Fourth Circuit Certifies Pollution Exclusion Ambiguity To The Virginia Supreme Court

Travco Ins. Co. v. Ward

(Fourth Circuit, March 1, 2012)

This environmental coverage dispute resulted from a property loss involving Chinese Drywall installed in policyholder’s residence. Over time, the Chinese Drywall released sulfuric gas into the residence causing damage to the interior structures of the home. Defendant filed a lawsuit against several development and supply companies, alleging that they constructed his home with "inherently defective" drywall.  Thereafter, the insurer filed a declaratory judgment action seeking a declaration that, under the Policies, it had no obligation to provide coverage for the losses claimed by the policyholder. 

Based on a review of applicable Virginia law, the district court held that the policyholder’s residence and its components suffered a "direct physical loss" within the meaning of the Policy.  However, the court also concluded that four separate exclusions applied to the damage claimed. Specifically, the claimed losses were found to be excluded by the Policy's latent defect, faulty materials, corrosion, and pollutant exclusions.

As to the pollutant exclusion, the district court specifically rejected policyholder’s argument that Chinese Drywall was not a "contaminant" or a "pollutant" and further held “under Virginia law, pollutant exclusions are not limited to ‘traditional environmental pollution.’”  The court determined that there is no dispute that the Chinese Drywall has released reduced sulfur gases into the residence and that both state and federal authorities recognize reduced sulfur gases as pollutants.  Thus, the gases released in the home qualified as irritants and contaminants.

On appeal to the Fourth Circuit, the policyholder asserted that the district court erred in holding that the policy exclusions barred coverage for the claimed losses.  Specifically, the policyholder contended that Travco failed to meet its burden of establishing that the exclusions applied, and argued that the language in each of the exclusions at issue is not clearly or unambiguously defined.

Specifically, as to the pollution exclusion, the policyholder alleged that the meaning of “pollutant” is ambiguous under Virginia law, and was not intended to apply to product liability claims, but was intended to limit or exclude coverage for past environmental contamination.  The policyholder further noted that the district court relied on cases involving traditional environmental pollution and that there is a split in authority as to the scope of the pollution exclusion, generally.  The policyholder further argued that the issue is controlled by Unisun Ins. Co. v. Schulwolf, 53 Va. Cir. 220 (Va. Cir. 2000) wherein the Virginia Circuit Court declined to apply a pollution exception to a lead paint case, stating that “it is reasonable to conclude that the exclusion clause applies only to claims based on environmental pollution.”

The Circuit court, in certifying these questions to the Virginia Supreme Court, noted there is no clear controlling Virginia precedent to guide its decision on this appeal and the questions presented are purely questions of state law which have not been addressed by the Virginia Supreme Court.  In addition, the Fourth Circuit acknowledged the far-reaching impact of this decision and the state’s incentive for establishing how to interpret these standard exclusions in light of the number of consumers and insurers addressing similar drywall issues.  As such, the Fourth Circuit court held that, in light of the unusual nature of the losses involved, and because the questions are sufficiently unsettled, certification is warranted on the application of these four exclusions.

For a copy of the decision click here

Paul Steck and Michael Glascott

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