Pollution Exclusion Does Not Apply To Concrete Settling Dust

Tred R. Eyerly | Insurance Law Hawaii | October 24, 2018

Applying Virginia law, the federal district court determined that the pollution exclusion did not bar coverage. Allied Prop. & Cas. Ins. Co. v. Zenith Aviation, Inc., 2018 U.S. Dist. LEXIS 14727 (E.D. Va. Aug. 29, 2018).

Zenith Aviation, Inc. hired Abby Construction Company to install an elevator at its warehouse. A wet saw was used to cut away concrete, but Abby did not use any water with the wet saw. This created a significant amount of concrete dust to leave the warehouse. Surrounding businesses contacted the fire department because they thought the dust was smoke from a fire. The concrete dust settled inside Zenith’s building, damaging airplane parts stored in the warehouse.

Allied issued to Zenith a commercial insurance policy. Zenith submitted a claim for its loss. The policy’s pollution exclusion barred coverage for the discharge, dispersal, etc. of “pollutants” unless the escape of a “pollutant” was not “caused by any of the ‘specified causes of loss.'” But if the discharge . . . of ‘pollutants’ results in a ‘specified cause of loss,’ we will pay for the loss or damage caused by that ‘specified cause of loss.'” “Pollutants” included any irritant or contaminant, including smoke, chemicals and waste. Finally, “specified causes of loss” were defined as “fire; lightening; explosion; windstorm or hail; smoke . . .”

Cross motions for summary judgment were filed. Allied acknowledged that Zenith suffered a “direct physical loss” that would be covered but for the pollution exclusion. Allied argued that the concrete dust meet the definition of a “pollutant” since it was an “irritant or contaminant.” Zenith contended that cement was not a pollutant and Allied had offered nothing to suggest it was.

The court agreed that concrete dust was a pollutant since it could function as both an “irritant” and a “contaminant.” There was no genuine issue of fact concerning whether the concrete dust “contaminated” Zenith’s products and machinery.

Zenith then argued that the dust was a “specified cause of loss” in the form of “smoke.” The court found the applicable definition of “smoke” as used in the Pollution Exclusion to be unclear, with more than one reasonable definitions. Zenith argued “smoke” could mean a cloud of fine particulate matter. Allied submitted that “smoke” meant “the gaseous products of burning materials” and “suspension of particles in a gas.” With two reasonable definitions, the court construed the ambiguity in favor of the insured. “Smoke” referred to any visible suspension of particles in a gas, including the concrete dust suspended in the air in Zenith’s warehouse.

Allied then argued that even if the concrete dust was “smoke,” it did not “cause” a loss when it merely settled on the airplane parts, contaminating them, because the concrete in the air did not “result in” the dust on the inventory and machinery since it was the dust.

The exceptions to the Pollution Exclusion required a causal nexus between a specified cause of loss and the pollutant. The facts reflected: (1) Abby Construction used a wet saw without water to cut concrete; (2) the saw “released” concrete solids into the air; (3) the dust, rather than falling immediately to the ground, carried into a cloud of particulate, resulting in “smoke;” and (4) the particulate from the cloud of smoke ultimately settled on Zenith’s products and equipment, contaminating them and causing the loss.

Therefore, Zenith’s loss resulted from the dispersal or migration of a pollutant onto its inventory and machinery, and that dispersal or migration was caused by a visible gaseous suspension of the concrete particulate in the air, i.e., smoke. The “dispersal” or “migration” of the concrete dust onto Zenith’s products was therefore “itself caused by” the smoke from which it settled, and therefore the loss fell under the exception to the pollution exclusion. Further, the “discharge, dispersal, seepage, migration, release or escape” of the concrete dust from the wet saw “resulted in” smoke, a specified cause of loss, which then caused Zenith’s loss.

