylvania courts also provide little guidance.4 In Port Authority of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002), we considered a similar policy that insured against “physical loss or damage” as it applied to existence of asbestos in the insured buildings.5 We held that the insurer was only required to cover the expense of correcting the problem insofar as the asbestos made the structure unusable. Id. at 230.6 In the case of asbestos, Port Authority stated the following as the “proper standard for ‘physical loss or damage’ to a structure”: only if an actual release of asbestos fibers from asbestos containing materials has resulted in contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable, or if there exists an imminent threat of the release of a quantity of asbestos fibers that would cause such loss of utility. Id. at 236 (emphasis added). 4 Instructive, however, is Hetrick v. Valley Mut. Ins. Co., 15 Pa. D. & C.4th 271, 273 (Pa. Com. Pl. 1992). In Hetrick, the court gave substantial attention and approval to Western Fire Insurance Co. v. First Presbyterian Church, 165 Colo. 34, 38-39(1968). In that case, the Colorado Supreme Court held the term “direct physical loss” extended to cover the loss of use of the insured property where the accumulation of gasoline around and under the property rendered it uninhabitable. 5 Like the Hardingers’ policy, the policy in Port Authority was a first-party insurance policy – one which protects against loss caused by injury to the insured’s property. See Port Authority, 311 F.3d at 233. 6 We noted that, “[i]n ordinary parlance and widely accepted definition, physical damage to property means ‘a distinct, demonstrable, and physical alteration’ of its structure.” Port Authority, 311 F.3d at 235. (citing 10 Couch on Insurance § 148:46 (3d ed.1998)). We found that “[p]hysical damage to a building as an entity by sources unnoticeable to the naked eye must meet a higher threshold.” Id. 6 The District Court provided two reasons why Port Authority is inapplicable. First, the District Court reasoned that Port Authority’s holding, a “prediction of what may eventually become the law of [New York and New Jersey],” is not applicable to this diversity case, which is governed by Pennsylvania substantive law. Motorists Mut. Ins. Co. v. Hardinger, 2004 WL 384999, at  n.5 (E.D.Pa. Feb. 27, 2004). We find nothing, however, in New York, New Jersey, or Pennsylvania law that would cause us to disregard Port Authority under Pennsylvania law. Indeed, Port Authority noted that “applicable state law provides no guidance,” id. at 234-35, and thus, it appears that nothing unique about the law of New York or New Jersey dictated the result. Nor does it appear that there is any substantive law in Pennsylvania at odds with Port Authority. Second, the District Court suggested that Port Authority does not apply because “[t]he presence of asbestos in a structure presents unique concerns” not applicable in this case. Hardinger, 2004 WL 384999, at  n.5. While we agree that asbestos presents unique concerns, we find Port Authority instructive in a case where sources unnoticeable to the naked eye have allegedly reduced the use of the property to a substantial degree. We predict that the Pennsylvania Supreme Court would adopt a similar principle as we did in Port Authority. Applying Port Authority’s standard here, we believe there is a genuine issue of fact whether the functionality of the Hardingers’ property was nearly eliminated or destroyed, or whether their property was made useless or uninhabitable. 7 B. Whether the Loss Predated the Policy and the Pollution Exclusion Because it decided the motion for summary judgment entirely on the basis that there was no physical loss, the District Court did not consider Motorists’ other stated reasons for denial – namely, that the loss predated the policy and that it fell within the pollution exclusion.
We believe the August 20, 2001 memorandum written by Ron Snyder, a Motorists regional property consultant, at the least, creates a genuine issue of material fact on whether the loss predated the policy. Snyder wrote: After as through [sic] investigation as possible at this time it can also be concluded that the well became contaminated after our insured moved into the house based of a water test by the health department and the fact that the previous occupants did not become ill. Microbiological contamination was not found in the water well when it was tested in 1998. Appendix at 393 (emphasis in original). Snyder’s opinion may not definitively establish that the loss occurred after the policy’s inception, but it is sufficient to create a genuine issue of fact. Summary judgment on the basis that the loss predated the policy is therefore inappropriate for Motorists.
The pollution exclusion applies to loss caused by “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids[,] alkalis, chemicals and waste.” There is no Pennsylvania case law identified by the parties that addresses 8 whether bacteria should fall within the definition. Courts that have addressed whether bacteria fits under similar pollution exclusions are divided. Compare Keggi v. Northbrook Prop. and Cas. Ins. Co., 199 Ariz. 43, 47 (Ariz. App. Div. 2000) (holding that bacteria does not constitute a pollutant under an identical pollution exclusion clause), and E. Mut. Ins. Co. v. Kleinke, Index # 2123-00, RJI #0100062478 (N.Y. Super. Ct. Jan. 17, 2001) (holding that similar pollution exclusion is ambiguous on whether e-coli bacteria falls within the policy’s definition of pollutant), with Landshire Fast Foods of Milwaukee v. Employers Mut. Cas. Co., 676 N.W.2d 528, 532 (“bacteria, when it renders a product impaired or impure” falls within “the ordinary, unambiguous definition of ‘contaminant’”).