In Lapolla Indus., Inc. v. Aspen Spec. Ins. Co., --- F. App’x ----, 2014 WL 2019281 (2d Cir. May 19, 2014), the United States Court of Appeals for the Second Circuit applied Texas law and held that pollution exclusions precluded coverage for a class action lawsuit alleging bodily injuries and property damage caused by “off-gassing” from the policyholder’s spray foam insulation product.
The policyholder, a Delaware corporation with its principal place of business in Texas, sought coverage under a commercial general liability policy (“the Primary Policy”) and an excess liability policy (“the Excess Policy”) for a class action lawsuit alleging bodily injuries and property damage resulting from a spray polyurethane foam (“SPF”) insulation product manufactured by the policyholder. 2014 WL 2019281 at *1. The underlying plaintiffs alleged that the SPF product “off-gassed,” or emitted toxins in a gaseous form, after application. Id.
The insurers denied coverage on the basis of the policies’ pollution exclusions. The Primary Policy contained a “total pollution exclusion,” which provided, in relevant part, that the Primary Policy would not cover “‘[b]odily injury’ or ‘property damage’ which would not have occurred in whole or part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.” Id. The Excess Policy provided coverage “subject to the terms, conditions and exclusions of the Primary Policy,” and also contained a similar pollution exclusion. Id.
The policyholder brought a lawsuit in the United States District Court for the Eastern District of New York, seeking a declaration that the insurers were obligated to provide a defense and indemnity. Id. The district court granted the insurers’ Rule 12(b)(6) motion to dismiss. Id. The district court found that: (1) a conflict of law existed between New York and Texas law with respect to the interpretation of total pollution exclusions; (2) New York choice of law provisions governed and required the application of Texas law; and (3) under Texas law, the total pollution exclusions unambiguously excluded coverage. Id.
The policyholder appealed. First, the Second Circuit considered whether New York or Texas law governed the interpretation of the pollution exclusions. Id. at *2. To determine which state’s law governed, the court applied New York’s choice of law principles, which direct a court to first determine whether an “actual conflict” exists and, if a conflict does exist, to apply the law of “the state which the parties understood was to be the principal location of the insured risk.” Id. (citations omitted). The Second Circuit noted that, where policies cover risks located in multiple states, “New York courts have ‘regard[ed] the state of the insured’s domicile to be a proxy for the principal location of the insured risk.’” Id. (citation omitted). Agreeing with the district court, the Second Circuit held that there was an actual conflict between New York and Texas law regarding the interpretation of the total pollution exclusion. Id. In the district court’s decision, it had explained that “Texas law holds [the total pollution exclusion] to be unambiguous in all but the narrowest of cases, where such application would be ‘absurd,’” whereas New York law “holds the [exclusion] to be ambiguous when applied in the context of personal injury lawsuits stemming from non-environmental discharges.” 962 F. Supp. 2d at 489. Because there was a conflict between Texas and New York law and because the policyholder’s principal place of business was in Texas, the Second Circuit held that Texas law governed. Id.
Next, the Second Circuit held that, under Texas law, “the [total pollution exclusion] was unambiguous and excluded coverage of the underlying claims.” Id. The Second Circuit affirmed the district court’s order granting the insurer’s motion to dismiss. Id.
This decision is important because it illustrates the importance of choice of law to coverage disputes, especially because most general liability policies do not have choice of law provisions. Here, the choice of law determination was outcome-determinative. This decision also confirms that, under Texas law, the plain language of the total pollution exclusion bars coverage for exposure to gases emitted from a policyholder’s product.