Allied argued that “smoke” could not simultaneously be both the “pollutant” and the “specified cause of loss.” But the fact that the particles that contaminated Zenith’s products and equipment were the same as the particles that were a constituent part of the “smoke” did not mean that there was no causal separation between the “pollutant” that was dispersed and the “specified cause of the loss” that dispersed it or resulted from it.

Therefore, the court believed that the Supreme Court of Virginia would conclude that the Pollution Exclusion did not apply and that there was coverage under the policy for Zenith’s alleged losses.

A Fire Destroying More Than Half of the Project is not a Cardinal Change Where the Parties Entered Into a Separate Agreement to Cover the Fire Remediation Work

Kristopher Berr | Constructlaw | November 29, 2018

IES Commercial, Inc. v. Manhattan Torcon, A Joint Venture, 2018 U.S. Dist. LEXIS 164973 (D. Md. Sept. 26, 2018)

In 2009, the Army Corps of Engineers hired Manhattan Torcon Joint Venture (“MT”) as general contractor to build a biological research facility at Fort Detrick, Maryland.  MT subcontracted with IES Commercial, Inc. (“IES”) to perform the electrical system work.

In August 2013, after IES had completed over 90% of its work, a fire destroyed or damaged more than half of the facility, including significant portions of IES’s work. MT ordered IES to perform significant fire remediation work in addition to the remainder of its base contract work. In November 2013, IES and MT entered into a subcontract amendment referred to as the “Fire Rider,” which included an agreed rate schedule for the fire remediation work, along with a procedure by which IES would perform work at MT’s direction, submit daily work tickets and monthly invoices, and be paid within ten days after MT received payment from its insurer.

The parties performed under the Fire Rider for over four years.  During this time, IES complained that MT was mismanaging the work by, among other things, failing to develop a schedule accounting for fire remediation work in addition to base contract work, and by requiring IES to work out of sequence. In September 2017, MT informed IES it would not be paid for the remainder of its work because MT’s insurer had ceased payments. In December 2017, IES sued MT in federal court in Maryland, asserting breach of contract and cardinal change claims. It also sued MT’s sureties under the Miller Act. MT and its sureties moved to dismiss all counts. The Court denied the motion with respect to the breach of contract and Miller Act claims but granted the motion on the cardinal change claim.

In granting the motion, the Court first reasoned that IES had misconstrued the nature of a cardinal change claim. Under the cardinal change theory, a contractor is entitled to recover damages when work ordered by the government is materially different from the work initially bargained for. In its complaint, however, IES did not allege that MT ordered work materially different from IES’s original scope. Instead, it alleged that the fire itself constituted a cardinal change. Thus, IES failed to allege a valid cardinal change claim.

Second, even assuming that the changed work ordered by MT – rather than the fire itself – was a cardinal change, the Court held that claim still failed because IES failed to allege damages resulting from that work. Instead, IES alleged damages consisting primarily of labor inefficiency costs, allegedly caused by MT’s mismanagement of the project. However, IES did not allege that MT’s mismanagement after the fire was, itself, a cardinal change. Thus, IES failed to allege increased costs resulting from a cardinal change.

Finally, the Court held that the cardinal change claim was barred by the existence of the Fire Rider. According to the Court, a cardinal change occurs when the government demands a contractual alteration that requires the contractor to perform duties materially different from those originally bargained for. Here, however, the parties bargained for and entered into the Fire Rider to account specifically for fire remediation work. Thus, the Court held that the cardinal change claim failed as a matter of law because IES was not ordered to complete fire remediation work materially different from its contractual scope of work. Instead, it agreed to perform the work pursuant to a new agreement.

Third Circuit Holds No Coverage for Faulty Workmanship Despite Insured’s Expectations

Brian Margolies | Traub Lieberman Straus & Shrewsberry LLP | November 20, 2018

In its recent decision in Frederick Mut. Ins. Co. v. Hall, 2018 U.S. App. LEXIS 31666 (3d Cir. Nov. 8, 2018), the United States Court of Appeals for the Third Circuit had occasion to consider Pennsylvania’s doctrine of reasonable expectations in the context of a faulty workmanship claim.

