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Summary Judgment - Oral Evidence

In this post, we continue our discussion of the Court of Appeal's decision in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764.

Rule 20.04(2.2) permits a judge to hear oral evidence on a summary judgment motion. The Court provided guidance on when this discretion may be exercised.

The Court held that a party that moves for summary judgment must be in a position to present a case capable of being decided on a paper record. The motions judge can decide if he or she requires viva voce evidence under r. 20.04(2.2). The purpose of the rule is not to allow a party to enhance the record it has put before the court.

An order for oral evidence will generally be appropriate where the judge concludes the exercise of powers under r. 20.04(2.1) will be facilitated by hearing oral evidence of a limited number of witnesses on one or more specific, discrete and likely determinative issues.

An order under r. 20.04(2.2) may be appropriate where:

(1) Oral evidence can be obtained from a small number of witnesses and gathered in a manageable period of time;
(2) Any issue to be dealt with by presenting oral evidence is likely to have a
significant impact on whether the summary judgment motion is granted; and
(3) Any such issue is narrow and discrete – i.e., the issue can be separately decided and is not enmeshed with other issues on the motion.

- Tara Pollitt

New York Court Holds Disgorgement Payment Not Covered Under Professional Liability Policies

In its recent decision in J.P. Morgan Securities, Inc. v. Vigilant Ins. Co., 2011 N.Y. App. Div. 8829 (N.Y. 1^st Dep’t Dec. 13, 2011), the New York Appellate Division for the First Judicial Department considered whether a disgorgement payment made pursuant to a settlement with the SEC qualified for coverage as compensatory damages under the insureds’ professional liability coverage program.

The insureds, various Bear Stearns entities, had been the subject of an SEC investigation in connection with its alleged practices of facilitating late trading and engaging in deceptive market timing for certain favored customers.  While Bear Stearns did not admit to liability, it ultimately settled with the SEC by agreeing to a disgorgement payment in the amount of $160 million and a civil penalty payment in the amount of $90 million.   

Bear Stearns sought indemnification for the settlement amount under its primary and excess layer professional liability policies that provided coverage for “Loss which the insured shall become legally obligated to pay as a result of any Claim … for any Wrongful Act on its part.”  “Loss” was defined by the policies as including compensatory damages and costs associated with defending an governmental investigation, but expressly carved out “(i) fines or penalties imposed by law; or … (v) matters which are uninsurable under the law pursuant to which this policy shall be construed.”  The policies also excluded coverage for claims “based upon or arising out of any deliberate, dishonest, fraudulent or criminal act or omission.”  Bear Stearns insurers disclaimed coverage for the disgorgement payment on the basis that it did not fall within the definition of “Loss” and that it was otherwise excluded. 

Bear Stearns subsequently commenced coverage litigation against its insurers, and the trial court denied the insurers’ motion to dismiss.  Bear Stearns argued that while the $160 million payment to the SEC was labeled a “disgorgement payment,” it nevertheless should be considered compensatory damages for the purpose of the policies’ definition of Loss.  The court held that a question of fact existed as to whether the disgorgement payment was exclusively linked to improperly acquired funds.  Specifically, the lower court found that there was nothing in the SEC Order or the related documents from which to conclude that Bear Stearns directly profited from the alleged violations, or that it earned $160 million as a result of its conduct. 

On appeal, the Appellate Division reversed, concluding that the facts established that Bear Stearns’ offer of settlement, the corresponding SEC Order, and various other documents, established that Bear Stearns “knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity.”   Among other things, the SEC Order demonstrated Bear Stearns’ falsification of order tickets and its use of dummy account and trader numbers to conceal late trades.  The Order also determined that Bear Stearns “willfully violated, willfully aided and abetted and caused” numerous securities violations.  As such, the Appellate Division concluded that it “cannot be seriously argued that Bear Stearns was merely found guilty of inadequate supervision and a failure to place adequate controls on its electronic entry system.”

The Appellate Division also rejected Bear Stearns contention that an issue of fact was raised as to whether the entirety of the $160 million disgorgement payment related to ill-gotten gains.  While the SEC Order did not specifically itemize how the $160 million disgorgement figure was determined, explained the court, it also did not raise a possibility that the amount, or at least a portion of it, was compensatory in nature. A disgorgement payment need not be specifically calculated, noted the court, but need only be a “reasonable approximation of profits casually connected to the violation.”

Court of Appeal comments on the new summary judgment rule

The Court of Appeal has now released its decision regarding the new summary judgment rule. The appeal was heard before a five panel Court and pertained to five action. It is released under the name Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764.

The Court held that there are three types of cases that are amenable to summary judgment:

1. Where the parties agree it is appropriate to determine an action by way of summary judgment (para. 41);
2. Claims or defences that are shown to have no merit (para. 42); and
3. Where the trial process is not required in the interest of justice (para. 44).

