Present: All the Justices
PBM NUTRITIONALS, LLC
OPINION BY
v. Record No. 110669 JUSTICE S. BERNARD GOODWYN
April 20, 2012
LEXINGTON INSURANCE COMPANY, ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Walter W. Stout, III, Judge
In this appeal, we consider whether the circuit court
erred in construing pollution exclusion endorsements in a
commercial property insurance policy as precluding coverage for
a multi-million dollar infant formula loss resulting from the
infiltration of filter elements into the formula during the
manufacturing process.
Background
PBM Nutritionals, LLC (PBM) filed a declaratory judgment
action in the Circuit Court of the City of Richmond against
Lexington Insurance Company (Lexington), Arch Insurance Company
(Arch) and ACE American Insurance Company (ACE) (collectively
the Insurers). PBM sought insurance coverage for its loss
resulting from infiltration of filter elements into the infant
formula it manufactured between January 22 and January 30,
2009. The Insurers claimed that the insurance policies'
"Pollution Exclusion Endorsements" excluded coverage for PBM's
infant formula loss because the formula was "contaminated."
The circuit court found that the Insurers were not liable under
the policies for PBM's infant formula losses, and PBM appeals.
Facts
Infant Formula Loss
PBM manufactures and produces infant formula at a facility
located in Burlington, Vermont. PBM manufactures its infant
formula by mixing dry ingredients with hot, filtered water. To
heat the water, PBM uses a heat exchanger, a vessel in which
steam heats water flowing through tubes. A butterfly valve
regulates the steam by opening or closing to allow more or less
steam into the heat exchanger. Once heated, the water is
released from the heat exchanger and passes through water
filters, to ensure its cleanliness before it enters the
liquefying tank where it mixes the dry ingredients. Industrial
dryers then dry the created mixture into finished infant
formula.
On December 14, 2008, PBM conducted a routine cleaning and
discovered a defect in the butterfly valve. The defect allowed
steam to leak into the steam tube when the valve was in the
closed position. PBM ordered a replacement valve, but it did
not arrive until late January 2009. Until January 20, 2009,
PBM continued to manufacture infant formula and conduct routine
cleanings. PBM’s testing revealed no problems with the infant
formula produced during this period.
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Between January 20 and January 22, 2009, PBM conducted an
extensive cleaning of the system in preparation for the
manufacture of its Profylac brand infant formula. PBM can
complete a routine cleaning in 4 to 6 hours, but a Profylac
cleaning takes between 42 and 46 hours. During this Profylac
cleaning, water was sealed inside the heat exchanger water tube
and in the filter housing. Because the butterfly valve was
leaking, steam seeped into the heat exchanger and superheated
the water in the water tube and the filter housing. Unable to
withstand the superheated water, the water filters
disintegrated into their constituent components of cellulose,
melamine and other filter materials, which infiltrated the
water.
After the Profylac cleaning, PBM began to manufacture its
Profylac formula, unaware that it was using superheated water
that contained melamine and other filter materials to mix the
formula ingredients. When PBM tested the batches of Profylac
made during this period, it discovered that 4 of the 25 batches
contained levels of melamine that exceeded the Food and Drug
Administration (FDA) limit of one part per million. The other
21 batches had melamine levels within the FDA limit, but PBM
feared they contained disintegrated filter components.
Prior to trial, the parties stipulated that the
“[e]levated levels of melamine detected in infant formula
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batches made between January 22, 2009 and January 30, 2009 are
evidence of the disintegration of the water filters and the
infiltration of melamine and other filter media into the infant
formula.” PBM’s Executive Vice-President Scott F. Jamison
testified that all batches manufactured during this period had
no salvage value, were unfit for human consumption, and were
unmarketable as a result of the infiltration.
After notifying its insurance companies, PBM elected to
destroy all batches manufactured after the Profylac cleaning.
It sought insurance coverage for the formula it had to destroy.
The Insurance Policies
At the time of the loss, PBM had insurance policies with
four different insurance companies. Specifically, PBM had
property damage and business interruption policies with the
Insurers. PBM also had a contamination insurance policy with
Dornoch LTD.
PBM settled its claim with Dornoch for $2 million. The
Insurers denied that their policies provided coverage for the
loss.
To secure the policies from the Insurers, PBM retained an
insurance broker to assist with purchasing sufficient insurance
to manage the risk of owning a manufacturing plant. PBM sought
a commercial property, or "all risks," policy. Such policies
insure "against all risks of physical loss or damage to
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property described herein, . . . except as hereinafter
excluded."
