On June 8, 2010, the Third Circuit held that a total pollution exclusion within a contractor's commercial general liability policy (the "Policy") barred property damage and bodily injury claims related to dust and fumes dispersed from a construction site. See Devcon Int'l. Corp., et al. v. Reliance Ins. Co., et al., Nos. 07-4602/08-1996, __ F.3d __ (3d Cir., June 8, 2010). Central to that holding was the court's determination that the pollution exclusion is unambiguous and must be interpreted pursuant to the plain meaning of its terms. In so holding, the Third Circuit criticized opinions from other courts finding pollution exclusions ambiguous, not for want of clarity in the text, but due to the belief that a literal reading of the exclusions could bar claims for damages beyond the catastrophic environmental pollution claims that the exclusions were intended to address.
The coverage action in Devcon arose from bodily injury and property damage claims asserted against V.I. Cement, a subsidiary of Devcon International Corporation (collectively referred to as "Devcon"). The Virgin Islands Port Authority ("VIPA"), which operates an airport on St. Croix, hired Devcon to act as general contractor on a runway extension project. The construction generated large quantities of dust, as well as vehicle and equipment exhaust that drifted over surrounding properties. Nearby residents and property owners filed suit against Devcon, alleging that the dust contaminated their drinking water, that the dust and exhaust caused breathing disorders, and that the construction noise deprived them of the quiet enjoyment of their land.
Devcon tendered the underlying action to its insurer, Reliance Insurance Company ("Reliance"). Reliance accepted the tender pursuant to a full reservation of rights, prompting Devcon to file a declaratory judgment action in the United States District Court for the District of the Virgin Islands. The district court resolved the coverage litigation on summary judgment, holding that the Policy's pollution exclusion relieved Reliance of any obligation to defend or indemnify Devcon in the underlying lawsuit. The Policy's pollution exclusion provided as follows:
This insurance does not apply to:
- "Bodily injury" or "property damage" which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.
- Any loss, cost or expense arising out of any:
- Request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants;
* * *
- Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste . . . .
Devcon Int'l. Corp., et al. v. Reliance Ins. Co., et al., Civ. No. 2001-210, Slip Op. at p. 10 (D.V.I. Oct. 23, 2007).
On appeal to the Third Circuit, Devcon argued that the scope of the pollution exclusion was ambiguous and asked the court to construe the exclusion to provide coverage for the damages claimed in the underlying action. Devcon argued in the alternative that it reasonably believed that the Policy would provide coverage for construction-related injuries and requested that the court extend coverage under the doctrine of reasonable expectations.
Devcon's principal argument relied upon a line of cases from various jurisdictions, all of which found pollution exclusions to be ambiguous due to the possibility that a literal application of the exclusions' terms would bar coverage for claims other than traditional, environmental contamination claims. Devcon suggested that a literal reading of the Policy's pollution exclusion could lead to absurd results, even excluding from coverage a suit asserted by a claimant injured in a slip and fall caused by a puddle of spilled drain opener in a supermarket aisle. The Third Circuit, however, rejected Devcon's ambiguity analysis because it focused on the result of the application of the exclusion and not on the terms of the exclusion themselves. "The trouble with Devcon's approach," the circuit court wrote, "is that, instead of asking whether the contractual language is clear and then applying the exclusion's unambiguous meaning, it looks at the effects of the exclusion and concludes that the language must be unclear because it produces, in Devcon's view, bad results." Devcon, Nos. 07-4602/08-1996, Slip Op. at p. 13.
Instead, the Third Circuit reasoned that the focus of any ambiguity analysis necessarily must be upon the terms of the policy. The court cited to and adopted the holding of an earlier opinion decided under Pennsylvania law, Reliance Insurance Company v. Moessner, 121 F.3d 895 (3d Cir. 1997). In that case, an insured argued that a similar total pollution exclusion's terms "suggest that the exclusion applies only to environmental catastrophes." Devcon, Nos. 07-4602/08-1996, Slip Op. at p. 9 (quoting Moessner, 121 F.3d at 900). In Moessner, the Third Circuit rejected the argument as contrary to the "facial reading" of the policy and concluded that the plain terms of the pollution exclusion contained no language limiting its application to only environmental catastrophes. Because both Pennsylvania and the Virgin Islands follow the same guiding principles for the interpretation of insurance contracts, the Third Circuit concluded that the Moessner holding – that the pollution exclusion is not ambiguous – also applied under the law of the Virgin Islands.
Having concluded that the pollution exclusion was not ambiguous, the Third Circuit applied the plain meaning of the exclusion to the lawsuit asserted by the residents and property owners against Devcon. The court determined that the underlying litigation asserted claims that fell within the "plain language of the exclusion." Specifically, the court found that the underlying plaintiffs' allegations – that particulate dust generated by construction at the airport caused a variety of bodily injuries and property damage – asserted claims for damages resulting from the "release" of any "solid ... irritant or contaminant." Devcon, Nos. 07-4602/08-1996, Slip Op. at p. 12. The Third Circuit held that the pollution exclusion removed the underlying litigation from the coverage afforded by the Policy. The court similarly rejected Devcon's argument pursuant to the doctrine of reasonable expectations, holding that the doctrine does not apply absent a showing that an insurance policy is ambiguous.
The Third Circuit recognized that other jurisdictions have reached the opposite conclusion concerning the ambiguity of pollution exclusions. The court cited to several opinions from various jurisdictions holding that versions of the absolute pollution exclusion were ambiguous because they could be interpreted as barring coverage for various harms in addition to the traditional, environmental catastrophes to which those courts determined the exclusions were intended to apply. The court specifically identified: State v. Allstate Ins. Co., 201 P.3d 1147, 1020 (Cal. 2009); Am. States Ins. Co. v. Koloms, 687 N.E.2d 72, 79 (Ill. 1997); Motorists Mut. Ins. Co. v. RSJ, Inc., 926 S.W.2d 679, 682 (Ky. Ct. App. 1996); Morton Int'l, Inc. v. Gen. Accident Ins. Co. of Am., 629 A.2d 831, 848-55, 875 (N.J. 1993). The Third Circuit criticized those courts for treating "the historical reasons for including pollution exclusions in insurance contracts like a legislative history to guide interpretation of the exclusions." Devcon, Nos. 07-4602/08- 1996, Slip Op. at p. 12-13. The Third Circuit noted, "[w]hatever the insurance industry background for the framing of the exclusion at issue here, the dispositve point is that the language of the exclusion is, as the District Court noted, sufficiently plain to understand on its face and apply to these facts." Id. at 14
Undoubtedly, courts in many jurisdictions will continue to apply an ambiguity analysis that looks to the potential results of a pollution exclusion's application rather than the exclusion's terms. Undoubtedly too, some of those courts will entertain the slippery slope (or the slippery Drano on the floor) argument as a reason to narrowly limit the application of the pollution exclusion in favor of a finding of coverage. Devcon, however, offers wellreasoned authority for the argument that pollution exclusions are unambiguous, and the plain meaning of their texts should be applied. More broadly, Devcon provides a persuasive argument that courts should look in the first instance to a policy's terms when analyzing whether a policy provision is ambiguous.
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