It is not necessary for the judge to categorize the type of of case in question. In fact, the Court held that the latter two types of cases are not to be viewed as discrete compartments.

The test for summary judgment is the "full appreciation test". The motions judge must ask "can the full appreciation of the evidence and issues that is required to make dispositive findings be
achieved by way of summary judgment, or can this full appreciation only be achieved by
way of a trial?" (para. 50). In cases that call for multiple findings of facts emanating from a number of witnesses and found in a voluminous record, summary judgment is not a substitute for the trial process. On the other hand, the full appreciation test may be met in document-driven cases with limited testimonial evidence, cases with limited contentious factual issues or where the record can be supplemented to the requisite degree at the motion judge's direction by hearing oral evidence on discrete issues.

It remains to be seen how this will impact summary judgment motions going forward. Are judges going to be more reluctant to grant summary judgment?

- Tara Pollitt

4th Circuit Holds No Duty to Defend Insurance Broker In Bodily Injury Suit

In its recent decision in Houston Cas. Co. v. St. Paul Fire & Marine Ins. Co., 2011 U.S. App. LEXIS 24157 (4^th Cir. Dec. 6, 2011), the United States Court of Appeals for the Fourth Circuit, applying South Carolina law, considered whether a general liability insurer had a duty to defend its insured, an insurance broker, in connection with an underlying construction site injury lawsuit.

The insured, McGriff, Seibels & Williams, Inc. (“McGriff”), was the broker of record for an owner-controlled insurance program (“OCIP”) issued to provide coverage for claims arising out of dam construction project.  As part of its services, McGriff distributed a document called “Manual of Insurance Procedures” to the various contractors covered under the OCIP policy.  The Manual expressly stated that McGriff, in conjunction with the project’s general contractor, would have various safety-related responsibilities in connection with the project. 

McGriff was named as a defendant in a suit brought by an individual who suffered catastrophic injuries while working on the project.  Plaintiff alleged causes of action for negligence and breach of contract against McGriff on the basis that it had assumed responsibiliy for performing inspections at the work site to ensure that it was reasonably safe, but failed to perform these inspections.  McGriff’s professional liability carrier, Houston Casualty Company, undertook McGriff’s defense.  St. Paul, however, which was McGriff’s general liability carrier denied coverage on the basis of an “Insurance and Related Work” endorsement, stating:

We won't cover injury or damage or medical expenses for which the protected person may be held liable because of:

• any obligation assumed by any protected person in connection with an insurance contract or treaty; [or]

• any failure to carry out, or improper carrying out of, any contractual or other duty or obligation in connection with an insurance contract or treaty.

Houston brought a contribution action against St. Paul, alleging that St. Paul had a duty to defend and McGriff in the underlying suit.  The trial court granted summary judgment in St. Paul’s favor, agreeing that the exclusion applied because McGriff was sued “in connection with an insurance contract.”  On appeal, Houston argued that McGriff’s safety-related duties in connection with the project existed independent of the insurance contract, and thus did not fall within the scope of the exclusion.  More specifically, Houston argued that plaintiff’s negligence claim against McGriff was based upon a common law duty arising from a voluntary undertaking of various safety-related duties, and that plaintiff’s breach of contract claim did not allege breach of an insurance contract.

The court rejected Houston’s broad reading of the complaint, pointing out that the exclusion applied to any failure to carry out any contractual or other duty in connection with an insurance contract.  As such, the court explained, the exclusion would apply to a breach of any contract claim, even one other than the insurance policy itself, so long as the additional contractual obligation arose “in connection with” an insurance contract.  The court further explained that as long as McGriff’s common law obligations would fall within the exclusion as long as those obligations arose “in connection with” an insurance contract.

Looking to the complaint, as well as the Manual, the court concluded that McGriff’s contractual and common law obligations were related to and stemmed from its efforts to issue the OCIP.  While McGriff assumed various obligations outside of the OCIP, it did so as part of its efforts to broker the program, and thus arose “in connection with” the policy.  As such, the Fourth Circuit affirmed the grant of summary judgment, finding persuasive the lower court’s statement that “there is no allegation or suggestion in the complaint that McGriff assumed any safety-related duties except in this role [i.e., as the broker of record].” 

Occupier’s Liability S.4(4)(f): Recreational Trail

In Turner v. Kitchener (City) [2011] O.J. No. 4803, the plaintiff was riding his bike along a recreational trail in Kitchener. It was his regular route and time of travel which put him on the trail at 5:15 am.

Earlier that day vandals had set fire to a bridge along the trail and after investigating, the police and fire personnel had blocked off the bridge with a wooden barricade and yellow caution tape.

