Cincinnati Specialty Underwriters Ins. Co. v. Energy Wise Homes, Inc.

Cincinnati Specialty Underwriters Ins. Co. v. Energy Wise Homes, Inc. et. al., No. 339-9-12 Bncv (Wesley, J., Jan. 28, 2014).
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
VERMONT SUPERIOR COURT

SUPERIOR COURT CIVIL DIVISION
Bennington Unit Docket No. 339-9-12 Bncv

Cincinnati Specialty Underwriters
Insurance Company,
Plaintiff.

v.

Energy Wise Homes, Inc., Shirley A.
Uhler, and, Michael D. Uhler,
Defendants.

Opinion and Order
Denying Defendant’s Motion for Summary Judgment

Background

Plaintiff brings a declaratory judgment action against Defendants seeking a determination
of the scope of coverage as to the commercial general liability policy it sold to Energy Wise.
Energy Wise is a company that insulates buildings. In November or October of 2010, Energy
Wise contracted to install spray insulation at the Shrewsbury Mountain School. Shirley Uhler
was an employee of the Shrewsbury Mountain School when the spraying occurred. Ms. Uhler
alleges she suffered respiratory problems due to exposure to toxic airborne chemicals released as
a result of the spraying. Together with her husband, Michael, who seeks damages for loss of
consortium, Ms. Uhler brought suit against Energy Wise in Rutland County seeking personal
injury damages, Uhler v. Energy Wise Homes, Inc., Doc. No. 295-4-12 Rdcv.

As Energy Wise’s insurer, while reserving any rights later determined to limit the scope
of its policy, Plaintiff agreed to defend Energy Wise in the Rutland case. On September 21,
2012, Plaintiff filed its complaint in this action against Energy Wise and the Uhlers, seeking a
declaration that Plaintiff’s insurance contract with Energy Wise precludes coverage for this
claim.1

On September 23, 2013, Plaintiff moved for summary judgment. Plaintiff argues
it is not obligated to defend or indemnify Energy Wise on the Uhler’s claim relying on
the total pollution exclusion in the policy. The contract does not cover “‘bodily injury’…
which would not have occurred in whole or in part but for the actual, alleged or
threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at
any time.” The policy further defines “pollutants”:

1
The record indicates another insurance company, Poulos Insurance, was a third-party defendant but Energy Wise
dismissed its claim against Poulos.
 ‘Pollutants’ include but are not limited to, that which has been recognized in
industry or government to be harmful or toxic to persons, property or
environment, regardless of whether the injury damage, or contamination is caused
directly or indirectly by the ‘pollutants’ and regardless of whether (a) The insured
is regularly or otherwise engaged in activities which taint and degrade the
environment; or (b) The insured uses, generates or produces the ‘pollutant.’

The policy also lists pollutants that are specifically excluded, which are: respirable dust,
microorganisms, fungi, bacteria, sulfuric acid, tainted drywall, chromated copper aresante,
fluorine, beryllium, benzene, formaldehyde, and manganese. The Uhlers’ complaint does not
specifically identify the toxic airborne substance allegedly responsible for the injury, but the
Uhlers’ expert will testify it was most likely tertiary amine catalysts.

The Uhlers opposed the motion for summary judgment on November 22, 2013. They
argue the pollution exclusion is only intended to protect the insurance company from liability for
traditional environmental hazards, and that Plaintiff’s interpretation to exclude coverage under
the circumstances presented here is so overbroad as to make the policy meaningless. Plaintiff
responded to the opposition on December 20, 2013. Energy Wise did not filed a response to the
motion for summary judgment.

Standard of Review

The Court grants summary judgment “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
V.R.C.P. 56(a). The Court makes all reasonable inferences and resolves all doubts in favor of the
non-moving party. Lamay v. State, 2012 VT 49, ¶ 6, 191 Vt. 635. When interpreting an
insurance policy, the Court seeks to implement the plain meaning of an insurance contract. Vt.
Mut. Ins. Co. v. Parsons Hill P’ship, 2010 VT 44, ¶ 21, 188 Vt. 80. Where an ambiguity exists,
the Court construes the policy in favor of the reasonable expectations of the insured. Id. Further,
it is the burden of the insurer to show an exclusion applies. State v. CNA Ins. Cos., 172 Vt. 318,
330 (2001).

