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Nav-Its, Inc. v. Selective Insurance Company of America

183 N.J. 110, 869 A.2d 929 (2005)

INSURANCE; ENVIRONMENTAL COVERAGE—The standard pollution exclusion clause in a commercial liability insurance policy does not exclude claims arising out of toxic fumes from a floor sealing operation by a contractor.

A contractor specializing in tenant “fit-out” work obtained a comprehensive general liability insurance policy to cover work on a shopping center in Pennsylvania. It hired a painting subcontractor to do painting, coating and floor sealing work. A physician with office space in the shopping center “suffered from nausea, vomiting, lightheadedness, loss of equilibrium and headaches allegedly as a result of exposure to fumes released during the work.” That doctor sued the contractor and others for personal injuries. The contractor forwarded the complaint to its insurance carrier, seeking defense and indemnification. The insurer refused to provide coverage based upon the pollution exclusion provision in the policy. Under the pollution exclusion endorsement, the insurer “was not obligated to, among other things, defend a claim or suit alleging injury or damage arising out of a ‘pollution hazard,’ and would not pay damages, settlements, losses, costs or expenses awarded as a result of such a claim.” The policy defined pollutants “as including, among others, ‘any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.’” Waste included “materials to be recycled, reconditioned or reclaimed.” The policy defined “pollution hazard” to mean “an actual exposure or threat of exposure to the corrosive, toxic or other harmful properties of any ‘pollutants’ arising out the discharge, dispersal, seepage, migration, release or escape of such ‘pollutants.’” Finally, the policy contained a limited exception to the pollution exclusion, “stating in part that it did not apply to exposures within a structure resulting from a release of pollutants ‘within a single-forty-eight hour period.’”

The physician’s case against the contractor was resolved through binding arbitration. The contractor then commenced a declaratory judgment action against its insurer. The lower court found that the insurer had an obligation to defend and indemnify the contractor in accordance with the policy. The insurer appealed, and the Appellate Division reversed the lower court, “finding that pollution exclusion clauses are not necessarily limited to the clean up of traditional environmental damage.” It ordered that “a jury must decide whether each of period of time that [the physician] was at work represented a separate exposure of less than forty-eight hours or one continuous exposure period.”

On further appeal to the New Jersey Supreme Court, that Court held that the “pollution-exclusion clause in this case [did] not bar coverage for personal injuries arising from exposure to toxic fumes emanating from a floor coating-sealant operation performed by the [contractor].” The Court recognized that “courts should give the words of an insurance policy their plain, ordinary meaning.” On the other hand, if a policy is ambiguous, it is to be construed in favor of the insured. This is because policies are “usually prepared by insurance company experts, [and are] a contract of adhesion between parties who are not equally situated.” Further, the Court found “that the purpose of the “pollution-exclusion clause ... was to have broad exclusion for traditional environmentally-related damages, such as remediating hazardous waste under” CERCLA. “Read liberally, the exclusion at issue [in this case] would exclude from coverage essentially all pollution hazards except for those falling within the ‘exception’ for exposure within a structure resulting from a release of pollutants ‘within a single forty-eight hour period.’” The Court rejected that interpretation “as overly broad, unfair, and contrary to the objectively reasonable expectations of the New Jersey and other state regulatory authorities that were presented with an opportunity to disapprove the clause.” It also looked at the policy’s terms: “discharge, dispersal, release or escape,” and held those to be “environmental law terms of art, thereby reflecting the exclusion’s historical objective – avoidance of liability for environmental catastrophe related to intentional industrial pollution.” As a consequence, it had no reason to address the ramifications of the forty-eight exception because if the pollution exclusion was not applicable, neither was any exception to the pollution exclusion. Finally, the Court believed that “industry-wide determinations to restrict coverage of risks, particularly those that affect the public interest, must be fully and unambiguously disclosed to regulators and to the public.”


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