The plaintiff was biking at a relatively high speed for the time of morning, was wearing a helmet but did not have any light affixed to his bike. As the plaintiff approached the barricade, he was not able to see it, and when he did notice it is was too late to stop safely. The plaintiff applied his brakes so hard that he flipped over the bike and suffered injuries.

In this case, the plaintiff must establish that the defendant acted with “reckless disregard” towards him.

The trail is a “recreational trail”, so that s.4(4)(f) of the Occupier’s Liability Act (“Act”) was triggered. Section 4(3)(c) of the Act is also triggered and the plaintiff is deemed to have willingly assumed all risks when he rode his bike on the trail that day.

The deputy trial judge cited Cormack v. Mara (Township) (1989), 68 O.R. (2d) 716 (C.A.) which defined “reckless disregard” as doing or omitting to do something which the occupier “should recognize as likely to cause damage or injury to [the person] present on his or her premises, not caring whether such damage or injury results”.

After the fire, police and fire personnel attended the scene the city dispatched a crew to erect an orange barrier with several lines of yellow caution tape blocking off bridge access. The bridge was blocked off in order to arrange an inspection to determine if the bridge was structurally safe.

The plaintiff’s expert report concluded that the city ought to have used either a reflective warning sign and/or a flashing beacon.

The city offered evidence that the recreational trails are closed between 11pm and 6am. There are signs posted which state this and there is a by-law which specifically prohibits presence in the park, including on the trails between those hours.

The deputy judge accepted the city’s evidence, although it only showed that the plaintiff was in violation of a city by-law. He held that the city did not act with “reckless disregard” for the plaintiff. The deputy judge further explained that,“it could not be deemed likely, from the city’s perspective, that a bicyclist riding a trail while it was closed, and more importantly, while it was almost completely dark, without a headlight, would fail to see the barricade until it was too late to stop safely. Nor do I find that the city did not care whether injury resulted from its erection of the barricade.”

The deputy judge also stated that a flashing light on the barricade would have increased the possibility of the plaintiff seeing the barrier, but that a light on his bike and riding at a slower speed in the dark would have done the same thing.

If the deputy judge had found for the plaintiff on liability, he would have reduced the damages by a factor of 70%.

Also see Kennedy v. London (City) (2009), 58 M.P.L.R. (4th) 244 (Ont S.C.J.) and Schneider v. St. Clair Region Conservation Authority (2009), 97 O.R. (3d) 81 (C.A.) on the issue of recreational trails.

- Alison McBurney

Pennsylvania Federal Court Addresses Insolvency Exclusion

In its recent decision ACE Capital Ltd. v. Morgan Waldon Ins. Mgmt., LLC, 2011 U.S. Dist. LEXIS 135902 (W.D. Pa. Nov. 28, 2011), the United States District Court for the Western District of Pennsylvania had occasion to consider the scope of an insolvency exclusion in a professional liability policy.

ACE provided errors and omissions coverage to Morgan Waldon Insurance Management, LLC (“MWIN”), an insurance agency that created and administered employee health benefit plans.  MWIN was named as a defendant in two lawsuits brought by union clients alleging that MWIN had wrongfully created their health care benefit plans as self-insured plans funded by trusts established and controlled by MWIN.  The unions alleged that they did not know that their employers were paying health care benefits into the trust rather than directly to a health care insurer.  The unions claimed that MWIN negligently failed to calculate the monthly contributions necessary to fund the benefits offered, and as a result, the trusts were grossly underfunded and many health care claims subsequently went unpaid. 

Although ACE defended MWIN in the suits, subject to a reservation of rights, it subsequently sought a declaratory judgment on several grounds, including the application of its policy’s insolvency exclusion, which stated that:

We will not defend any Claim or pay any Damages or Claim Expenses based upon, arising out of, directly or indirectly relating to or in any way involving:

*          *          *

3.         Insolvency, bankruptcy, liquidation, receivership, rehabilitation or financial inability of the following, including but not limited to the failure, inability or unwillingness to pay Claims, losses or benefits due to the insolvency, liquidation or bankruptcy of:

    a. Any insurance company; or

    b. Any reinsurer; or

    c. Employee benefit plan; or

    d. Any self-insured program; or

    e. Any trust; or

    f. Any risk retention group; or

                g. Any risk purchasing group.

ACE argued that the exclusion applied because the underlying suits were premised on the theory that the self-insured plans were insufficiently funded, i.e., the plans were insolvent.  MWIN argued that the exclusion was ambiguous as applied, and that its application would defeat MWIN’s reasonable expectations of coverage and would otherwise render coverage under the policy illusory.

