The Complex Insurance Coverage Reporter

MOLD EXCLUSION

American Guar. & Liab. Ins. Co. v. Victory Highlands Condo. Ass’n, 2024 N.J. Super. Unpub. LEXIS 3128 (N.J. Super. Ct., App. Div., Dec. 26, 2024)

New Jersey appeals court concludes that claims by a condominium resident alleging injury from indoor exposure to mold did not fall within a “consumption” exception to mold exclusions^* in CGL policies where the resident demonstrated only that mold was present on his food and not that he was injured by eating mold on the food. It reasoned that, if the resident needed to prove only that there was mold on his food, and not that he was injured by eating the mold, “the exception [would] swallow the exclusion.” The court further determined that, although the exclusions in certain policies did not include anti-concurrent causation clauses, they were not subject to the efficient proximate cause doctrine^** because, under their unambiguous language, “it is irrelevant how the mold came to exist; rather, it matters only whether the mold is the direct or indirect cause of the alleged damages.” Because the exclusions barred coverage, the court found it unnecessary to review the lower court’s determination that the resident’s claims were subject to the “first manifestation trigger” rather than the “continuous trigger.”

^* The exclusions state that the policies do not apply to “liability, damage, loss, cost or expense . . . [c]aused directly or indirectly by the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of any . . . fungi,” including mold. The exception applies to “fungi” that “are, are on, or are contained in, an edible good or edible product intended for human or animal consumption.”

^** As articulated, the efficient proximate cause doctrine, sometimes referred to as “Appleman’s Rule,” provides that, “[i]n situations in which multiple events, one of which is covered, occur sequentially in a chain of causation to produce a loss, . . . the loss is covered if a covered cause starts or ends the sequence of events leading to the loss.” Flomerfelt v. Cardiello, 997 A.2d 991, 1000 (N.J. 2010). Because it found the doctrine inapplicable under the policy language, the Victory Highlands court declined to address whether it applies only to first-party insurance.

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NEW YORK INSURANCE LAW SECTION 3420

The Chapel v. GuideOne Mut. Ins. Co., 2025 N.Y. App. Div. LEXIS 555 (N.Y. Sup. Ct., App. Div., 4th Dept., Jan. 31, 2025)

New York appeals court issues a mixed decision on whether a suit against an insured-church and its youth group leader arising out of alleged sexual abuse was subject to New York’s timely-disclaimer requirement for bodily injury claims. As to the leader, the court found no duty to defend or indemnify under the liability policies issued to the church because: (1) in committing the alleged abuse, he had “departed from his duties for solely personal motives unrelated to the furtherance of [the church’s] business” and, thus, was not an “insured,” which the policies defined to include the named insured’s employees “but only for acts within the scope of their employment by” the named insured; and (2) the alleged injuries were intended from the leader’s standpoint and, thus, were not an accidental “occurrence” under New York law. Because the claims against the leader fell outside the policies’ insuring agreements, the insurer was not required to issue a timely disclaimer as to him under New York Insurance Law § 3420(d)(2). As to the church, the court held the insurer was required to issue a timely disclaimer based on a sexual misconduct exclusion in the policies as it was not disputed that the church was an insured and the alleged injuries arose out of an accident from its standpoint. According to the court, the insurer’s initial correspondence, sent approximately a week after it had located the policies, did not comply with the statute because it did not “apprise the claimant with a high degree of specificity of the ground or grounds on which the disclaimer is predicated.”^** Although it agreed that the insurer’s subsequent correspondence, sent 56 days after it had discovered the policies, was sufficiently specific, the court held the disclaimer was untimely under the circumstances as a matter of law.

^* The policies define “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

^** The insurer’s initial correspondence stated that “it does not appear there was any misconduct coverage added to the policies” and that the policies “includ[ed] a specific exclusion for any misconduct or any type of allegation relating to misconduct.”