Hallstone procured a general liability policy from Frederick Mutual to insure its masonry operations. Notably, when purchasing the policy through an insurance broker, Hallstone’s principal stated that he wanted the “maximum” “soup to nuts” coverage for his company.  Hallstone was later sued by a customer for alleged defects in its masonry work.  While Frederick agreed to provide a defense, it also commenced a lawsuit seeking a judicial declaration that its policy excluded coverage for faulty workmanship. The district court agreed that the business risk exclusions applied, but nevertheless found in favor of Hallstone based on the argument that Hallstone had a reasonable expectation that when applying for an insurance policy affording “soup to nuts” coverage, it this would include coverage for faulty workmanship claims.

On appeal, the Third Circuit acknowledged that the reasonable expectations doctrine can overrule policy language when the insured is issued a policy different than what it specifically requested to purchase.  The court nevertheless reasoned that this doctrine did not apply to Hallstone, which generally asked for a broad policy, but not specifically a policy that would insure faulty workmanship claims – a coverage the court acknowledged does not exist.  The pointed out the absurdity of relying on the reasonable expectations doctrine to overcome the policy’s otherwise plain and unambiguous language, observing that “Hall’s claim that he expected Hallstone’s ‘maximum,’ ‘soup to nuts’ liability policy to include workmanship coverage is no more reasonable than if a purchase of auto insurance expected his policy to cover repairs if his car breaks down, even if he asked for ‘soup to nuts’ coverage.”

Construction Contractors Should Promptly Notify Insurers of a Potentially Covered Claim

Patrick Johnson | Construction Industry Counselor | November 15, 2018

Contractors always should put their insurers on notice of a potentially covered claim as soon as possible.  In many states, an insured typically will not be denied coverage for the late notice of a claim if there is no prejudice to the insurer, however, there are circumstances under which late notice alone can bar coverage.  A recent case before a New York appellate court demonstrates the importance of being aware that liability insurance policies subject to New York Insurance Law § 3420 law which were issued before January 17, 2009 are not subject to a requirement that an insurer may deny coverage for late notice of a claim only if the insurer was prejudiced by the late notice.   In  Lafarge Bldg. Materials Inc. v. Harleysville Ins. Co. of New York, 2018 WL 5659750 (N.Y. App. Div. Nov. 1, 2018), the New York appellate court rejected a construction contractor’s claim for coverage under an insurance policy due to late notice to its insurer.

This case followed the injury of a subcontractor’s employee at a construction site.  The commercial general liability policy issued to the subcontractor required the subcontractor to name the general contractor as an additional insured.  Subsequently, a personal injury action was commenced in March 2008.  Nine months later, the general contractor   tendered to the defendant insurer a letter requesting coverage.  The insurer declined to provide coverage on the grounds that the general contractor failed to provide notice “as soon as practicable” as required by the policy.  The general contractor filed suit against the insurer to challenge the declination of coverage.  The defendant insurer moved for summary judgment on the grounds that the notice was deficient and the New York Supreme Court, New York’s trial level court, agreed.

In the appeal that followed, the question before the New York appellate court was whether the general contractor’s notice to its insurer was timely based on the policy language that notice be given “as soon as practicable.”  The general contractor argued that it lacked knowledge as to whether it was covered under the policy, thus causing  the delay.  The appellate court disagreed, based on the fact that shortly after being served with the underlying personal injury complaint the plaintiff became aware of the occurrence and had in its possession the certificate of insurance outlining its status as an additional insured and identifying the insurer. The appellate court held that although the reasonableness of delay ordinarily presents questions of fact, the facts presented by the general contractor in support of the nine month delay were unreasonable as a matter of law as the insured failed to demonstrate that it lacked knowledge of the identity of the insurer and its additional insured status for over 8 months.

