The question of the proper scope of the absolute pollution exclusion typically is characterized as whether it applies only to “traditional” environmental claims or whether it applies to any toxic-exposure case. Disputes have proliferated, with the main groups of disputes concerning: (i) worker-exposure claims where a worker is, for example, doused with a toxic substance or exposed to toxic fumes; (ii) product-liability claims where the injury produced by a defect in a product involves the exposure to toxic substances; and (iii) landlord-tenant and similar premises claims where a tenant is exposed to fumes through the negligent act of the landlord or of a contractor it hired.

The New Jersey and Washington State Supreme Courts have reached conflicting results on this question this year. Nav-Its, Inc. v. Selective Insurance Company of America (N.J. April 7, 2005); The Quadrant Corporation, et al., v. American States Ins. (Wash. April. 28, 2005) The New Jersey Court, like the Washington Court, recognized that “read literally, the exclusion would require its application to all instances of injury or damage to persons or property caused by . . . any solid, liquid, gaseous, or thermal irritant or contaminant.” (Slip op. at 19) But the court rejected this construction saying that it would be “overly broad, unfair, and contrary to the objectively reasonable expectations of the . . . regulatory authorities” who approved it. (id. at 20). The New Jersey court found that when presented for approval the insurance industry did not say that the exclusion would bar coverage for toxic exposures but rather characterized it as a pollution exclusion, and applying its former ruling on the sudden-and-accidental exclusion the New Jersey court confined the reach of the absolute pollution exclusion to pollution activities. (The New Jersey approach is sometimes called “regulatory estoppel” but it is really a form of “estoppel in pais” and its variants such as Cal. Evid. 623.)

Seemingly mindful of its reputation with insurers as a court that runs roughshod over policy language (or, more charitably, negates the application of policy terms without quite finishing the intellectual edifice to support the result, e.g., Spaulding Composites v. Aetna Cas. & Sur. Co., 819 A.2d 410 (NJ 2003), the New Jersey Supreme Court ended its unanimous opinion stating:

As a final observation, the insurance industry has revised its policies in the past to provide for the exclusion of certain coverages. We will review each change on the record presented. We emphasize that industry-wide determinations to restrict coverage of risks, particularly those that affect the public interest, such as the risk of damage from pollution, environmental or otherwise, must be fully and unambiguously disclosed to regulators and the public.

In justifying its holding, the New Jersey court sought comfort in numbers and cited a number of other courts that similarly confined the application of the exclusion to “traditional” environmental claims. One of those jurisdictions it relied on was Washington State, whose highest court ironically held three weeks later that an absolute pollution exclusion was not limited in this manner.

Both the New Jersey and the Washington cases involved remarkably similar facts: tenants who inhaled fumes from chemical sealants and claimed various ailments as a result. While recognizing the split in the case law, the Washington court’s nose-counting exercise convinced it that “a majority of courts have concluded that absolute pollution exclusions unambiguously exclude coverage for damages caused by the release of toxic fumes.”

The key to the Washington court’s rationale was the manner in which it sought to distinguish its own prior authority where the absolute pollution exclusion was held not to apply to the claim by a worker who was doused with gasoline. Essentially, in Quandrant the court holds that if one breathes fumes the pollution exclusion does apply but if one bathes in the source it does not apply.

The court further posits that the reasonable expectation of an insured would naturally be that the policy would not respond to a fume case caused by the negligence of a third party. And while the court assiduously claims to be applying the plain meaning of the exclusion, it never once comes to grips with the fact that the exclusion is for “pollution.” In other words, the court would be on stronger ground in my opinion were the exclusion simply to apply to the discharge, release, etc. of any irritant or contaminant – but the exclusion bars coverage for liability due to “pollution,” which in turn is defined to include irritants and contaminants. A reasonable insured may be charged with understanding the titles of the various exclusions (though the terms govern), but it is absurd to posit that the title indicating a limited context – pollution – is irrelevant to hypothesizing what a reasonable insured would understand. Compare Tektrol Ltd. v. International Ins. Co., [2005] EWCA Civ. 845 at para. 22 (July 21, 2005) (Opinion of Sir Martin Nourse) (''Loss' is a word whose meaning varies widely with the context in which it is used. If a man said to you: 'I have lost my wife', you would understand him to mean one thing outside the maze at Hampton Court and another outside an undertakers in the high street.").

The landlord is being held liable on straightforward premises liability (there being no suggestion of the landlord’s contributory negligence or negligent supervision or hiring); the landlord’s conduct in the circumstances is no different from where a painter negligently spilled paint on a tenant passing by. (Under the Washington decision, that claim would be covered, but if the passerby inhaled the latex in the paint that would be excluded as a polluting event.)