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POLLUTION EXCLUSION

Est. of Wheeler v. Garrison Prop. & Cas. Ins. Co., 2025 Alas. LEXIS 32 (Alaska Feb. 28, 2025)

Alaska Supreme Court, on certified question^* from the Ninth Circuit, holds that a “total” pollution exclusion^** in a homeowners insurance policy does not apply to a death claim involving carbon monoxide exposure from a residential water heater. Although it agreed that the policy’s definition of “pollutants” was broad and that carbon monoxide can reasonably be understood to be a “contaminant” and an “irritant” as ordinarily defined^***, the court concluded that the terms in the exclusion describing the method by which “pollutants” cause harm, such as “discharge” and “dispersal,” are “‘terms commonly associated with environmental law’ that suggest a narrower interpretation, excluding coverage for the kind of pollution that harms the environment” (quoting Essex Ins. Co. v. Avondale Mills, Inc., 639 So. 2d 1339, 1341-42 (Ala. 1994)). It further reasoned that, based on the policy’s exclusions for injury arising out of exposure to lead and asbestos, which it characterized as “common household ‘pollutants,’” a reasonable insured could infer that “exposure to toxic substances commonly found within the home does not fall within the pollution exclusion.” Notably, it acknowledged that some jurisdictions have interpreted the pollution exclusion in light of its supposed “drafting history,” but stated that drafting history was irrelevant to the analysis because “[m]ost reasonable people are not aware of the drafting history of clauses in insurance policies.”

^* The certified question was: “Does a total pollution exclusion in a homeowners’ insurance policy exclude coverage of claims arising from carbon monoxide exposure?” The Alaska court chose to “slightly rephrase” the question to be: “Does the pollution exclusion in the [at-issue] homeowners insurance policy bar coverage for injury arising out of exposure to carbon monoxide emitted by an improperly installed home appliance?”

^** The policy’s pollution exclusion bars coverage for “bodily injury” and “property damage” “[a]rising out of the actual, alleged, or threatened discharge, dispersal, release, escape, seepage or migration of ‘pollutants’ however caused and whenever occurring.” “Pollutant” is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

^*** The court cited dictionary definitions of “contaminant” (“a substance that contaminates”), “contaminate” (“to make impure, infected, corrupt . . . by contact” and to “pollute”), “irritant" (“something that causes irritation”) and “irritation” (“a condition of soreness or inflammation in some organ or [bodily] part”).

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SEXUAL ABUSE AND MOLESTATION EXCLUSION

Gordon v. Cont’l Cas. Co., 327 Cal. Rptr. 3d 797 (Cal. Ct. App. 2d App. Dist. 2024)

In a case of first impression, California appeals court holds that a sexual abuse and molestation (SAM) exclusion^* barred a duty to defend under a CGL policy where the underlying plaintiff was in the “care, custody or control” of the insured-massage spa at the time she allegedly was sexually assaulted. Although no California court had previously interpreted “care, custody or control” in the context of an SAM exclusion, the court determined, based on principles of contract interpretation and cases from other jurisdictions, the terms should be construed according to their plain and ordinary meanings, with “care” meaning “responsibility for or attention to health, well-being, and safety”; “custody” meaning “immediate charge and control (as over a ward or a suspect) exercised by a person or an authority” or “safekeeping”; and “control” meaning “to exercise restraining or directing influence over” or “to have power over.” Observing that the exclusion used the disjunctive “or,” the court held that the underlying plaintiff was both in the “care” of the spa’s operator because the operator was responsible for the plaintiff’s well-being as her massage therapist and under the control of the operator, who allegedly had held down the plaintiff with his body weight and pressure during the massage. The court further held that the exclusion precluded coverage for the plaintiff’s negligent training claim against the spa’s manager because the alleged negligence “arose out of,” i.e., originated or flowed from, the operator’s sexual assault and molestation within the meaning of the exclusion.^** As to two other underlying plaintiffs, the court found no coverage because the operator's alleged assaults of them did not take place during the relevant policy period.

^* Subpart (a) of the exclusion states that the policy does not apply to bodily or personal injury “arising out of” the “actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured.”

^** Subpart (b) of the exclusion states, in relevant part, that the policy does not apply to bodily or personal injury arising out of the negligent employment or supervision “of a person for whom any insured is or ever was legally responsible and whose conduct would be excluded by” subpart (a).