PBM's broker ultimately arranged a "quota share" agreement
whereby the three separate Insurers issued all risks policies
to PBM and shared percentages of the risk of coverage. Under
this agreement, ACE afforded coverage for 50% of any loss,
while Arch and Lexington each afforded coverage for 25%. All
three policies were based on a "manuscript form" or "broker's
manuscript" prepared by PBM’s broker. The manuscript form
includes the insuring agreement, the terms of insurance, limits
of liability, deductible, coverage, and perils excluded. PBM's
broker selected the manuscript form by retrieving it from the
public domain.
The manuscript form policy contained a provision entitled
"Pollution." This provision, Paragraph 9(H), states:
9. PERILS EXCLUDED
This policy does not insure:
. . . .
H. Pollution. The Insurers will not cover loss or
damage solely and directly caused by or resulting from
the presence, release, discharge or dispersal of
"pollutants" unless the presence, release, discharge
or dispersal is itself caused by a peril insured
against.
Definition: Wherever in this policy the word
"pollutant(s)" occurs, it shall be held to mean any
solid, liquid, gaseous or thermal irritant or
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contaminant, including smoke, vapor, soot, fumes,
acids, alkalis, chemicals and waste.
PBM's broker solicited quotes from insurance companies for
the coverage provided in the manuscript form policy he had
prepared. As part of the negotiations, the Insurers asked for
endorsements to change, alter, add, or delete coverage from
that provided in the manuscript form policy. Based upon
negotiations, each of the Insurers added endorsements,
declaration pages, and certain forms to the manuscript form to
complete their respective negotiated policies. Each Insurer
added a similar pollution exclusion endorsement during this
negotiating process.
A. ACE
ACE added to its policy a "Contamination and/or Seepage
and/or Pollution Exclusion" endorsement, which provides:
This Policy does not insure against loss or damage
caused by or resulting from any of the following
causes . . . :
Loss or damage caused by, resulting from, contributed
to or made worse by actual, alleged or threatened
release, discharge, escape or dispersal of
CONTAMINANTS or POLLUTANTS, all whether direct or
indirect, proximate or remote or in whole or in part
caused by, contributed to or aggravated by any
physical damage insured in this Policy.
. . . .
CONTAMINANTS or POLLUTANTS mean any material which
after its release can cause or threaten damage to
human health or human welfare or cause or threaten
damage, deterioration, loss of value, marketability
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or loss of use to property insured hereunder,
including, but not limited to, bacteria, fungi,
virus, or hazardous substances as listed in the
Federal Water Pollution Control Act, Clean Air Act,
Resource Conservation and Recovery Act of 1976, and
Toxic Substances Control Act, or as designated by the
U.S. Environmental Protection Agency.
An exception is also included in this pollution exclusion
endorsement stating that the exclusion does not apply if the
contamination or pollution arises from direct physical loss or
damage to insured property from "Fire, Lightning, Explosion,
Windstorm, Hail, Smoke, Aircraft or Vehicle Impact or Leakage
from Fire Protection Equipment."
B. Arch
The Arch policy contained a "Pollution & Contamination
Exclusion Endorsement," which states:
This policy does not cover any loss, damage, cost or
expense caused by, resulting from, contributed to or
made worse by actual, alleged or threatened release,
discharge, introduction, escape or dispersal of
contaminants or pollutants, all whether direct or
indirect, proximate or remote or in whole or in part
caused by, contributed to or aggravated by any
physical damage insured by this policy.
. . . .
Contaminants or pollutants means any material,
whether solid, liquid, gaseous or otherwise, which,
after its release, discharge, introduction, escape or
dispersal, can cause or threaten damage to human
health or human welfare or causes or threatens
damage, deterioration, loss of value, marketability
or loss of use to the property insured hereunder.
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Like the ACE policy, the Arch pollution exclusion endorsement
contains an exception stating that the exclusion does not apply
to "loss or damage directly caused by fire, lightning, aircraft
impact, explosion, riot, civil commotion, vehicle impact,
windstorm, hail, vandalism, malicious mischief or accidental
discharge from automatic fire protective systems."
C. Lexington
The Lexington policy contained a "Pollution,
Contamination, Debris Removal Exclusion Endorsement," 1 which
states:
This policy does not cover loss or damage caused by,
resulting from, contributed to or made worse by
actual, alleged or threatened release, discharge,
escape or dispersal of CONTAMINANTS or POLLUTANTS, all
whether direct or indirect, proximate or remote or in
whole or in part caused by, contributed to or
aggravated by any physical damage insured by this
policy.
