PRACTICAL POLICYHOLDER ADVICE

Insurers cannot always rely on broad, general exclusions, particularly when specific exclusionary language exists and is used in the insurance marketplace.

Certain jurisdictions interpret the pollution exclusion more expansively than others, see, e.g., Certain Underwriters at Lloyd’s London v. C.A. Turner Const. Co., 112 F.3d 184, 187-88 (5th Cir. 1997) (noting that in Texas the pollution exclusion encompasses “more than traditional conceptions of pollution”), but a recent Illinois decision interpreting Texas law suggests that this expansiveness has its limits.  See In re Liquidation of Legion Indemnity Company, 2015 IL App (1st) 140452-U.

Legion arose out of a contract between D. Reyna Construction, Inc. (“Reyna”) and Hidalgo County, Texas (“County”), to construct various government buildings.  Id. ¶ 5.  Pursuant to the contract, Reyna procured a CGL policy from Legion Indemnity Co. (“Legion”).  Id.  The County subsequently filed suit against Reyna for mold in the buildings, and County employees also intervened to bring mold-related claims.  Id. ¶ 6.  In 2009, the employees obtained a $37.7 million judgment against Reyna, and Reyna thereafter assigned to the employees its right to recovery under the Legion Policy.  Id. ¶ 7.  Because Legion was being liquidated, the County employees filed a proof of claim against Legion.  Id.  The liquidator disallowed the claim, contending (among other things) that the “Pollution and Health Hazard” exclusion in the Policy barred the employees’ claims.  Id.

The Policy included specific exclusions for asbestos and lead contamination as well as a generic “Pollution and Health Hazard” exclusion, which excluded from coverage: “either (1) the contamination of the environment by any pollutant that is introduced at anytime, anywhere, or in any way; or (2) on account of a single, continuous, or intermittent or repeated exposure to, ingestion of inhalation of or absorption of any Health Hazard.”  Id. ¶ 8. “Pollutant” was in turn defined as “any smoke, vapors, soot, Electromagnetic Field Radiation, fumes, acids, alkalis, chemicals, liquids, solids, gases, radiation, thermal pollutants, noise or sound of any kind or any other irritant or contaminant.”  Id.  And “Health Hazard” was defined as “any chemical, alkali, radioactive material, or any other irritant or any pollutant or other substance, product, or waste product, or the fumes or other discharges or effects therefrom, whether liquid, gas or solid, alleged or determined to be toxic or harmful to the health of any person, plant or animal.”  Id.

The trial court held that mold fell within the definition of both “pollutant” and “Health Hazard” and, therefore, that the “Pollution and Health Hazard” exclusion barred coverage for the employees’ claims.  Id.  The First District reversed, holding that the trial court misapplied well-settled rules of contract construction, which require a court to look at the plain language of the contract to give effect to the parties’ intent and to interpret exclusions  narrowly and in favor of coverage.  Id. ¶ 16.  The First District acknowledged that the Policy did not specifically exclude mold- or fungi-related claims.  Id.  Because those terms were not listed in the Policy exclusions, any intent to exclude “must be expressed in clear and unambiguous language.”  Id. ¶ 17.

The trial court had held that, “due to its irritating and toxigenic effects, and because it poses health risks to humans,” mold fell within the scope of the exclusion, which “precluded coverage for bodily injury caused by ‘ingestion of inhalation of or absorption of any Health Hazard.’”  Id. ¶ 19.  The First District rejected that open- ended holding, reasoning that the Policy exclusion and definitions used such “broad and general language” that “anything—solid, liquid, gas or substance—that would potentially cause injury to a person would be excluded from coverage.”  Id. (emphasis added).  The First District concluded that such a reading would make the policy “illusory.”  Id.  Because exclusions are “strictly construed against the insurer,” the First District found that the exclusion did not bar coverage for mold-related claims.  Id.

In reaching its conclusion, the First District took into account the fact that Legion had later issued several other liability and property insurance policies that “unambiguously” excluded mold or fungi from coverage, but the court stressed that the existence of such revised policies was not determinative.  Id. ¶ 28.  The First District reversed the trial court and remanded the case for further proceedings.  Id. ¶ 29.  Although not explicitly stated, the case confirms that even an expansive reading of the “broad and general” pollution exclusion must have its limits.