The MWIN court acknowledged that in the context of an insurance broker’s professional liability policy, an insolvency exclusion is most often applied in situations in which the broker places a client’s coverage with a carrier that subsequently becomes insolvent.  The court did find, however, a line of cases extending the exclusion to situations in which investment advisors place their clients’ funds in investments that subsequently become insolvent. MWIN argued that these cases were inapplicable since they concerned situations in which third parties became insolvent whereas the underlying suits alleged that MWIN’s own negligence resulted in the insolvency of the plans.  The court held that this was a distinction without a difference, explaining:

… the Policy exclusion is broadly worded: it precludes coverage for any claim "based upon, arising out of, directly or indirectly relating to or in any way involving" the insolvency, bankruptcy, liquidation, receivership, rehabilitation or financial inability of" a number of entities, including an "employee benefit plan," a "self-insured program" or a "trust." … Defendants cannot and do not dispute that the [the underlying suits] allege that the self-insured programs and/or employee benefit plans set up by MWIM to pay the plan members' benefit claims, which were funded through trusts … were unable to satisfy those claims because the plans were insufficiently funded by MWIM. Even if the claims cannot be said to "arise from" the plans' insolvencies, it cannot be argued that the claims do not "relate to" these insolvencies, irrespective of the fact that the mistakes made by MWIM occurred prior to the insolvencies.    

The court further rejected MWIN’s arguments concerning reasonable expectations and illusory coverage.  The court held that as a sophisticated, commercial enterprise, MWIN could not rely on the reasonable expectations doctrine to defeat an otherwise clear and unambiguous exclusion.  Moreover, because the exclusion would only apply to a limited category of claims, the court concluded that the exclusion did not render coverage under the policy illusory.

Admissibility of Expert Reports in Small Claims Court

In Turner v. Kitchener (City) [2011] O.J. No. 4803, there was a mid-trial ruling on the admissibility of an expert report in Small Claims Court.

The facts of this case involve a plaintiff who was riding his bike along a recreational trail in Kitchener. It was his regular route and time of travel which put him on the trail at 5:15 am.

Earlier that morning vandals had set fire to a bridge along the trail and after investigating, the police and fire personnel had blocked off the bridge with a wooden barricade and yellow caution tape.

The plaintiff was biking at a relatively high speed for the time of morning, was wearing a helmet but did not have any light affixed to his bike. As the plaintiff approached the barricade, he was not able to see it, and when he did notice it is was too late to stop safely. The plaintiff applied his brakes so hard that he flipped over the bike and suffered injuries.

At trial, the plaintiff attempted to admit into evidence a report from a professional engineer. Defence counsel objected and intended to cross-examine the expert and challenge the admissibility of his report based on the evidence of qualifications.

The deputy trial judge held that the report was admissible. He cited section
27(1) of the Courts of Justice Act which provides the Small Claims Court (“SCC”) with the general authority to “accept and act on lower-quality evidence than would otherwise be permitted under the common law rules of evidence”.

He then examined the SCC Rule 18.02 subsections (1) to (7) and held that the position of defence counsel as he intended to cross-examine the expert is not contemplated by the Rules and that the report had already been admitted into evidence by way of Rule 18.02 (1) to (3). Admissibility of documents under Rule 18.02 is to be determined at the initial stage under Rule 18.02(1) when the document is tendered - “Once the document is admitted, the witness may be-cross-examined using the summons procedure under rule 18.02(4). But since that is cross-examination,the rule presupposes that the report or document is already admitted into evidence. The report or document serves as the examination-in-chief of that
witness.”

The deputy judge found no merit in the defendant’s objection to the expert’s qualifications. The expert was a professional engineer and his qualifications to provide the opinion evidence were of the highest quality generally seen in civil courts.

- Alison McBurney

OPCF 44R - Family Protection Endorsement

The Court of Appeal recently affirmed a lower court decision on the OPCF44R.

In Van Bastelaar v. Bentley, [2011] O.J. No. 4666 (C.A.), the plaintiffs were concerned that the defendant's $1,000,000 policy would be apportioned between four injured parties and there would be a shortfall. As a result, they added their own insurer pursuant to the inadequately insured motorist provisions of their policy. Their policy had a Family Protection Endorsement with limits of $1,000,000. The key provision read as follows:

The insurer's maximum liability under this change form, regardless of the number of eligible claimants or insured persons injured or killed or the number of automobiles insured under the Policy, is the amount by which the limit of family protection coverage exceeds the total of all limits of motor vehicle liability insurance, or bonds, or cash deposits, or other financial guarantees as required by law in lieu of such insurance, of the inadequately insured motorist and of any person any person jointly liable with that motorist.

The motions judge held that "An underinsurer's obligation to pay does not arise until the total amount of insurance held by the tortfeasor at the moment of the accident is less than the family protection coverage liability limit." He concluded that since "the policies of the parties are unevenly matched, so therefore, the underinsurer had no exposure to liability".

