For The First Time, California Appellate Court Finds Asbestos Is “Pollutant” And Holds Release Of Asbestos In Residential Building Is “Traditional” Environmental Pollution Barred By First Party Policy Pollution Exclusion

For The First Time, California Appellate Court Finds Asbestos Is “Pollutant” And Holds Release Of Asbestos In Residential Building Is “Traditional” Environmental Pollution Barred By First Party Policy Pollution Exclusion

09.08.2011

In Villa Los Alamos Homeowners Assn. v. State Farm General Ins. Co., 2011 WL 3586475 (8/17/2011), the California Court of Appeal examined whether the California Supreme Court’s rationale in MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635 (2003), limiting the scope of the “absolute” pollution exclusion in a commercial general liability (“CGL”) policy to “traditional” environmental pollution, applied in the first party insurance context.[FN1]  The Villa Los Alamos Court adopted MacKinnon’s narrow interpretation and concluded that the “absolute” pollution exclusion in a first party property policy barred coverage only for events “commonly” or “traditionally” regarded as environmental pollution. However, even under this more restrictive interpretation and seemingly at odds with MacKinnon, the Court further determined that the “absolute” pollution exclusion applied to exclude coverage for damages resulting from the release of asbestos fibers from the ceiling of a residential building.

In Villa Los Alamos, a homeowners association made an insurance claim under its own property policy for losses suffered when a contractor’s scraping of acoustical “popcorn” ceilings in a three-story, 18-unit residential building caused asbestos fibers to be released throughout the building. The insurer denied coverage based on an absolute pollution exclusion. The Association filed suit. The trial court granted summary judgment to the insurer. 

The Court of Appeal affirmed. The Court began its analysis by addressing whether MacKinnon, decided in the third party liability context, governed the interpretation of a similar pollution exclusion in a first party property policy. The insurer argued that MacKinnon’s restrictive interpretation of the pollution exclusion did not apply to losses arising under a first party property policy and that the pollution exclusion in the first party policy should be broadly construed.
 
Although the Court acknowledged that there are “analytical differences” between first party and third party liability policies, the Court rejected the insurer’s position. The Court reasoned that the “absolute” pollution exclusion language at issue in MacKinnon was substantively “identical” to the language at issue in the subject property policy and “[t]here is no principled reason, based on third-party versus first-party distinctions, to reject MacKinnon's fundamental directive that the pollution exclusion is aimed at environmental pollution, and instead adopt a dictionary-based, literal language approach to divining whether the coverage decision here was correct.” 
 
Despite the Court’s adoption of the restrictive interpretation of the pollution exclusion, the Court held that the pollution exclusion applied to preclude coverage for the Association’s asbestos claim. In reaching its decision, the Court decided several, critical “threshold” issues.
 
First, the Court determined that asbestos is a “pollutant” within the meaning of the pollution exclusion because (1) it comes within the broad definition of “pollutant” in the policy, which included “any solid, liquid, gaseous, or thermal irritant or contaminant”; and (2) several state and federal environmental laws specifically identify asbestos as a “pollutant” or a “contaminant.” 
 
Second, the Court determined that the “causal mechanism” for the property damage was the “release” of asbestos into the air as a result of the scraping of the acoustical ceiling material, which “freed” asbestos fibers from containment. Such a “release” of “pollutants,” the Court determined, comports with “the common understanding of the word ‘pollute.’” 
 
Third, the Court rejected the Association’s argument that the property damage was the result of “ordinary acts of negligence involving harmful substances,” and that under MacKinnon, the pollution exclusion did not apply. Rather, the Court reasoned, unlike the spraying of pesticide in MacKinnon, asbestos contamination in a residential building constituted “traditional” environmental pollution:
 
[W]hat happened here with the scraping and removal of acoustical “popcorn” ceilings containing asbestos cannot be lumped in with the “ordinary” act of spraying pesticides or the “normal application” of pesticides [as in MacKinnon]. To begin with, the Association was aware that the ceiling material contained some asbestos, as was the contractor. More to the point, whereas a homeowner can purchase and apply pesticides in a residential setting to kill insects, it is highly unlikely that a homeowner, on his or her own, could remove acoustical “popcorn” ceilings containing asbestos without violating a myriad of laws, and with good reason. Any renovation or demolition activity which disturbs asbestos-containing construction materials is stringently regulated.
 
The Villa Los Alamos case is the first to explicitly apply the “absolute” pollution exclusion to asbestos claims.
 
The decision is also instructive because MacKinnon did not define what constituted “traditional” environmental contamination. Under the Villa Los Alamos decision, when determining whether the bodily injury or property damage was the result of “traditional” environmental pollution, the relevant inquiry is what activities gave rise to the contamination, not where did the contamination occur. The decision lends support to the notion that “traditional” does not mean only contamination in the industrial context. Indeed, as the Court explained, the “residential/industrial distinction has little significance here” because the activity at issue was a “commercial operation, namely the removal of asbestos-containing ceiling material by a licensed general contractor, work that is tightly regulated and entails notification, and highly technical protocols for asbestos removal, containment and waste disposal.” 

We anticipate the Villa Los Alamos decision will be the subject of a petition to the California Supreme Court and, if review is granted, it will be interesting to see if the Supreme Court agrees that asbestos contamination in a residential building as a result of ceiling scraping qualifies as “traditional” environmental pollution and whether the “absolute” pollution exclusion applies to bar coverage. We would be pleased to provide you a copy of this opinion at your request. It may also be accessed here . We are also available to discuss any questions you may have.

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FN1 The MacKinnon case involved an alleged wrongful death from exposure to pesticide used to eradicate yellow jackets at the decedent’s apartment building. The Supreme Court held that the “absolute” pollution exclusion in the CGL policy did not apply to preclude coverage for liability in the wrongful death action because the bodily injury did not result from “conventional environmental pollution.” In so ruling, the Court limited the exclusion “to injuries arising from events commonly thought of as pollution, i.e., environmental pollution.” However, the Court did not define what constituted “traditional” or “conventional” pollution.

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