Discussion

Pollution exclusion contracts have been upheld in Vermont and the parties do not dispute
enforceability.2 However, the scope of the total pollution exclusion has not been well defined in
Vermont. See, e.g., Parsons Hill, 2010 VT 44, ¶¶ 1–2 (discussing coverage for a breach of the
implied warrant of habitability); Sperling v. Allstate Indem. Co., 2007 VT 126, ¶¶ 1–2, 182 Vt.

2
Vermont case law requiring prior regulatory approval of pollution exclusions does not apply. Plaintiff sold Energy
Wise a surplus policy and the parties do not argue surplus policies must go through the regulatory approval
requirements. See, e.g., State v. Onebeacon Am. Ins. Co., 485-7-07 Wncv, 2009 WL 6557344 (Vt. Super. Ct. Nov. 5,
2009) (Crawford, J.) (holding pollution exclusion enforceable); State v. Stonington Ins. Co., 811-12-02 Wncv, 2007
WL 3234763 (Vt. Super. Ct. July 27, 2007) (Teachout, J.) (discussing requirements for regulatory approval of
pollution exclusions); see also Maska U.S., Inc. v. Kansa Gen. Ins. Co., 198 F.3d 74, 80 (2d Cir. 1999) (holding
pollution exclusions do not violate Vermont public policy).

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521 (discussing coverage on a home owner’s policy for a home heating fuel spill). In Parsons
Hill, a landlord’s insurer sought a declaration that the pollution exclusion on their general
comprehensive liability policy precluded coverage. 2010 VT 44, ¶¶ 1–2. The tenants sued the
landlord for a breach of an implied warranty of habitability because their water contained a toxin.
Id. The landlord had three types of coverage. Id. ¶ 4. Coverage A covered bodily injury but
contained a pollution exclusion; Coverage B covered personal injury without a pollution
exclusion; and, Coverage D was for bodily injury caused by pollution. Id. The Court ruled none
of the policies covered the type of claim made by tenants against landlord because they only
covered property damage and personal injury, which are separate from a breach of the implied
warrant of habitability. Id. ¶ 1, 15, 21–23.

Because Vermont cases do not define the scope of the pollution exclusion in this contract,
the Court looks for guidance from other jurisdictions. Two cases, from California and
Washington, help to frame the debate. See MacKinnon v. Truck Ins. Exch., 73 P.3d 1205 (Cal.
2003); Quadrant Corp. v. Am. States Ins. Co., 110 P.3d 733 (Wash. 2005). California holds the
pollution exclusion is limited to typical environmental pollution. See MacKinnon, 73 P.3d at
1216. In contrast, Washington holds the total pollution exclusion, by its plain language, excludes
all injuries that occur from pollutants. See Quadrant, 110 P.3d at 744. There are many other
cases, but these two cases frame each argument well. There is also discussion in the secondary
literature. See, e.g., Absolute Pollution Exclusion, 43 Am. Jur. 2d Insurance § 708; What
Constitutes "Pollutant," "Contaminant," "Irritant," or "Waste" Within Meaning of Absolute or
Total Pollution Exclusion in Liability Insurance Policy, 98 A.L.R.5th 193; Generally; Total
Pollution Exclusions, 9 Couch on Ins. § 127:13.

MacKinnon concerned a suit against a landlord for failure to properly apply pesticides to
kill wasps. 73 P.3d at 1207. The landlord sought indemnification from its insurer, which
disclaimed coverage due to the pollution exclusion. Id. at 1207–08. To give context to the
coverage dilemma, the California Supreme Court summarized:

To say there is a lack of unanimity as to how the clause should be interpreted is an
understatement. Although the fragmentation of opinion defies strict
categorization, courts are roughly divided into two camps. One camp maintains
that the exclusion applies only to traditional environmental pollution into the air,
water, and soil, but generally not to all injuries involving the negligent use or
handling of toxic substances that occur in the normal course of business. These
courts generally find ambiguity in the wording of the pollution exclusion when it
is applied to such negligence and interpret such ambiguity against the insurance
company in favor of coverage. The other camp maintains that the clause applies
equally to negligence involving toxic substances and traditional environmental
pollution, and that the clause is as unambiguous in excluding the former as the
latter.

Id. at 1208–09. The Court also “recognized that the above categorization is an
oversimplification, because the same court may fall into different camps depending on the
situations presented.” Id. at 1209 n.2.

