Negligence or Pollution?

The Thomson Reuters News & Insight website reports that the California state Supreme Court recently ruled that “a commercial general liability policy’s pollution exclusion barr[ing] coverage of third-party damages from environmental pollution also governed first-party property insurance policies.”

The case involved the Villa Los Alamos Homeowners Association (VLAHA); Cal Coast Construction (CCC), a firm the VLAHA had hired to do property maintenance work; and State Farm, the VLAHA’s insurer.

In a residential building that the VLAHA operated and managed, CCC scraped the acoustical ceilings and stairways, causing “asbestos fibers to be released into the air, individual units, and the building’s indoor and outdoor common areas.” As a result, “a local environmental agency ordered the association to perform comprehensive cleanup of the building.” The total cost came to $650,000.

The VLAHA complied, but asked State Farm to cover expenses. The insurer refused, citing a pollution exclusion in the VLAHA’s policy “which covered both first party robbery losses and third-party business liability claims.”

The association won a negligence suit against the CCC and was awarded $600,000. But it lost another suit it filed against State Farm for “breach of contract and bad faith.” VLAHA argued that “a one-time ordinary act of negligence failed to constitute environmental pollution.”

The California Supreme Court ruled that State Farm was within its rights to refuse payment because the work CCC had done for VLAHA “occurred over several days and resulted in sufficient release of asbestos fibers into the air contaminate the building complex in the adjacent outside areas, constituting environmental pollution.”