The Court of Appeal affirmed the decision.

- Tara Pollitt

New Jersey Federal Court Addresses Related Wrongful Acts

In its recent decision Gladstone v. Westport Insurance Corporation, 2011 U.S. Dist. LEXIS 132100 (D.N.J. Nov. 16, 2011), the United States District Court for the District of New Jersey addressed the concept of related wrongful acts in the context of a lawyers malpractice insurance policy.

The issue presented to the Gladstone court was whether a malpractice lawsuit filed against Westport’s insured, Robert Gladstone, during the policy period was related to a claim first made against Mr. Gladstone prior to the policy’s issuance.  Both claims arose out of a suit in which Mr. Gladstone unsuccessfully represented numerous parties in a zoning ordinance matter.  Sometime after the suit ended, Mr. Gladstone brought a collection action against eleven of his former clients.  In 2006, one of the former clients, Merrick Wilson, filed an answer in which he asserted the affirmative defense that Mr. Gladstone’s work had not met the standards of professional conduct.  In 2007, another of the defendants in the collection action asserted a counterclaim, alleging that Mr. Gladstone committed malpractice in connection with his prosecution of the zoning matter.   Ultimately, Mr. Gladstone settled the collection action, as well as the counterclaim, and obtained releases from each of the defendants, with the exception of Merrick Wilson, who for reasons not clear to the court, was never advised of the settlements or that Mr. Gladstone’s suit was dismissed.

In 2007, Mr. Gladstone joined the New Jersey firm of Szaferman, Lakind, Blumstein & Blader, P.C. (“SLBB”), and SLBB’s malpractice policy, issued by Westport, was endorsed to include coverage for Mr. Gladstone’s work prior to joining the firm.  Westport renewed the policy, with a similar endorsement, for the period July 4, 2008 to July 4, 2009.  In May 2009, Merrick Wilson commenced a malpractice action against Mr. Gladstone for the same zoning ordinance matter.  Westport denied coverage to Mr. Gladstone on the basis that the 2009 claim related back to the counterclaim originally asserted in 2007, and thus constituted a claim first made prior to the inception of the 2008-009 policy.  In doing so, Westport relied on the following policy provision:

Two or more CLAIMS arising out of a single WRONGFUL ACT, as defined in each of the attached COVERAGE UNITS, or a series of related or continuing WRONGFUL ACTS, shall be a single CLAIM.  All such CLAIMS whenever made shall be considered first made on the date on which the earliest CLAIM was first made arising out of such WRONGFUL ACT …

The court agreed that, at a minimum, the counterclaim asserted in 2007 constituted a “claim” that was first asserted prior to the 2008-2009 policy period.  Thus, the questions for the court were: (a) whether the related acts provision was enforceable and (b) was whether Mr. Merrick’s 2009 lawsuit was sufficiently related to the earlier counterclaim such that it should be deemed first made prior to the policy’s date of inception.

The insured argued that the related wrongful act provision was ambiguous and unenforceable under New Jersey law.  In considering the issue, the Gladstone court observed that New Jersey’s Supreme Court had not yet addressed the issue of related claims in a professional liability policy.  This concept had been addressed, however, by the United States District Court for the District of New Jersey in G-I Holdings v. Hartford Fire Ins. Co., 2007 U.S. Dist. LEXIS 19069 (D.N.J., Mar. 16, 2007), aff’d, 586 F.3d 247 (3d Cir. 2009) and by a New Jersey state appellate level court in Passaic Valley Sewerage Commissioner v. St. Paul Fire and Marine Ins. Co., 2010 N.J. Super. Unpub. LEXIS 475 (N.J. Super. Ct. App. Div. Mar. 8, 2010), aff’d, 2011 N.J. LEXIS 686 (N.J., June 21, 2011).  In both cases, the courts held that related wrongful act provisions were unambiguous and enforceable under New Jersey law.  From these cases, the Gladstone court concluded that the provision in the Westport policy should be enforced.  As the court explained, the provision:

… is not unclear.  It does not include any undefined terms and is not so lengthy or convoluted that the average insured (especially the average lawyer!) would be unable to predict its effect in cases such as this one.

After determining that the provision was enforceable, the court considered whether it should be.  The standard for determining “relatedness,” explained the court, is whether “there is a logical connection between [the claims], even if different plaintiffs brought them.”  Thus, finding that the malpractice alleged in the 2007 counterclaim was identical to that alleged in Merrick Wilson’s 2009 malpractice suit, the court held that “[n]o reasonable jury could stray from the conclusion that the … [c]ounterclaim and the 2009 Wilson Malpractice Complaint arose from the same related wrongful acts – Mr. Gladstone’s alleged negligence during his work on the Hopewell Zoning Matter.”  Accordingly, the court concluded that Westport properly denied coverage for the Merrick suit on the basis that it was properly deemed a claim first made prior to the policy period.

