Facts

M.S. Industrial Sheet Metal Inc. was sued for a personal injury/negligence action related to M.S. Industrial's alleged installation and/or recommendation of a ventilation system for a commercial printer, which the personal injury plaintiffs claimed caused them to be exposed to chemicals. M.S. Industrial's commercial general liability insurer, Great American Assurance Company, accepted the defense, then filed this declaratory relief action to determine its duty to defend M.S. Industrial under its policy, in light of a "Total Pollution Exclusion" endorsement in the insurance contract.

Both parties filed cross-motions for summary judgment on the issue of whether Great American owed M.S. Industrial a duty to defend.

PLAINTIFF'S CONTENTIONS:
Great American argued that the total pollution exclusion endorsement precluded coverage because the personal injury plaintiffs alleged that they were harmed as a result of chemical exposure, and thus the injuries were excluded from coverage under the endorsement which excluded "'Bodily 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."

Great American further argued that California courts have applied the total pollution exclusion to exclude coverage for claims arising in industrial setting, rather than residential settings.

DEFENDANT'S CONTENTIONS:
M.S. Industrial contended that under California precedent, the courts look not to a "but-for" test but instead evaluate whether the injuries alleged against the insured arose from acts and events commonly thought of as environmental pollution, in which case the total pollution exclusion would apply to preclude coverage, or whether the acts were instead just ordinary acts of negligence involving toxic chemicals, in which case the total pollution exclusion would not be held to preclude coverage based on the reasonable expectations and understanding of the policyholder.

Result

Order granting defendant's motion for partial summary judgment, and denying plaintiff's motion for partial summary judgment. The court denied Great American's motion and granted M.S. Industrial's motion, finding that the exclusion did not apply in this case to bar coverage of the defense of the underlying claim. The court did not find the total pollution exclusion endorsement to be applicable because the personal injury plaintiffs suffered a "localized toxic accident" rather than environmental pollution or a persistent byproduct of M.S. Industrial's business operations. Moreover, the court held that excluding coverage in this case would not be consistent with the insurance industry's historical objective of avoiding liabilities for environmental catastrophes related to industrial pollution, which comprised the backdrop of prior cases determining the law regarding total pollution exclusions in insurance policies.

Other Information

The total pollution exclusion coverage is not commonly litigated and the ruling appears to hold new precedential value in both federal and California courts, by setting forth a two part test: the total pollution exclusion precludes coverage only if the exposure is (1) from a toxic environmental pollution or accident that is not localized or a persistent by-product of the insured's business; and (2) within the insurance industry's historical objective of avoiding liabilities for environmental catastrophes related to industrial pollution. FILING DATE: May 16, 2011.