Insurer's Pollution Exclusion Clause Does Not Exclude Coverage for Releases of Toxic Fumes on Contractor's Job Site
The U.S. Court of Appeals for the 6th Circuit has found that a pollution exclusion clause in a painting contractor's general liability insurance policy did not exclude coverage for injuries due to releases of toxic fumes from sealants used by the contractor on a job site.
Skender Bajrami owned a painting company doing business as Kopliku Painting Company (Kopliku). Kopliku's general liability insurance policy was issued by Meridian Mutual Insurance Company (Meridian). In November of 1994, Kopliku contracted with the Detroit Board of Education to perform painting and drywall sealing at Cass Technical High School. A teacher at the School, Roslyn Kellman, claimed that fumes from chemicals used by Kopliku in sealing a floor in the room above her classroom caused her severe and disabling respiratory injuries. Kellman sued Kopliku for her injuries in February of 1997.
Upon receiving a claim from Kopliku for defense of the personal injury lawsuit, Meridian denied coverage on the basis of a total pollution exclusion in its policy with Kopliku, which stated that:
This insurance does not apply to… "[b]odily injury" or "property damage" which 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.
Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste. Waste includes material to be recycled, reconditioned or reclaimed.
Meridian then sued in federal district court for a declaration that there was no duty under the insurance policy to defend or indemnify Kopliku in Kellman's lawsuit. Meridian contended that the sealant that caused Kellman's injuries was a pollutant, and was, therefore, excluded from coverage under the policy. Although both sides agreed that the sealant that caused Kellman's injuries was a pollutant, they disputed before the trial court whether the sealant fumes had been a "discharge, dispersal, seepage, migration, release or escape" of pollutants, so as to bring Kellman's injuries within the policy's pollution exclusion. The trial court found that Meridian's pollution exclusion was intended to protect the insurer from liability for environmental pollution. The trial court found that:
The pollution exclusion clause is intended to protect the insurer from liability for the enforcement of environmental laws. The exclusion contains environmental terms of art because it is intended to exclude coverage only as it relates to environmental pollution. When a toxic substance is confined to an area of intended use it does not come within the exclusion clause.
The trial court found that the sealant used by Kopliku was confined to its area of intended use and was used in its intended manner, and, therefore, it did not fall under Meridian's pollution exclusion clause as environmental pollution. The trial court concluded that Meridian had a contractual obligation under the insurance policy to defend Kopliku in the Kellman lawsuit. Meridian appealed.
Appellate Court's Decision
The only issue on appeal was whether the release of fumes from a chemical sealant in the course of regular business constitutes "discharge, dispersal, seepage, migration, release or escape" within the terms of Meridian's pollution exclusion, when those fumes cause injury to an employee of the business for which the sealant is being applied. The appeals court noted that no Michigan court cases had ever addressed this issue. As a result, the Federal appeals court attempted to ascertain how a Michigan court would rule in such a case. The court used three general principles of insurance policy interpretation under Michigan law as a guideline:
First, although the court cannot create an ambiguity in an otherwise clear policy, any ambiguity must be construed in favor of the insured and in favor of coverage… Second, exemptions to coverage are strictly construed against the insurer. Third, under the rule of reasonable expectations, the court grants coverage if "the policyholder, upon reading the contract language is led to a reasonable expectation of coverage."
Upon application of these guidelines, the appeals court found that Meridian's pollution exclusion did not bar insurance coverage for Kellman's injuries. The appeals court determined that no reasonable person could find that Meridian's policy unambiguously excluded coverage for injuries suffered by an employee who was legitimately only a few feet from where the chemicals were being properly used. The court noted that the 6th Circuit has adopted a clear rule that a pollution exclusion does not protect an insurer from liability for injuries caused by toxic substances released within the area of the chemicals' intended use.
Meridian then argued that the pollution exclusion clause should exempt it from having to provide coverage because, in another 6th Circuit case, the exclusion clause applied only to the discharge of pollutants "into or upon land, the atmosphere, or any watercourse or body of water," while the clause in the Meridian policy did not contain a similar limitation. The court replied by noting that in dozens of other reported court cases where the policy language did not contain such limitations, the pollution exclusion coverage language still did not shield insurers from liability for injuries caused to workers by toxic fumes confined within the area of the chemicals' use.
Meridian then argued that other cases holding that a pollution exclusion policy does not shield insurers from workplace exposure claims are limited to injuries to workers who work with the toxic chemicals. Kellman was not the actual user of the sealant, and did not personally apply it. The appeals court disagreed, and noted, "the fact that the injured party was not the direct user of a harmful product does not change a localized injury into the ‘discharge, dispersal, seepage, migration, release or escape of pollutants' under the policy, where the injured third party was in the immediate vicinity of the harmful product at the time of injury." Because the appeals court determined that the language of the policy did not clearly and unambiguously exclude coverage for such injuries, it ruled in favor of coverage and affirmed the trial court's decision.
Meridian Mutual Insurance Agency v. Kellman, No. 97-72462 (6th Cir., Dec. 2, 1999)
This article was prepared by Stuart J. Weiss, an associate in our Environmental Department, and previously appeared in the January, 2000 edition of the Michigan Environmental Compliance Update, a monthly newsletter prepared by the Environmental Department and published by M. Lee Smith Publishers.