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2024 YEAR IN REVIEW 

Cases to Know

Truck Ins. Exchange v. Kaiser Gypsum Co., Inc., 602 U.S. 268 (2024) (Bankruptcy; Insurer Standing)

A unanimous United States Supreme Court holds that an insurer facing financial responsibility for a bankruptcy claim is sufficiently concerned with, or affected by, the proceedings to be a “party in interest” under the Bankruptcy Code (11 U. S. C. §1109(b)) and can raise objections to a Chapter 11 debtor’s proposed reorganization plan. The insurer sought to object to a policyholder reorganization plan (which treated insured and uninsured claims differently) mainly because the plan lacked disclosure requirements that the insurer believed could save it from paying millions of dollars in fraudulent asbestos claims. The Fourth Circuit concluded that the insurer was not a “party in interest” since the plan was allegedly “insurance neutral” (i.e., did not increase the insurer’s prepetition obligations or impair its rights under insurance policies). The Supreme Court disagreed and rejected the use of so-called “insurance neutrality” to preclude consideration of insurer objections on the merits (emphasis added):

The [Fourth Circuit] looked exclusively at whether the Plan altered Truck’s contract rights or its “quantum of liability.” This approach, known as the “insurance neutrality” doctrine, is conceptually wrong and makes little practical sense. Conceptually, the doctrine conflates the merits of an objection with the threshold party in interest inquiry. . . Practically, the doctrine is too limited in its scope. By focusing on the insurer’s prepetition obligations and policy rights, the doctrine wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers and debtors.

Since it may have been directly and adversely affected by the plan, the insurer was a “party in interest” and was entitled under Section 1109(b) to “a voice in the proceedings.”

A transcript of the argument is available here.

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Wesco Ins. Co. v. Brad Ingram Constr., 2024 U.S. App. LEXIS 1488 (9th Cir. Jan. 23, 2024) (Pollution Exclusion; Wildfire Debris)

A divided Ninth Circuit panel, applying California law, holds that a pollution exclusion^* in a CGL policy does not preclude a duty to defend an underlying suit alleging physical injury from exposure to “clouds of toxic dust” deposited in the environment by a wildfire and released during clean-up efforts. Citing MacKinnon v. Truck Ins. Exch., 73 P.3d 1205 (Cal. 2003), the majority explained that determining whether a “pollution event” (i.e., “environmental pollution”) resulting in excluded injury has occurred involves consideration of “the character of the injurious substance” and whether the exposure resulted from a “mechanism specified in the policy.” It concluded that a potential for coverage (and, therefore, a defense obligation) existed because, although wildfire debris may be considered a “pollutant” in certain circumstances, the mechanism alleged in the underlying complaint – “expos[ure] . . . to clouds of toxic dust during the loading and unloading of [the underlying plaintiff’s] truck” –  did not clearly constitute an “event commonly thought of as pollution.”

The dissent disagreed with the majority’s application of the “governing legal standard,” reasoning that, “[e]ven though the dust was originally created by a wildfire and may consist of natural material, that does not prevent it from being part of a pollution event,” and a reasonable insured would have viewed the alleged circumstances to have been “an act of pollution.”^**

On February 20, 2024, the Ninth Circuit denied the insurer’s request for rehearing.

^* The exclusion precludes coverage for “‘[b]odily injury’ . . . 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.” The policy defines pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

^** Similarly, in finding for the insurer, the trial court said: “Given the heavy regulation of the cleanup effort evidenced by the hazardous materials gear worn by those involved, a reasonable layperson would consider the release of toxic dust in this context to be environmental pollution.”

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Aloha Petroleum, Ltd. v. National Union Fire Ins. Co. of Pittsburgh, PA, 557 P.3d 837 (Haw. 2024) (Accident; Climate Change; Pollution Exclusion)

Hawaii Supreme Court on certified questions rules in the context of climate change-related claims that (1) an “accident” under the “occurrence”-based CGL policies at issue includes reckless conduct; and (2) greenhouse gases (GHGs) are “pollutants” within the meaning of the policies’ forms of pollution exclusion.* The policyholder sought a defense in connection with underlying deceptive marketing lawsuits by local governments that alleged the company acted recklessly in that it knew of climate risk but nevertheless emitted and misled the public about the dangers of emitting GHGs.

The Court clarified that under its precedents awareness of risk differs from awareness of certain harm, that covered “accidents” differ from expected or intended injury when the harm was intended or “practically certain” to occur (i.e., “expected” injury is “practically certain” from the subjective standpoint of the insured), and that reckless conduct (awareness of risk of harm) falls short of that standard. Among other things, it declined to follow AES Corp. v. Steadfast Ins. Co., 725 S.E.2d 532 (Va. 2012) in which the Virginia Supreme Court found no duty to defend a climate damage lawsuit since the alleged “natural or probable consequence” of the policyholder’s intentional carbon dioxide emissions (contribution to global warming) was not an “accident” under that state’s law.

