When an insurance carrier  refused to defend the owners of a building  under a general liability policy against claims by occupants alleging injuries from toxic fumes from carpeting, the owners sued the carrier to enforce their rights under the policy.  They also sued for punitive damages, claiming that the insurance carrier denied coverage in bad faith.  The courts held that despite an absolute pollution exclusion, the policy could not be applied to deny coverage for fumes from carpet glue.  On the issue of bad faith, however, the court held that although the insurance carrier’s failure to indemnify was wrong, it had a reasonable basis for incorrectly interpreting its policy and, therefore, it did not act in bad faith.

In Freidline v. Shelby Insurance Company, 774 N.E. 2d 37 ( Indiana , 2002), the building occupants complained that substances that were used to install new carpeting in their offices caused them to become sick and to suffer bodily injuries.  In response to a request by the building owners to defend them in the legal proceedings, and to indemnify them in case of judgment, the insurance carrier declined to do either.  The owners then sued the carrier as stated above.  On the issue of whether the pollution exclusion effectively precluded coverage, the appellate court concluded that the fumes emanating from carpet glue were not included in the policy’s definition of pollutants, and that bodily injury arising from the fumes would therefore be covered.

The exclusion provided as follows:  “This insurance does not to: … Bodily injury and property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants…  Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, acids, alkalis, chemicals and waste.  Waste includes materials to be recycled, reconditioned or reclaimed.”   The court found this exclusion to be ambiguous and construed it against the insurance company so as not to exclude coverage for injuries arising from carpet glue fumes.

On the issue of bad faith, the court explained that in order to prove bad faith, the plaintiff would have to establish with clear and convincing evidence that the insurance carrier had knowledge that there was no legitimate basis for denying coverage.   In seeking to prove this, the plaintiffs argued that the insurer knew of previous case precedent from the Court that had found the definition of pollutants to be ambiguous, and which had strictly construed the pollution exclusion against insurance companies.  The court acknowledges that in several reported decisions it did, in fact, find the pollution exclusion to be ambiguous, and that it had construed the language strictly against the insurance companies.  The court noted, however, that the defendant insurance carrier in this case argued that each of those previous decisions dealt with business operations that involved the “handling and use of toxic or potentially polluting substances, so that the pollution exclusion would virtually negate coverage.”  In contrast, the carrier argues that this case should be viewed differently because the insured building owner owns an office building which is an operation that does not regularly use toxic or caustic substances.  They also argued that those previous cases involved environmental clean-up costs, whereas the instant case involves bodily injury to office workers.  The insurance company cited to the court numerous recent out-of-state decisions holding that injuries resulting from similar types of emissions are excluded from insurance by the pollution exclusion.

Based on the good faith arguments and logic presented by the insurance company, the court found that there was a rational basis for the company’s decision, even though that decision was wrong in the opinion of the court..  Consequently, the insurance carrier was entitled to summary judgment in its favor on the question of bad faith despite the court’s conclusion that the company would be required to acknowledge coverage against damages arising out of  bodily injuries.

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, Vol. 5, No. 3 (Apr 2003).

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