How 'absolute' is an absolute exclusion: insurance coverage for indoor pollution.

If you are either an owner or lessee of commercial space, chances are you have purchased liability insurance to cover lawsuits by people injured on your premises. And if you purchased a policy within the past 12 years or so, chances are it contains what is known as an "Absolute Pollution Exclusion Clause," which reads more or less like this:

"This insurance does not apply to ... bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants ... at or from promises owned, rented or occupied by the insured."

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.

The term "absolute" does not refer to the scope of the clause. Rather, it is intended to distinguish this clause from a similar clause found in pre-1986 policies, which contained an exception from the exclusion (i.e., provided coverage) for pollution-related occurrences that were "sudden and accidental."

Nevertheless, insurance companies have in recent years expended significant resources arguing for an interpretation of this clause so "absolute" in application is to exempt from coverage not only what most insureds would generally understand environmental pollution to mean - like oil spills and smokestack emissions - but also harmful chemical substances causing injury indoors. such as peeling lead paint, products and equipment emitting harmful vapors, friable asbestos, and the range of chemicals responsible for the ailment known as "sick building syndrome."

For the most part, courts have blocked these efforts on the part of insurance companies to read the clause so sweepingly. Judges have sent their clerks to look up "pollution" in the dictionary, and concluded that the everyday meaning of the word would not necessarily put a reasonable insured on notice that the policy excluded liability for injury to, for instance, a tenant's child who ingested lead paint chips.

New York courts have recently held the absolute pollution exclusion did not cover (and, thus, that the policy did cover) injury from carpet fumes, asbestos poisoning and carbon monoxide poisoning caused by a faulty heating and ventilation system. One court noted that the "overwhelming trend" in cases considering the matter was not to exclude injury caused by indoor contaminants from coverage. Another observed that the terms "irritant" and "contaminant" in the clause are so broad that, if the clause were interpreted literally, it would extend "far beyond its intended scope" and lead to "absurd results" - excluding, for instance, injury suffered by someone who slips and falls on the spilled contents of a bottle of Drano, or has an allergic reaction to the chlorine in a public pool.

In support of this view, courts usually reference the general principle that ambiguities in an insurance contract - in this case, the language in the exclusion clause that could be construed either broadly or narrowly - are to be construed against the insurer. Many also cite with approval one court's comment that most indoor pollution injuries "involve injuries resulting from everyday activities gone slightly, but not surprisingly, awry," such that a reasonable policyholder "would not characterize such routine incidents as pollution."

A measure of additional support for a narrow interpretation of the exclusion has been provided by the Insurance Service Office (ISO), the insurance industry trade organization that drafted the most widely-used version of the clause, which recently tried to put a stop to insurance companies' overuse of the clause by circulating a policy paper reminding them of its limits. The paper reiterated that the exclusion was never intended to be "absolute" in scope, and did not apply to products, completed operations or off-premises releases.

Not all courts, however - in New York and elsewhere - have jumped on this general trend favoring coverage. A number of them have concluded that the insured's injury fit within the literal meaning of one of the definitional words in the exclusion clause, and accordingly denied coverage under the policy. For instance, only two months after a New York federal district court handed down a decision holding the absolute exclusion inapplicable to injury from inhalation of carpet fumes, having determined that the clause "reasonably may be construed" to apply only to "the kind of environmental pollution about which state and federal regulators are concerned," a Suffolk County court reached the opposite conclusion, finding that the clause barred coverage for sick building syndrome injuries. That court held the clause applicable because "the condition known as 'sick building syndrome' is caused by a 'contaminant' as that term is used in the definition for 'pollution' in the insurance policy." Courts in other jurisdictions have, upon similar reasoning, held the exclusion clause to bar coverage for injuries from carbon monoxide poisoning, seepage of waterproofing material into the interior of a home, vapors from ammonia accidentally spilled from a blueprint machine, and concrete sealant fumes that escaped into an enclosed area.

Given this split among judicial authorities concerning the scope of the absolute exclusion clause, there is no way for a policyholder to know for sure what types of indoor pollution injuries a policy will cover. Nevertheless, the cases do provide some clues for assessing the likelihood that a given type of injury will fall within the exclusion.

At the outset, it is important to note that not all exclusion clauses are identically worded. Particular words and phrases in the clause on which courts have based coverage denials do not exist in all such clauses, and/or do not apply to every sort of indoor pollution. For instance, one court that found that a carbon monoxide related injury fell within the absolute exclusion based on the fact that the definition of "pollution" included the word "vapors" - a word that rather neatly defines carbon monoxide fumes, but does not define, for instance, lead paint chips. Another found that injury from indoor inhalation of friable asbestos was not excluded under the clause because, unlike the more recent variants of the clause, it expressly defined pollution to include a release of contaminants "into the atmosphere" - a phrase the court interpreted as not including indoor air.

In addition, as noted in the policy paper circulated by the ISO, there is general consensus (albeit not full consensus) that the exclusion clause does not apply to injuries from commercial products being used for their intended purpose. The most common injury to which this principle is applied is lead paint poisoning, and similar reasoning has been applied to injuries related to asbestos.

Based on these principles, it is fair to conclude, generally speaking, that neither injury from lead paint nor asbestos will likely be excluded from coverage under New York law, in the absence of a separate exclusion that expressly covers such injury. Beyond that, however, given the potential variety in exclusion clause language, injuries that can happen indoors, and judicial perspectives on interpreting the absolute exclusion, it is very difficult for an insured to know for certain whether liability for any given type of indoor pollution injury will be covered. Undoubtedly, in future years, the matter will become less murky, as insurance companies continue to refine and clarify (and undoubtedly expand) the language of their pollution exclusions, and the growing body of judicial interpretations of those clauses sheds light on the issue.

In the meantime, the most prudent course of action for insureds is to make sure that they and their counsel have read and understand the absolute pollution exclusions in their existing policies, so as to take at least a degree of the guesswork out of knowing what they cover. In addition, an insured wishing to eliminate such guesswork in the future can do so in several ways. It could obtain coverage specifically to cover any particular type of indoor pollution, either by paying an additional premium for an endorsement (assuming the carrier is willing to include one), or else purchasing separate environmental impairment liability insurance. It could also address the issue through means other than insurance, by including indemnification clauses in contracts and leases. The extra cost of these options may, in the end, be a small price to pay for certainty compared to the potentially high cost of remaining at the mercy of judicial interpretation.