A first-party “pollution” exclusion eliminated coverage where a contractor caused the release of asbestos inside and outside a building. ( The Villa Los Alamos Homeowners Assn. v. State Farm General Insurance Company (2011) WL 3586475)
Facts
The Villa Los Alamos Homeowners Association (Association) purchased a “Condominium/Association Policy” from State Farm General Insurance Company (State Farm). The policy provided “all-risk” (“open-peril”) coverage for first-party property losses, subject to the policy’s exclusions and limitations.
Pursuant to the terms of the policy, State Farm agreed to insure “for accidental direct physical loss” to buildings and structures and business personal property owned by the Association and caused by an insured loss, unless specifically limited or excluded by the policy. The policy excluded coverage for loss caused by “the presence, release, discharge or dispersal of pollutants, meaning any solid, liquid, gaseous or thermal irritant or contaminant, including vapor, soot, fumes, acids, alkalis, chemicals and waste.”
The Association contracted with Cal Coast Construction (Cal Coast) to remove the sprayed-acoustical ceilings in a three-story, 18-unit building. Over the course of a few days, Cal Coast disturbed asbestos contained in the acoustical ceilings. This caused the fibers to become airborne and to spread throughout the building, including its corridors, stairwells, in residential units, inside the HVAC system, and onto the exterior grounds, at the entrance of the building, on sidewalks, in bushes and grass in front of the building and in parking lots and a private street.
The Bay Area Air Quality Management District (District) cited Cal Coast and removed the company from the project. The District also ordered the Association to perform a comprehensive abatement of the building, including all common areas and separate interest areas, individual units, and residents’ personal property.
The Association hired another contractor to perform the remediation work the District ordered. The Association submitted a first-party claim to State Farm, which State Farm declined. Ultimately, the Association spent $650,000 to complete work ordered by the District.
Thereafter the Association sued State Farm, asserting causes of action for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief. The trial court granted summary adjudication in favor of State Farm, ruling that the pollution exclusion eliminated coverage for the Association’s claims. The Association appealed.
Holding
The Court of Appeal affirmed the summary judgment in favor of State Farm. The appellate court held that a “pollution” exclusion, whether found in the first-party property section of a policy or in the third-party liability section of a policy, applies to “environmental” pollution. Asbestos is considered to be a “pollutant” under many state and federal laws and regulations, and is a “pollutant” for purposes of the exclusion in State Farm’s policy. What occurred here was environmental pollution, even though it was confined to only a relatively small area, and even though it occurred only over a few days. As such, the State Farm policy excluded coverage for the Association’s claim.
Comment
This case extends the basic holding of an important third-party coverage case, MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635. In that case, MacKinnon was the owner of an apartment building who, at the request of a tenant, hired a pest control company to eradicate yellow jackets at the apartment. The pest control company treated the building several times and the tenant died from pesticide exposure. The tenant’s parents sued, and MacKinnon tendered the claim to his insurer. However, MacKinnon’s insurer concluded that the pollution exclusion precluded coverage.
In MacKinnon , the California Supreme Court ultimately ruled that the standard pollution exclusion clause in a comprehensive general liability policy was intended to exclude coverage for injuries resulting from events commonly regarded as “environmental pollution.” Thus, the MacKinnon Court held that a reasonable policyholder would not think that the activity in question – namely, the normal but negligent spraying of pesticides around an apartment building in order to kill yellow jackets – was an act of pollution.
The basic test for determining whether a pollution exclusion applies in either the third-party context or the first-party context is whether a reasonable policyholder would characterize the event as “environmental pollution.” The California Supreme Court and the Courts of Appeal have recognized that this “test” is imprecise.