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 The California Supreme Court also summarized the history of the pollution exclusion.
See id. at 1209–10. The exclusion started as a qualified pollution exclusion, which was designed
to shield insurers from liability when the insureds violated federal law, such as the Clean Air
Act. See id. After years of litigation about the meaning of some of the words in the qualified
pollution exclusion, insurance companies adopted the so-called total pollution exclusion in 1985.
Id. Nevertheless, the purpose remained to protect insurers against exposure to substantial
environmental clean-up costs resulting from their insureds’ activities in violation of
environmental laws and regulations. See id. at 1210. “Even commentators who represent the
insurance industry recognize that the broadening of the pollution exclusion was intended
primarily to exclude traditional environmental pollution rather than all injuries from toxic
substances.” Id.

The California Supreme Court then discussed the strengths and weaknesses of each
argument and held the pollution exclusion did not apply to improper use of pesticides that
harmed a single tenant. See id. at 1211–13. The insurance company’s argument was based on a
fallacy that the meaning can be discovered by interpreting words such as “irritant” or
“discharge.” Id. at 1214. The court found this argument unreasonable because it lacked a
limiting principle allowing the insured to determine what, if any, perils were covered. Id.
Therefore, the insurance company’s argument was rejected as overly broad. Id. at 1215. Hence,
the pollution exclusion only applied to traditional environmental liabilities, not to a standard suit
for negligence in which a toxic substance was the agent of the harm. See id. at 1216–18.

The Washington Supreme Court conducted a similar analysis but reached the opposite
conclusion. See Quadrant, 110 P.3d at 744. Quadrant concerned a suit by a tenant who became
ill from the fumes coming off a sealant on a deck. Id. at 735. As in MacKinnon, the defendant
had a commercial general liability policy that contained an absolute pollution exclusion. See id.
at 736. The insureds filed a suit against the insurance company for denying coverage. Id.

The court started its analysis by reciting the standard for interpreting insurance contracts.
See id. at 736–37. Insurance policies are contracts. Id. at 737. The Court considers the policy as
a whole. Id. The court strives to apply the plain language of a policy. Id. “[A] clause is
ambiguous only when, on its face, it is fairly susceptible to two different interpretations, both of
which are reasonable.” Id. (internal quotations omitted).

The court discussed the history and purpose of pollution exclusions. See id. “Pollution
exclusions originated from insurers' efforts to avoid sweeping liability for long-term release of
hazardous waste.” Id. After litigation in the 1970s, insurance companies started using the current
pollution exclusion in the mid-1980s. See id. The court also summarized the split between courts
on the scope of the exclusion:

Many courts have interpreted absolute pollution exclusions specifically in the
context of claims for bodily injuries arising out of the release of toxic fumes.
Some have concluded that the absolute pollution exclusion does not apply where
personal injury has resulted from the negligent release of fumes during the
ordinary course of the insured's business. See, e.g., Nautilus Ins. Co. v. Jabar, 188
F.3d 27, 29–31 (1st Cir.1999); Am. States Ins. Co. v. Koloms, 177 Ill.2d 473, 687

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 N.E.2d 72, 82, 227 Ill.Dec. 149 (1997) (“[T]he exclusion applies only to those
injuries caused by traditional environmental pollution.”). These courts have relied
on several different theories. Some have concluded that the terms “discharge,”
“dispersal,” “irritant,” and “contaminant” are terms of art in environmental law,
thus rendering the exclusion ambiguous. See Belt Painting, 763 N.Y.S.2d 790,
795 N.E.2d at 19 (citing Nautilus Ins. Co., 188 F.3d at 30). Others have concluded
that because the historical purpose of the prior qualified pollution exclusion was
to shield insurers from sweeping liability for environmental cleanups, the absolute
pollution exclusion clause could be reasonably interpreted to apply only to
traditional environmental harms. See id.; Koloms, 227 Ill.Dec. 149, 687 N.E.2d at
81. Finally, some courts have concluded that a “commonsense approach” is
necessary and the pollution exclusion should not be read to apply to “injuries
resulting from everyday activities gone slightly, but not surprisingly, awry.”
Pipefitters Welfare Educ. Fund v. Westchester Fire Ins. Co., 976 F.2d 1037,
1043–44 (7th Cir.1992).

Id. at 737–38.