McQueen v. Echelon General Insurance Co. [2011] O.J. No. 4563 (Ont CA)

Appeal by the insurer from an award of accident benefits and damages for mental distress.

At trial, the plaintiff sought housekeeping, transportation, costs of medical assessments and damages for bad faith and mental distress.

The insurer made three major arguments on the issue of damages for mental distress:

1. That there was procedural unfairness based on the trial judge’s
consideration of conduct unrelated to rejected claims for statutory
accident benefits;

2. That merely denying benefits does mean that there was bad faith; and

3. That the trial judge lacked jurisdiction to make an award for mental
distress.

The trial judge quickly dismissed the initial two arguments by concluding that the plaintiff was seeking to recover damages for more than the SABS benefits and that this was not a case where the insured simply denied benefits.

In regards to the allegation that there was merely a denial of benefits the appeal judge agreed with the trial judge on the following points:

• The insurer had a duty to act in good faith in all its dealings with the
insured and had an additional duty not to inflict unnecessary mental
distress. Fidler v. Sun Life Assurance Co. Ltd. 2006 2 SCR 3 (Fidler);

• That the insurer repeatedly refused to provide benefits noting that they
were not “reasonable and necessary”, but never provided and reasons why
they were not reasonable and necessary;

• That damages were warranted because benefits were denied contrary to
medical recommendations;

• That the insurer took an adversarial approach to the plaintiff in the
beginning;

• That the one object of the insurance contract was to secure the plaintiff’s
peace of mind and that it was within the reasonable contemplation of the
parties that breach of peace of mind promise would bring about mental
distress; and

• That the plaintiff’s mental distress was palpable and accepted her evidence
that the change in her emotional and psychological conduct was the result
of her relationship with the insurer.

In regards to the jurisdiction argument, the insurer argued that the plaintiff was not a party to the insurance contract since it was her husband’s policy, and therefore, she was not entitled to claim for damages for mental distress.

It was further argued that Fider was distinguishable because Fidler dealt with LTD benefits not SABS benefits and that consequently, peace of mind cannot have been a contemplated term.

The appeal judge held that the reasoning in Fidler applies to an insured person under an automobile policy, whether the person is the named party or not.

“Mental distress to anyone insured under the policy upon breach would
have been within the reasonable contemplation of the insurer and the
insured and, thus, damages are recoverable pursuant to the basic
principle of compensatory damages.”

….

“People purchase motor vehicle policies to protect themselves from
financial and emotional stress and insecurity. An object of such
contracts is to secure a psychological benefit that brought the prospect
of mental distress upon breach within the reasonable contemplation of
the parties at the time the contract was made.”

In the end, the appeal judge affirmed all aspects of the trial judge’s decision only modifying the total awarded under the transportation head of damages as the trial judge provided inadequate reasons for the amount.

- Alison McBurney

Third Circuit Finds Additional Insured Coverage Based on Peculiar Risk Doctrine

In its recent decision Lafayette College v. Selective Insurance Company, 2001 U.S. App. LEXIS 22721 (3d Cir. Nov. 10, 2011), the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, addressed under what circumstances additional insured coverage may be triggered.

The underlying suit in Lafayette arose out of a construction site injury at Lafayette College in Easton, Pennsylvania.  Lafayette had hired Telesis Construction, Inc. as the  general contractor to renovate a portion of the campus.  Telesis was insured under a general liability policy issued by U.S. Fire.  Telesis, in turn, subcontracted out a portion of the work to Alan Kunsman Roofing & Siding, Inc.  During the course of the renovation work, an employee of Kunsman fell from a scaffold and sustained severe injuries.  That employee later sued Lafayette and Telesis, among others. 

The primary coverage dispute in Lafayette was whether the college qualified for additional insured coverage under Telesis’ policy.  That policy’s additional insured endorsement stated that an entity such as Lafayette “is only an additional insured with respect to liability caused by your negligent acts or omissions at or from your ongoing operations performed for the additional insured at the job indicated by written contract or written agreement.”  In other words, the additional insured coverage was limited to vicarious liability imposed on Lafayette as a result of Telesis’ work. 

U.S. Fire argued that it did not have a coverage obligation to Lafayette because the underlying suit alleged that Lafayette was jointly and severally liable rather than vicariously liable for plaintiff’s injuries.  The court noted that while true, such was not fatal to Lafayette’s claim for coverage, as it is not the legal theories advanced, but rather the underlying facts that are dispositive of coverage issues.  With this in mind, the court addressed Lafayette’s contention that the underlying suit asserted liability based on the “peculiar risk doctrine,” which imposes liability on employers of independent contractors when: (1) a risk is foreseeable to the employer at the time of contract and (2) the risk is different “from the usual and ordinary risk associated with the general type of work done.”  The court explained that if the underlying complaint could be read to assert such a claim against Lafayette, such would be tantamount to an assertion of vicarious liability for the purpose of the additional insured endorsement in the U.S. Fire policy.