The policy in this case was issued prior to the amendment of N.Y. Ins. Law § 3420, effective January 19, 2009. Most notably, the amendment requires that an insurer show that it was prejudiced by a failure to provide notice in order to successfully disclaim coverage.  The appellate court held that the insurer was not required to show that it had been prejudiced by the untimely notice because the policy had been issued prior to the statutory amendment. Both construction companies and insurers are often faced with claims under policies that pre-date the amendment.  Prejudice requirements vary by state. In some states whether prejudice is required can depend on the type of policy and when it was issued. As demonstrated in the Lafarge case, it is important, particularly with older policies, that construction companies promptly place their insurer on notice of potentially covered claims to avoid any coverage disputes based on late notice.

Insurer Must Defend Insured Against Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii | October 4, 2018

Finding various exclusions inapplicable, the Federal District Court ruled that the insurer owed a defense to the general contractor based upon Texas law. Mt. Hawley Ins. Co. v. Slay Engineering, 2018 U.S. Dist. LEXIS 139363 (W.D. Texas Aug. 15, 2018).

Huser Construction had a CGL policy issued by Mt. Hawley Insurance Company. Huser contracted to design and construct a municipal sports complex with the City of Jourdanton. The project consisted of four baseball fields, a softball field, parking lots and swimming pool. Huser subcontracted with Cody Pools, Inc. to design and build the swimming pool. Huser also subcontracted with Q-Haul, Inc. to perform earth work, grading and storm drainage work at the site.

After substantial completion of the project, a Huser employee noticed cracks in the pool and parking lot paving. Cody Pool began repair work, but the problem was not cured. The City later notified Huser of several alleged deficiencies involving the swimming pool structure, asphalt paving, concrete flatwork and curbing, and overall drainage. When repairs were not performed to the satisfaction of the City, it sued Huser alleging breach of contract and negligence.

Huser notified Mt. Hawley. Coverage was denied based on certain exclusions. Mt. Hawley then filed suit seeking a judgment that it had no duty to defend or indemnify Huser. Mt. Hawley relied upon the Your Work Exclusion which precluded coverage for “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.” The policy further stated that the exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” The policy included a separate endorsement that excluded coverage arising out of a breach of “express or implied contract, breach of express or implied warranty . . . regarding the formation, terms or performance of a contract.”

The parties both moved for summary judgment. The court rejected Mt. Hawley’s argument on the breach of contract exclusion. Merely because Huser may ultimately be liable for certain of the City’s economic losses under a breach of contract theory did not mean that all of the alleged property damage was causally attributable to Huser’s alleged breach of its contract with the City. The fact that all claims contained in the underlying suit have some relation to Huser’s contract with the city or that Huser was sued for breach of contract were not enough to trigger the exclusion. To accept Mt. Hawley’s argument, the facts alleged in the underlying suit would have to demonstrate that there were no other independent, coverage (non-excluded) “but for” caused of the alleged property damage.

The underlying suit alleged that “work performed by [Huser], its subcontractors and suppliers, was defective.” Therefore, the underlying suit alleged that entities other than Huser were responsible for the allegedly defective work and the resulting damage. Accordingly, the allegations left open the possibility that the property damage may have occurred even in the absence of a breach of contract or implied duty by Huser.

Mt. Hawley argued that the subcontractor exception to the Your Work Exclusion was irrelevant because it was overridden by the endorsement containing the Breach of Contract Exclusion. But it was not natural to interpret the Breach of Contract Exclusion to encompass all work incidentally related to the project regardless of the party that performed the work or the capacity in which it did so. The court rejected the sweeping interpretation asserted by Mt. Hawley and instead found that the policy should be interpreted such that the subcontractor exception to the Your Work Exclusion still had meaning. Therefore, Mt. Hawley had a duty to defend.

Mt. Hawley’s motion as to the duty to indemnify was also denied because it was premature to determine whether it had such a duty.