The New Jersey Superior Court, Appellate Division recently held that a pollution exclusion contained in a D&O liability policy does not bar coverage for shareholder claims alleging fraudulent statements in SEC disclosures concerning alleged pollution. Sealed Air Corp. v. Royal Indem. Co., Slip. Op., No. A-5951-06T3 (N.J. App. Div. August 15, 2008).

Shareholders filed a class action against Sealed Air’s directors and officers concerning a decline in stock value allegedly caused by discovery of misrepresentations in SEC filings and press releases regarding a complex corporate transaction. In particular, subsequent to its merger with W.R. Grace & Co., Sealed Air announced that it would not be exposed to any additional asbestos liability through its merger with W.R. Grace. However, it later became clear that Sealed Air indeed was acquiring W.R. Grace’s asbestos liabilities in the merger and its stock price declined, leading to a shareholder securities class action.

Sealed Air sought coverage for the suit from its D&O insurer. The insurer denied coverage on the basis of its policy’s pollution exclusion, arguing that the claims arose out of asbestos litigation. Sealed Air brought a declaratory judgment suit, arguing that the claims arise out of “alleged misrepresentations by the directors and officers and not from air-borne asbestos.”

On cross-motions for summary judgment, the trial court ruled in favor of the insured. The appeals court affirmed, concluding that “[t]he alleged pollution, in and of itself, did not give rise to the damages alleged . . . without the numerous intervening events and, ultimately the securities fraud litigation, there would be no damages which could be alleged by the securities holders and, thus no claim.” The court further held that the pollution exclusion, interpreted in a plain and ordinary manner, was “too attenuated” from the damages arising from the alleged misrepresentations to trigger the exclusion.

For a full copy of the decision, please click here.