After discussing the history of interpretations of pollution exclusions in Washington, and
based on its reading of the plain language of the insurance contract, the court found the pollution
exclusion covered all torts in which pollutants, broadly defined, had a causal role in the injury for
which coverage was sought. See id. at 738–41. Unambiguous contracts must be interpreted on
their face. Id. at 741. Courts should not create an ambiguity where none exists. Id. The policy
language, but its plain language, excluded coverage for bodily injury caused by the discharge of
pollutants. Id. Fumes from sealant coming off of a deck is the discharge of a pollutant. Id. at 744.
Thus, the exclusion barred the suit. See id. A dissent characterized the majority’s interpretation
of the contract too broad and inconsistent with precedent in Washington. See id. at 744–45, 748
(Chambers, J. dissenting).

The current case confronts this Court with the same analytic quandary represented by the
California and Washington cases just discussed. The Court finds the reasoning of the California
Supreme Court more persuasive. See MacKinnon, 73 P.3d at 1209–10, 1214–18.The purpose of
the total pollution exclusion was and remains to protect insurance companies against traditional
environmental liabilities. See id. at 1210. As applied to the facts here, ambiguity arises as to the
meaning of pollutant and discharge, both of which are capable of such broad interpretations as to
frustrate any reasonable purpose of the policy. As described by the Uhlers’ expert, the foam
insulation is not any of the listed pollutants. Although the list of pollutants is likely broader than
those explicitly defined, the insurance company’s definition admits to no limiting principle
which would leave an insured conducting a business such as Energy Wise’s with any assurance
that any aspect of its business operations was not excluded by the policy Plaintiff sold.

Similar ambiguity afflicts Plaintiff’s broad definition of discharge for the purpose of
applying the total pollution exclusion. Energy Wise sprays insulation into buildings as the
fundamental aspect of its business operations. By contrast, Energy Wise did not spray the
insulation into the air, water, or earth in a manner that is consistent with traditional
environmental liability. For example, Energy Wise did not spray the insulation into the air

5
around a public park, or allow it to run through a pipe into a water supply, or bury it in the
ground. Under Plaintiff’s argument almost any use of the products of Energy Wise’s business
that harmed a third party might be excluded. Seen in this light, the term discharge is rendered
ambiguous and does not support resort to the exclusion for discharge of pollutants to relieve
Cincinnati of its duty to defend and indemnify Energy Wise.

The Court disagrees with the reasoning of the Washington Supreme Court, finding its
resort to plain language analysis overly facile. See Quadrant, 110 P.3d at 744. The opinion does
not sufficiently account for the historical purpose and development of the pollution exclusion,
nor for the reasonable expectations of an insured business that the pollution exclusion should be
subject to a limiting principle that preserves the meaning and value in the general commercial
liability policy. As suggested by Justice Chambers, applying the pollution exclusion in the
circumstances presented by this type of case makes the exclusion so broad as to render the
insurance policy almost meaningless. See id. at 748 (Chambers, J. dissenting). Similar to the
rationale deemed insubstantial by the Quadrant dissent, Cincinnati’s argument here for
excluding coverage represents “an ‘opportunistic afterthought,’” inimical to the expectations of
coverage reasonably associated with the sale of a general commercial liability policy to a
company engaged in the business of spraying insulation. Id.

Adopting the reasoning of MacKinnon, this Court concludes the meanings of pollutant
discharge are ambiguous as applied to this case. The Court must interpret all ambiguities in
favor of the insured and therefore does not read the policy to exclude coverage in this case. See
Parsons Hill, 2010 VT 44, ¶ 21. Moreover, Plaintiff has not met its burden of showing an
exclusion applies. See CNA, 172 Vt. at 330. The Court denies summary judgment to Plaintiff
because Plaintiff is not entitled to judgment as a matter of law. See V.R.C.P. 56(a).

Although the Uhlers request a judgment declaring Plaintiff is obligated to indemnify
Energy Wise, Defendants have not moved for summary judgment. Nevertheless, it appears there
are no disputed facts and the Court’s analysis in this order suggests Defendants are entitled to
judgment as a matter of law. Thus, the Court will enter summary judgment in favor of
Defendants in ten days unless Plaintiff responds with a persuasive demonstration as to why such
relief is unwarranted. See V.R.C.P. 56(f)(3).

Order

The Court DENIES Plaintiff’s motion for summary judgment. The Court will enter
summary judgment for Defendants unless Plaintiff convinces the Court otherwise within ten
days.

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Dated and signed electronically at Bennington, Vermont on January 23, 2014.

John P. Wesley
Superior Court Judge

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