Contractors must carry commercial general liability (CGL) insurance, which covers a variety of property damage and bodily claims arising from a contractor’s work and materials supplied to projects. Being aware of coverage exclusions, specifically pollution exclusions, can help them evaluate their coverage positions and consider steps to minimize the risk.
CGL insurance is often viewed as a burdensome cost of doing business that erodes the bottom line. If all goes well, the insurance policy will collect dust and only the insurer will benefit from the premiums. Where all does not go well, however, CGL insurance can be the difference between a contractor moving on to the next project or bankruptcy.
All too often, contractors facing property damage or bodily injury claims find themselves fighting on two fronts because their insurers refuse to acknowledge expected coverage. When coverage is disputed, contractors typically encounter three primary hurdles to establish coverage for a loss caused by faulty work or provision of defective or otherwise inappropriate materials to a project.
First, “property damage” as defined in CGL policies means physical injury to property that was previously undamaged, not the contractor’s own defective work. Second, the loss must result from an “occurrence,” which requires an “accident” in the sense that the loss was unintended and unexpected. These threshold prerequisites to possible coverage reside in the coverage portion of a CGL policy.
The third major hurdle is coverage exclusions. One exclusion that contractors need to be aware of is the so-called “absolute pollution exclusion.” Contrary to what contractors may presume, application of the absolute pollution exclusion is not limited to facilities that manufacture, store or dispose of hazardous materials. The exclusion could apply to virtually any construction project.
The insurance industry has spent more than three decades expanding the reach of the pollution exclusion through policy revisions and strenuous litigation. The current iteration is commonly referred to as the “absolute” or “total” pollution exclusion, and it is found in nearly all CGL policies. The exclusion features an extremely broad definition of “pollutant.” The most common definition encompasses “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
The hottest litigation issue in recent years is whether the absolute pollution exclusion bars coverage for indoor releases of substances not normally thought of as “pollutants.” Notable for contractors are lawsuits involving application of the exclusion to indoor releases of carbon monoxide from furnaces and other fuel-burning equipment, sulfur from Chinese drywall, and formaldehyde from various building products. Many such lawsuits have been waged between contractors and insurance companies, often involving huge financial stakes.
Courts around the nation are split on the questions of whether the absolute pollution exclusion applies to indoor releases at all and/or whether particular substances constitute “pollutants.” Some courts have ruled that, despite its expansive language, the absolute pollution exclusion is limited to “traditional” environmental harms, such as soil and groundwater contamination. Other courts, however, have ruled that the exclusion’s broad language is unambiguous, and bars coverage for outdoor and indoor releases of virtually any substance which causes property damage or bodily injury.
Chinese drywall litigation offers a good case study because several prominent contractors have been swept into the litigation, and different courts considering substantially identical coverage issues have reached opposite conclusions. These lawsuits claim property damage and bodily injury caused by indoor sulfur releases from Chinese drywall installed in hundreds of thousands of homes and commercial buildings, primarily in Gulf Coast states. Prevalence of Chinese drywall emerged after Hurricanes Katrina and Rita, because domestic drywall manufacturers were unable to meet increased demand for their products. As it turns out, much of the Chinese drywall emits levels of sulfur sufficient to cause property damage and alleged bodily injuries. Hundreds of lawsuits resulted, including several national class actions. Significant parallel litigation ensued between contractors and their insurance companies which sought to avoid coverage based on the absolute pollution exclusion.
Courts have thus far issued more than 20 reported decisions on application of the absolute pollution exclusion to damage caused by Chinese drywall. Most of the decisions have been based on Florida and Virginia law, which tend to be insurer-friendly. Insurance companies prevailed in these lawsuits, successfully invoking the absolute pollution exclusion to avoid coverage for the massive alleged losses. Courts in other states, including Louisiana, have refused to apply the absolute pollution exclusion to bar Chinese drywall claims.
The split of judicial authority in insurance coverage litigation involving Chinese drywall is indicative of the broader split on whether the absolute pollution exclusion applies to indoor releases at all, or is limited to traditional environmental pollution. It will be several years before the courts of all 50 states weigh in on this important issue. In the meantime, contractors should consult with their insurance brokers or attorneys to evaluate their coverage positions and consider steps to minimize the risk of being found to have no coverage for property damage and bodily injury claims.