. . . .
CONTAMINANTS or POLLUTANTS means any solid, liquid,
gaseous or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis, chemicals
and waste, which after its release can cause or
threaten damage to human health or human welfare or
causes or threatens damage, deterioration, loss of
value, marketability or loss of use to property
insured hereunder, including, but not limited to,
bacteria, virus, or hazardous substances
. . . .
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The ACE “Contamination and/or Seepage and/or Pollution
Exclusion,” the Arch “Pollution & Contamination Exclusion
Endorsement,” and the Lexington “Pollution, Contamination,
Debris Removal Exclusion Endorsement” shall be referred to
collectively as “the pollution exclusion endorsements.”
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Similar to the ACE and Arch policies, the Lexington pollution
exclusion endorsement states that it "shall not apply when loss
or damage is directly caused by fire, lightning, aircraft
impact, explosion, riot, civil commotion, smoke, vehicle
impact, windstorm, hail, vandalism, malicious mischief" or
"leakage or accidental discharge from automatic fire protective
systems."
None of the pollution exclusion endorsements contain an
exception for "insured perils" as contained in Paragraph 9(H)
of the manuscript form policy. The circuit court held that the
pollution exclusion endorsements are clear and unambiguous and
have the "effect of superseding Paragraph 9(H) to the extent
that they conflict." The final order states that “the Court
finds no liability for coverage of the Plaintiff’s
contamination losses.”
Analysis
PBM claims that the circuit court erred in ruling that it
was not entitled to insurance coverage from the Insurers for
the unsafe formula that PBM destroyed. First, PBM argues that
the circuit court erred by construing two directly conflicting
policy provisions in favor of the Insurers and not the insured.
PBM claims that when read together, the pollution exclusion in
Paragraph 9(H), which does not exclude coverage, and the
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pollution exclusion endorsements, which do exclude coverage,
create "coverage inconsistencies" that render the policies
ambiguous, and that the circuit court erred in not adhering to
the well-established principle that conflicting provisions in
insurance policies must be construed in favor of coverage.
The Insurers respond that the policies do not contain
directly conflicting provisions. The Insurers note that the
exclusion in Paragraph 9(H) does not "provide" coverage even if
an exception to the exclusion prevents it from being operative.
They also claim that the pollution exclusion endorsements do
not conflict with Paragraph 9(H), but rather are separate
additional exclusions that modify the manuscript form policy by
expanding the exclusion of pollution and contamination.
Further, the Insurers contend that, if there were a conflict,
the endorsements supersede and override conflicting provisions
of the policies' manuscript form.
The interpretation of a contract presents a question of
law subject to de novo review. Copp v. Nationwide Mut. Ins.
Co., 279 Va. 675, 681, 692 S.E.2d 220, 223 (2010). "[O]n
appeal [this Court is not] bound by the trial court's
interpretation of the contract provision at issue; rather,
[this Court has] an equal opportunity to consider the words of
the contract within the four corners of the instrument itself."
Eure v. Norfolk Shipbuilding & Drydock Corp., 263 Va. 624, 631,
10
561 S.E.2d 663, 667 (2002). "Each phrase and clause of an
insurance contract should be considered and construed together
and seemingly conflicting provisions harmonized when that can
be reasonably done, so as to effectuate the intention of the
parties as expressed therein." Seals v. Erie Ins. Exch., 277
Va. 558, 562, 674 S.E.2d 860, 862 (2009) (internal quotation
marks omitted). Additionally,
[i]nsurance policies are contracts whose language is
ordinarily selected by insurers rather than by policy-
holders. The courts, accordingly, have been
consistent in construing the language of such
policies, where there is doubt as to their meaning, in
favor of that interpretation which grants coverage,
rather than that which withholds it. Where two
constructions are equally possible, that most
favorable to the insured will be adopted. Language in
a policy purporting to exclude certain events from
coverage will be construed mostly strongly against the
insurer.
Copp, 279 Va. at 681, 692 S.E.2d at 223 (quoting Seals, 277 Va.
at 562, 674 S.E.2d at 862).
"When an insurer drafts policy language setting forth
exclusions that limit coverage under a policy, the insurer is
required to use language that clearly and unambiguously defines
the scope of the exclusions." Lower Chesapeake Assocs. v.
