In James River Ins. Co. v. Ground Down Eng’g, 540 F.3d 1270 (11th Cir. 2008), an engineering company was sued by its client (a real estate developer) for allegedly performing a Phase I Environmental Site Assessment (ESA) negligently by failing to discover and report that construction debris and underground storage tanks were buried on the site.
The developer, Priority Development, purchased the affected property after the engineer reported it found no recognized environmental conditions. Subsequently, the developer found a significant amount of buried construction debris, as well as several 55 gallon drums and “half an underground storage tank.”
Priority filed suit for breach of contract, negligence, and negligent misrepresentation. Priority alleged that the drums and tank previously contained petroleum and had to be disposed of at a special waste facility. Priority also alleged that the construction debris caused elevated levels of methane gas that required environmental remediation.
The engineer demanded that its professional liability insurer, James River Insurance Company, provide a defense to the claim. James River began providing a defense under a reservation of rights, but it also filed suit in federal district court seeking declaratory judgment that, due to the pollution exclusion of the policy, it was not required to provide a defense.
District Court Decision Finds Coverage and Duty To Defend
The district court denied the insurance company’s complaint for declaratory judgment. It found that the broad pollution exclusion in the policy did not apply to exclude coverage. The district court reasoned that the basis of the complaint against the engineer was an alleged negligent failure to find tanks and debris. There was no allegation that the engineer actually caused any pollution by its actions. The pollution exclusion was not intended to apply to this type of claim, concluded the district court.
In seeking to avoid the pollution exclusion, the developer and the engineer argued to the district court that there was no connection between the service performed by the engineer and the pollution that was found on the property. The trial judge agreed that because the engineer had not actually caused the pollution complained of in the complaint, the pollution exclusion did not apply. The insurer was, therefore, required by the district court to provide a defense to the engineer in the underlying action.
Policy Language Concerning Coverage and Pollution Exclusion
The professional liability policy in question stated that it would cover “wrongful acts” in the engineer’s “performance of or failure to perform professional services” that the engineer was qualified to perform in its “capacity as an architect, engineer, landscape architect, land surveyor or planner.”
The policy included a “pollution exclusion” excluding from coverage for “[a]ll liability and expense arising out of or related to any form of pollution, whether intentional or otherwise.” The exclusion stated that the policy did not cover “any damages, claim, or suit arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’ ” It further specified that this included:
Any loss, cost, expense, fines and/or penalties arising out of any (1) request, demand, order, governmental authority or directive or that any private party or citizen action that any insured, or others, test for, monitor, clean up, remove, contain, treat, detoxify or neutralize or in any way respond to, or assess same, the effects of pollutants, environmental impairments, contaminants, or (2) any litigation or administrative procedure in which any insured or others may be involved as a party as a result of actual alleged or threatened discharge, dispersal, seepage, migration, release, escape or placement of pollutants, environmental impairments, or contaminants into or upon land, premises, buildings, the atmosphere, any water course, body of water, aquifer or ground water, whether sudden, accidental or gradual in nature or not, and regardless of when.
Pollutants were defined to include:
any solid, liquid, gaseous, fuel, lubricant, thermal, acoustic, electrical, or magnetic irritant or contaminant, including but not limited to smoke, vapor, soot, fumes, fibers, radiation, acid, alkalis, petroleums, chemicals or “waste.” “Waste” includes medical waste, biological infectants, and all other materials to be disposed of, recycled, stored, reconditioned or reclaimed.
The policy stated that this exclusion applies “regardless of whether … an alleged cause for the injury or damage is the Insured’s negligent hiring, placement, training, supervision, retention, or, wrongful act.”
Appellate Court Reverses District Court
In reversing the district court, the Eleventh Circuit Court of Appeals made several significant findings and legal holdings that are important to understanding how the pollution exclusion is to be interpreted and applied.
The court rejected the argument that in order for pollution to be subject to the exclusion, it must have been “caused by” the insured. According to court, because the exclusion applies to pollution claims “arising out of” the insured’s performance of services, it does not matter whether or not the insured “caused” the condition. As explained by the court, the term “arising out of” is broader in meaning than “caused by” and it “means ‘originating from,’ ‘flowing from,’ ‘incident to’ or ‘having a connection with.’” Proximate cause is not required, says the court. “[T]he phrase ‘arising out of’ contemplates a more attenuated link than the phrase ‘because of.’”
A thorough reading of the policy in this case, says the court, “shows the breadth of the exclusion and reveals that the exclusion covers the claim brought by Priority.” With regard to the claims for damages based on the construction debris, the court found that they are explicitly within the exclusion and barred from coverage. As stated by the court, “Although the alleged conduct was negligence in performing the site assessment, Priority’s claim depends upon the existence of environmental contamination.”
Does the Construction Debris Fall within the Pollution Exclusion?
The argument that construction debris is not a pollutant within the meaning of the exclusion fails for two reasons, per the court. First, the complaint plainly alleged that the damages associated with the construction debris “come from elevated levels of methane gas caused by the debris.” The complaint even listed the debris under the heading “environmental contamination.”
Second, the pollution exclusion is not limited just to matters normally considered as “irritants” and “contaminants.” The definition of “irritants or contaminants” includes “waste.” The definition of “waste,” in turn, includes “all … materials to be disposed of, recycled, stored, reconditioned, or reclaimed.” The court concluded, “Only a strained reading of this language would exclude construction debris causing elevated levels of methane gas from this definition.”
Even without the methane gas, however, the court stated that the construction debris described in the complaint “would be considered an environmental impairment,” and coverage would, therefore, be denied by the first sentence of the exclusion that states “Pollution/environmental impairment/contamination is not covered under this policy.” For these reasons, the court reversed the district court with instructions to the court to enter summary judgment for James Rivers Insurance Company.
Risk Management Commentary
Firms performing environmental site assessments should carry professional liability coverage that specifically includes pollution liability. It is surprising to see that the engineering firm providing environmental site assessment services did not have an insurance policy that would specifically cover liability arising out of pollution claims since this perhaps the most significant risk of such a firm.
This case follows the reasoning of numerous other courts in finding that construction debris is a pollutant that falls within the pollution exclusion of the policy. According to the reasoning of most courts (depending on state jurisdiction), a substance does not have to be what a layperson might normally think of as a “pollutant” to be an “irritant or contaminant” or to create an “environmental impairment” that is subject to the pollution exclusion. For example, we have previously reported on claims for damages arising out of sand and dirt eroding into a stream from a construction site being held to be “pollutants” that are not covered by the policy.1
1See “Pollution Exclusion Bars Coverage for Damage Caused by Dirt and Rocks,” IRMI.com, March 2007.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, (Feb 2009).