In addition, the Court offered several reasons GHGs are excluded “pollutants”: (1) climate-heating gases are an example of “traditional environmental pollution” that, in the Court’s view, the exclusion was designed to exclude; (2) under a plain-language reading, GHGs fit the exclusion’s definition of “pollutant” (“GHGs are ‘gaseous,’ ‘contaminants’ that are ‘released’ causing ‘property damage’”); (3) the “legal uncertainty” rule** does not give rise to a duty to defend since GHGs are “pollutants” under any reasonable interpretation; (4) the exclusion is not ambiguous as there are not two plausible interpretations; and (5) the policyholder could not reasonably expect products liability coverage for pollution and GHGs are “so clearly pollutants.” It was unpersuaded by the argument that other courts have held carbon dioxide is not a pollutant:

Greenhouse gases, including carbon dioxide, produce “traditional” environmental pollution. Aloha’s gasoline produces GHGs. These gases accumulate in the atmosphere and trap heat. Because they are released into the atmosphere and cause harm due to their presence in the atmosphere, GHGs are pollutants.

Coverage for “emitting (or misleading the public about emitting) GHGs” was therefore precluded by the exclusion.

The Hawaii federal district court overseeing the case has since ruled that “[w]ith pollutants defined to include greenhouse gases, and with legal uncertainty closed off as an avenue, there is no possibility of coverage for Aloha under those ten policies with the pollution exclusions. As such, AIG has no burden to defend.” Dec. 27, 2024 Order. Further activity continues regarding two other policies without exclusions as to which the court has found a duty to defend.

^* “Occurrence” is defined in the policies as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured” or “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The policies include “sudden and accidental” and other forms of pollution exclusion. “Pollutants” is defined in certain policies as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”

^** The Court explains the rule as follows: “When Hawai’i courts have not answered a nationally-disputed legal question, there is, per se, a possibility of coverage, and therefore a duty to defend.”

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St. Paul Fire & Marine Ins. Co. v. Getty Props. Corp., 213 N.Y.S.3d 185 (N.Y. App. Div., 2d Dept., 2024) (MTBE; Pollution Exclusion)

New York appeals court holds that pollution exclusions (including “sudden and accidental” exclusions) contained in the CGL policies at issue precluded coverage for claims alleging environmental contamination from releases of the fuel additive methyl tertiary butyl ether (MTBE), which qualifies as a pollutant. The court rejected arguments by the policyholder that MTBE could not be considered a pollutant allegedly because it did not know MTBE was harmful and its use as an additive was required by EPA. The policies at issue “make no mention of the legality of the insured’s use or release of the claimed pollutant, and the [New York] Court of Appeals has rejected an insured’s claim that if discharge of a substance was legal, it could not be considered a pollutant under a pollution exclusion,” the court said. It concluded the exclusions were shown to apply, “‘regardless of whether’ MTBE was ‘specifically named as a pollutant’ or whether MTBE ‘was understood to have a detrimental effect on the environment at the time the policy was entered into,’” and that the temporal aspect of policies with “sudden and accidental” exclusions was not met given that the pollution alleged “occurred undetected over many years.”

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Sherwin-Williams Co. v. Certain Underwriters at Lloyd’s London, 2024 Ohio LEXIS 2789 (Ohio Dec. 10, 2024) (Abatement; Damages; Lead Paint)

Ohio Supreme Court finds that claims by a paint company-policyholder for money it was required to pay into an abatement fund to mitigate lead paint risks pursuant to a public nuisance lawsuit by California governmental entities did not allege covered “damages” under the liability insurance policies at issue. The parties agreed “damages” involve compensation for loss or injury. Since the payment into the fund was ordered to prevent or mitigate future risk to children of lead poisoning, and not to compensate for past harm, the Court concluded that it did not constitute “damages” under the policies. This distinction was explained in a California appellate decision cited in the case (emphasis added):

The abatement fund was not a “thinly-disguised” damages award. The distinction between an abatement order and a damages award is stark. An abatement order is an equitable remedy, while damages are a legal remedy. An equitable remedy’s sole purpose is to eliminate the hazard that is causing prospective harm to the plaintiff. An equitable remedy provides no compensation to a plaintiff for prior harm. Damages, on the other hand, are directed at compensating the plaintiff for prior accrued harm that has resulted from the defendant’s wrongful conduct.

The Court dismissed the suggestion that the abatement payment was ordered to compensate for past physical damage to affected residences. The governmental entities never alleged that buildings sustained physical injury and there is “no indication that lead paint causes physical damage to property,” the Court said.