Valley Forge Ins. Co., 260 Va. 77, 88, 532 S.E.2d 325, 331
(2000). Exclusionary language in an insurance policy will be
construed most strongly against the insurer and the burden is
upon the insurer to prove that an exception applies. Johnson
11
v. Insurance Co. of N. Am., 232 Va. 340, 345, 350 S.E.2d 616,
619 (1986).
Under Virginia law, an insurance policy is not ambiguous
merely because courts of varying jurisdictions differ with
respect to the construction of policy language. See Nationwide
Mut. Ins. Co. v. Wenger, 222 Va. 263, 268, 278 S.E.2d 874, 877
(1981). Additionally, "where the exclusion is not ambiguous,
there is no reason for applying the rules of contra proferentem
or liberal construction for the insured." 2 Eric M. Holmes,
Appleman on Insurance 2d § 7.2 (1996 & Supp. 2009).
Assuming arguendo that PBM is correct that the exception
to the exclusion in Paragraph 9(H) applies to its infant
formula loss and negates the pollution exclusion in Paragraph
9(H), PBM has not established that Paragraph 9(H) "conflicts"
with the pollution exclusion endorsements. Paragraph 9(H) is
an exclusion and not a coverage grant. If the exception
operates to render it inapplicable, then Paragraph 9(H) does
not operate to bar coverage. However, Paragraph 9(H) does not
“provide” any coverage and has no bearing on whether the
pollution exclusion endorsements bar coverage in this instance.
An exception that serves to negate the applicability of
one particular exclusion does not create a "conflict" with
another policy exclusion that operates to bar coverage. An
exception to an exclusion only has bearing on that exclusion's
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applicability—it is without force with respect to other
provisions of the policy. See Nationwide Mut. Ins. Co. v. The
Overlook, LLC, 785 F.Supp.2d 502, 530 (E.D. Va. 2011). In
other words, an exception to an exclusion does not create
coverage where none exists. Wenger, 222 Va. at 267, 278 S.E.2d
at 876. "The exception remains subject to and limited by all
other related exclusions contained in the policy." Id.
(quoting Haugan v. Home Indem. Co., 197 N.W.2d 18, 22 (S.D.
1972)).
Applying these principles to the instant case, the
exception to the pollution exclusion in Paragraph 9(H) does not
in and of itself provide coverage. If coverage is excluded
under the pollution exclusion endorsements, the exception to
exclusion in Paragraph 9(H) does not restore that coverage. As
a result, Paragraph 9(H) has no application to the pollution
exclusion endorsements and the provisions of the policies do
not conflict.
The circuit court did not err in concluding that the
provisions of the policies do not conflict. The circuit
court's conclusion that the pollution exclusion endorsements
modify "the manuscript policy to expand the exclusion of
pollution and contamination" is consistent with established
principles of insurance law. "In legally construing an
endorsement to an insurance policy, the endorsement and policy
13
must be read together, and the policy remains in full force and
effect except as altered by the words of the endorsement." 2
Holmes, Appleman on Insurance 2d § 5.1. "Where the language of
endorsement is clear and unambiguous, it must be given
recognition if the endorsement has been effectively made a part
of the policy." Id. In the instant case, the unambiguous
pollution exclusion endorsements must be recognized and applied
in determining insurance coverage for the loss.
PBM also argues that, even if applicable, the pollution
exclusion endorsements are ambiguous because they are all
overly broad and could exclude nearly any loss. It claims that
the circuit court erred in failing to limit the scope of the
pollution exclusion endorsements to traditional environmental
losses in order to avoid the problem of illusory coverage and
to give some reasonable meaning to the ambiguous endorsements.
The Insurers respond that the circuit court did not err by
rejecting PBM's assertion that the pollution exclusion
endorsements are ambiguous and should only apply to traditional
environmental pollution. The Insurers contend that because the
endorsements are not ambiguous, the circuit court properly
interpreted and applied the plain text of the endorsements. We
agree.
In City of Chesapeake v. States Self-Insurers Risk
Retention Group, 271 Va. 574, 628 S.E.2d 539 (2006), this Court
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considered a certified question asking whether claims by women
who alleged that they all suffered miscarriages resulting from
exposure to trihalomethanes in the City of Chesapeake's water
supply were precluded by the pollution exclusion in the
relevant insurance policy. Id. at 576, 628 S.E.2d at 540.