Looking to the underlying complaint, the court found sufficient allegations to substantiate Lafayette’s claim, notwithstanding the fact that plaintiff did not expressly assert a theory of legal liability based on the peculiar risk doctrine.  Among other things, the complaint alleged that defendants, including Lafayette, “knew or should have known that falls are one of the leading causes of fatalities and injuries at construction sites” and that defendants exposed plaintiff “to peculiar and unreasonable danger by refusing to permit workers to use the elevator and/or stairs inside the college to gain access to the roof and requiring workers … to climb more than 40 feet in the air on a vertically mounted scaffolding ladder without any adequate protection.”  These allegations, explained the court, established the foreseeability of the plaintiff’s injuries and that the risk involved was, in fact, different than ordinary risks associated with construction work.  As such, the court concluded that the two elements of a peculiar risk claim were satisfied by the underlying complaint, and U.S. Fire had a duty to defend Lafayette. 

   

Illinois Court Holds No Duty to Defend Water Intrusion Claim

In its recent decision Lagestee-Mulder, Inc. v. Consol. Ins. Co., 2011 U.S. Dist. LEXIS 129308 (N.D. Ill. Nov. 8, 2011), the United States District Court for the Northern District of Illinois addressed what allegations must be made in a construction defect lawsuit in order to trigger coverage under a general liability policy.

Lagestee, the general contractor on a construction project, was named as a defendant in a construction defect suit.  It sought coverage as additional insured under a commercial general liability policy issued to one of its subcontractors by Consolidated Insurance Company.  Consolidated denied coverage to Lagestee on the basis that the underlying suit did not allege property damage, but instead was limited to seeking a remedy of the alleged construction defects.  Notably, the suit did not allege any particular third-party property damage, although it did allege that as a result of certain of the defects, water was allowed to infiltrate the building.  The suit did not, however, identify any particular damage resulting from the water instrusion.

The court began its analysis by noting that Illinois court have long recognized the rule that “[w]here the underlying suit alleges damage to the construction project itself due to a construction defect, there is no coverage; by contrast, where the underlying suit alleges that the construction defect damaged something other than the project itself, there is coverage.”  As such, explained the court, the absence of any allegation of specific third-party property damage resulting from the alleged would be fatal to Lagestee’s claim for coverage.  Lagestee acknowledged that the underlying suit did not allege third-party property damage per se, as the suit related primarily to use of defective construction materials and faulty workmanship.  Lagestee nevertheless argued that a duty to defend was triggered by the water intrusion allegations, since the presence of water at the building raised the potential for resulting property damage.

The court disagreed, concluding that while “[i]t is true that the underlying complaint does not disavow the proposition that the water infiltration damaged something other than the building itself … the mere possibility that such damage occurred does not trigger a duty to defend under Illinois law.”  In other words, a court is not permitted under Illinois law to speculate as to what damages might have result from alleged water infiltration.  Rather, the duty to defend is determined based solely on the damages actually alleged.  Because the underlying suit did not identify any particular damage resulting from the water infiltration, but instead alleged only that the defective construction allowed for water infiltration, it was not permissible for the court to speculate that such infiltration could result in covered property damage.  Thus, concluded the court, Consolidated did not have a duty to defend Lagestee in the underlying suit.

Sheikh v. Pinheiro 2011 ONSC 6143

We thank M. Edward Key of O’Donnell, Robertson & Sanfilippo for this contribution to our blog.

The plaintiff was going westbound in her vehicle and the defendant taxi driver was travelling northbound in his taxi. They collided at an intersection. The defendant taxi then went on to collide with a southbound vehicle. That southbound vehicle did not collide with the plaintiff’s vehicle.

None of the drivers appeared to be hurt. They all went to the same Collision Reporting Center and filled out very detailed collision reports. There was no question who was driving what vehicle.

On the second anniversary of the collision, the plaintiff brought an action against the driver of the southbound vehicle, believing that he was the taxi driver. Essentially, the plaintiff got the other two drivers confused.
Two years after that (i.e. four years after the collision), the plaintiff commenced a separate action against the real taxi driver after realizing the mistake.

The taxi driver brought a motion for summary judgment on the basis that the action was limitation barred.

The plaintiff argued that there was a genuine issue regarding when the plaintiff knew or ought to have known the true identity of the driver that hit her vehicle. The motion judge made short work of that argument. In particular, for strategic reasons, the plaintiff did not swear an affidavit regarding the state of her personal knowledge of the issues, and the motion materials only included affidavits from their lawyers. The judge determined that the information was readily available in the form of the Self Collision Reports.

