Opinion by Judge J. Frederick Motz
Held: When alleged property damage arising from an insured's failure to perform under a contract is limited to the property to be provided under the contract, there is no "occurrence" subject to coverage under a commercial general liability policy.
A "pollution exclusion" written to encompass more than environmental pollution will be enforced according to its plain terms.
Where a court cannot rule out the "potentiality of coverage" for even a single claim, the insurance carrier has a duty to defend all claims.
Facts: Tenants sued their landlord for defects in the HVAC system on a leased premises. The tenants alleged that the system failed to balance temperature, conducted sound between rooms, and exposed them to toxic and dangerous airborne pollutants. The tenants alleged six counts: 1) breach of warranty of quiet enjoyment, 2) negligence, 3) negligent misrepresentation, 4) strict liability, 5) nuisances, and 6) loss of consortium.
The landlord tendered the defense to its insurance carrier. The insurance carrier denied coverage, and the landlord sued seeking a declaration that the insurance carrier had a duty to defend the underlying litigation.
Analysis: Under Maryland law, the obligation of an insurance carrier to defend its insured is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend. The duty to defend arises whenever there is a "potentiality that the claim could be covered by the policy." If there is a possibility, even a remote one, that the claims could be covered, there is a duty to defend. Any doubt as to whether there is a potentiality of coverage is ordinarily resolved in favor of the insured.
The analysis depends on the allegations of the underlying complaint. If these are ambiguous, the insured may rely on extrinsic evidence. The insurance carrier, however, may not use such evidence to contest coverage if the allegations sufficiently establish a potentiality of coverage. If any claim is potentially covered under the policy, the insurer is obligated to defend all claims. The insurance carrier argued it had no duty to defend on several grounds.
First, there was no "occurrence" subject to coverage. Rather, the alleged damages were caused by the landlord's failure to fulfill its contractual obligations under the lease. Because the plaintiffs' alleged damages involved only the use of the property that the landlord was obligated to provide, the court concluded that the damage was not the result of an "occurrence," as defined by the policy and Maryland law, and thus was not covered.
Second, the insurance carrier argued the pollution exclusion barred coverage for damage caused by the alleged "airborne pollutants." The landlord countered that the pollution exclusion applied only to environmental pollution. The exclusion provided:
"Pollutant” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, petroleum, petroleum products and petroleum byproducts, and waste. Waste includes materials to be recycled, reconditioned or reclaimed. “Pollutants” include but are not limited to substances which are generally recognized in industry or government to be harmful or toxic to persons, property or the environment regardless of whether the injury or damage is caused directly or indirectly by the “pollutants” . . .The court noted that the Maryland Court of Appeals concluded that pollution exclusion in a commercial general liability policy did "not apply beyond traditional environmental pollution situations." Clendenin Bros., Inc. v. United State Fire Insurance Co. The court further noted, however, that an insurance policy is a contract and is to be read as any other contract. Thus, although the Maryland courts previously determined the meaning of a pollution exclusion, the parties to subsequent insurance contracts remain free to change the scope of the exclusion by altering the language of the contract. The policy in the present case contained an important distinction from that involved in Clendenin Bros. Specifically, it tracked the traditional language but added "‘Pollutants’ include but are not limited to substances which are generally recognized in industry or government to be harmful or toxic to persons, property or the environment. . . .”
The addition of this sentence expanded the definition of pollutant beyond environmental pollutants to include irritants and contaminants that harm persons but not the environment. Accordingly, the pollution exclusion applied to bar coverage for the alleged claim.
Bodily Injury Claims & the Pollution Exclusion:
Finally, the insurance carrier admitted that the bodily injury claims alleged harm to something other than the insured's work product but argued that they too were precluded by the pollution exclusion. The court concluded, however, that the claims were covered by an exception to the pollution exclusion for bodily injuries caused by the inadequate ventilation of "vapors." The basis: though the complaint did not allege facts placing the airborne particles within the definition of "vapors," it did not foreclose the possibility either. Accordingly, the court could not rule out the possibility that the exception applies, and a potentiality of coverage existed.
On that basis, the court held that the insurance carrier had a duty to defend all claims.
The full opinion is available in pdf.