This Court held that the pollution exclusions operated to
preclude coverage. Id. at 578, 628 S.E.2d at 541. This Court
stated that when determining the meaning and application of a
pollution exclusion in a liability policy, "the law of this
Commonwealth and the plain language of the insurance policy
provide the answer." Id. at 579, 628 S.E.2d at 542.
It is a basic tenet of Virginia law that the courts, when
interpreting a contract, "construe it as written" and do "not
add terms the parties themselves did not include." Landmark
HHH, LLC v. Gi Hwa Park, 277 Va. 50, 57, 671 S.E.2d 143, 147
(2009). This Court "will not insert by construction, for the
benefit of a party, a term not express in the contract."
Lansdowne Dev. Co., L.L.C. v. Xerox Realty Corp., 257 Va. 392,
400, 514 S.E.2d 157, 161 (1999).
In the instant case, none of the pollution exclusion
endorsements reference any terms such as “environment,”
“environmental,” “industrial,” or any other limiting language
suggesting that the exclusions are limited to “traditional”
rather than “indoor” pollution. No language in any of the
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relevant endorsements suggests the discharges or dispersals of
pollutants or contaminants must be into the environment or
atmosphere. The endorsements are broad, but not unlimited.
Moreover, if the pollution exclusion endorsements were intended
to be limited to traditional environmental pollution scenarios,
the included exceptions to the pollution exclusion endorsements
would not be necessary. According to their plain language, the
pollution exclusions are not restricted to traditional
environmental pollution. The circuit court did not err in
refusing to limit the Insurers’ pollution exclusion
endorsements to traditional environmental contamination losses. 2
2
The Fourth Circuit Court of Appeals and the Eastern
District of Virginia have construed similar pollution exclusion
endorsements and reached the same conclusion. National Elec.
Mfrs. Ass'n v. Gulf Underwriters Ins. Co., 162 F.3d 821, 825-26
(4th Cir. 1998) (concluding pollution exclusion was "plain,"
"unambiguous," and "not limited to atmospheric or environmental
pollution"); Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d
997, 1006 (4th Cir. 1998) (finding pollution exclusion
unambiguous and applying it to non-traditional environmental
harm); Evanston Ins. Co. v. Harbor Walk Dev., LLC, 814
F.Supp.2d 635, 646-47 (E.D. Va. 2011) (finding pollution
exclusions unambiguous and not limited to traditional
environmental pollution); Dragas Mgmt. Corp. v. Hanover Ins.
Co., 798 F.Supp.2d 766, 774 (E.D. Va. 2011) ("The court will
not break with the weight of precedent on this point and holds
that the pollution exclusion in the instant policies is not
limited to traditional environmental pollution, as the
definition of 'pollutant' evinces no such intent on the part of
the parties."); Firemen's Ins. Co. v. Kline & Son Cement
Repair, Inc., 474 F.Supp.2d 779, 797 (E.D. Va. 2007)(holding
pollution exclusion is "sweeping, excepting both environmental
and indoor pollution occurrences from coverage").
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Finally, PBM argues that the circuit court erred in
failing to order insurance coverage for PBM’s loss because the
Insurers never presented any evidence that the infant formula
was "contaminated," and the circuit court never made an express
finding that the infant formula was contaminated. The Insurers
respond that the circuit court's final order evidences a
finding of contamination and that evidence was presented
through stipulations and testimony to support this finding. We
agree with the Insurers.
The parties stipulated that the "[e]levated levels of
melamine detected in infant formula batches made between
January 22, 2009 and January 30, 2009 are evidence of the
disintegration of the water filters and the infiltration of
melamine and other filter materials into the infant formula."
PBM's Executive Vice-President Scott F. Jamison testified that
all batches manufactured during this period had no salvage
value, were unfit for human consumption, and were unmarketable
as a result of the infiltration. As a result, the evidence
established that the formula was "contaminated" as defined in
the policies because disintegrated filter components caused a
loss of value or marketability of the formula. The final order
states "the Court finds no liability for coverage of the
Plaintiff's contamination losses." The circuit court's finding
with respect to contamination is not against the weight of the
17
evidence, and is not erroneous. See, e.g., Code § 8.01-680;
Weedon v. Weedon, 283 Va. 241, 253, 720 S.E.2d 552, 558 (2012).
Conclusion
For the reasons stated in this opinion, we find no error
in the judgment of the circuit court that the Insurers are not
liable to provide insurance coverage for PBM’s loss of infant
formula product. Therefore, we will affirm the judgment of the
circuit court.
Affirmed.
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