While the pollution exclusion has generated extensive litigation under liability insurance policies, few property insurance cases address it. In what appears to be the first state supreme court decision on the pollution exclusion in a property policy, the Virginia Supreme Court has upheld the exclusion as unambiguous.
In PBM Nutritionals, LLC v. Lexington Ins. Co., 2012 Va. LEXIS 84 (Va. Apr. 20, 2012)1, the Virginia Supreme Court confirmed that pollution exclusions that do not contain language explicitly limiting their application to traditional environmental contamination cannot be construed as being so limited. In so doing, the court reaffirmed its decision in City of Chesapeake, a 2006 decision involving a pollution exclusion under a liability policy, and adhered to long-settled Virginia law that when the words of a contract are unambiguous, the court will not consider extrinsic evidence or the purported intent of the drafter to introduce some limiting principle that cannot be found in the plain language of the contract.
The plaintiff in PBM manufactured infant formula. Batches of the formula were contaminated by constituent components of water filters that had disintegrated due to a leaking valve during a cleaning process. Id. at *3-*4. When PBM realized that the formula was contaminated, it destroyed all affected batches. Id. at *5. PBM then made a claim for property damage and business interruption. PBM was insured by three different property insurers based on a shared risk of coverage. Id. at *5-6. The insurers’ policies varied somewhat with respect to the pollution exclusion and definition of pollutants, but all contained a typical pollution exclusion and definition of pollutants.
PBM argued that the exclusions were ambiguous because they were “overly broad and could exclude nearly any loss,” and that the provisions should be limited to “traditional” environmental pollution in order to avoid illusory coverage. Id. at *16–*17. The Virginia Supreme Court affirmed the lower court’s decision that the claim was excluded, after finding that the provisions were to be construed as written, that they were not ambiguous, and that there was “[n]o language in any of the relevant endorsements suggest[ing] that the discharges or dispersals of pollutants or contaminants must be into the environment or atmosphere.” Id. at *18. The PBM Court cited its decision in City of Chesapeake, in which the court held that the pollution exclusion in a liability policy applied to claims from women who allegedly suffered miscarriages due to exposure to toxins in the City of Chesapeake’s drinking water; the toxins were a byproduct of the natural degradation process of a chemical introduced into the water as part of the city’s water purification process. Id. at *17 (citing City of Chesapeake v. States Self-Insurers Risk Retention Group, 271 Va. 574 (2006)).
This decision will be useful to insurers in coverage litigation involving the pollution exclusion, including imported corrosive (or “Chinese”) drywall litigation, in which one of the exclusions relied upon by insurers in denying coverage under homeowners’ policies (as well as commercial general liability policies) is the pollution exclusion.
1 Reproduced by Robinson & Cole LLP with the permission of LexisNexis. Copyright 2012 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. No copyright is claimed as to any portion of the original work prepared by a government officer or employee as part of that person’s official duties.