Alternatively, the plaintiff argued that there was a genuine issue for trial on the basis that she could not "discover" that her injuries were likely to satisfy the Insurance Act threshold until 2 years before she started the second action.
The motions judge rejected the plaintiff's argument. The trial judge considered that the medical evidence was clear that it was "reasonably discoverable" that the plaintiff's injuries met the threshold more than two years before the second action was commenced.

The motion judge looked not only at medical reports, but also relied on the fact that the first Statement of Claim (issued exactly 2 years after the accident) alleged that she sustained "serious and permanent injuries." The motion judge stated at paragraph 47 of his reasons that, "While this action was mistakenly directed against the wrong defendant, this assertion by the plaintiff in the Statement of Claim is akin to an admission that, by at least that time, if not earlier, the plaintiff viewed her injuries from the accident as serious and permanent, and that they had thereby discovered their potential cause of action."

Second Circuit Agrees that Pollution Exclusion Does Not Apply to Restaurant Odors

In 2010, the United States District Court for the Southern District of New York issued its decision in Barney Greengrass, Inc. v. Lumbermans Mut. Cas. Co., 2010 U.S. Dist. LEXIS 76781 (S.D.N.Y. July 27, 2010), a case addressing whether the pollution exclusion applied to restaurant odors.  The insured, Barney Greengrass (also known as the Sturgeon King), is a well-known delicatessen and fish purveyor located on New York’s Upper West Side.  It was sued by a residential tenant in the same building who claimed that the odors emanating from the restaurant were a nuisance.  Barney Greengrass’ commercial general liability insurer denied coverage on the basis of its policy’s pollution exclusion. 

In a particularly cheeky written opinion, the district court rejected the insurer’s contention that restaurant odors constitute a pollutant for the purpose of the exclusion, explaining that:

To read "pollution" as encompassing "restaurant odors," as defendant urges here, would contradict "common speech" and the "reasonable expectations of a businessperson," who has come to understand standard pollution exclusions as addressing environmental-type harms … Defendant's suggested interpretation of the exclusion is unreasonable because it would mean that plaintiff, the "Sturgeon King," procured liability insurance for its business while at the same time agreeing to exclude coverage for all "losses" caused by a byproduct integral to that business: the aromas which many people (other than Mr. Bohn, of course) apparently find quite pleasant. See Curt Gathje & Carol Diuguid, eds., ZAGAT: NEW YORK CITY RESTAURANTS 2009, Barney Greengrass, at 49 ("The smells alone are worth the price of admission."). We reject that interpretation, which "would infinitely enlarge the scope of the term 'pollutants.'" … Indeed, while the quality of plaintiff's restaurant smells may be in the nose of the beholder, ⁹ defendant's "pollution" argument -- as addressed to the odors here -- is malodorous to this Court.

In reaching its decision, the court distinguished other New York cases holding that odors can constitute a pollutant for the purpose of the pollution exclusion (Town of Harrison v. Nat'l Union Fire Ins. Co. of Pittsburgh, 653 N.Y.S.2d 75 (N.Y. 1996); Tri-Municipal Sewer Commission v. Continental Ins. Co., 636 N.Y.S.2d 856, 857 (N.Y. 2d Dep't 1996), explaining that those cases concerned odors from industrial facilities and thus involved traditional environmental pollution.  By contrast, noted the court, restaurant odors cannot be considered traditional environmental pollution.

In an opinion dated November 4, 2011, a three-judge panel for the United States Court of Appeals for the Second Circuit affirmed the lower court’s decision.  See Barney Greengrass, Inc. v. Lumbermens Mut. Cas. Co., 2011 U.S. App. LEXIS 22442 (2d Cir. Nov. 4, 2011).  The court rejected Lumbermens’ argument on appeal that fumes, as used in the policy definition of “pollutants,” should be interpreted to include odors.  The court explained that Lumbermens could have worded the policy language to include a specific definition of fumes, or could have included odors within the broader definition of “pollutants,” but elected not to.  The court further noted that under New York law, the terms used in the definition of “pollutants” (i.e., smoke, vapors, soot, fumes, acids, etc.) have been construed to mean industrial pollution.  As such, the court agreed that odors from industrial facilities, such as was the case in Town of Harrison and Tri-Municipal Sewer Commission, fall within the pollution exclusion, whereas restaurant odors do not.

Coincidentally, Barney Greengrass is not the only federal circuit decision in 2011 to address whether the pollution exclusion applies to restaurant odors.   In Maxine Furs, Inc. v. Auto-Owners Ins. Co., 2011 U.S. App. LEXIS 6706 (11th Cir. March 31, 2011), the United States Court of Appeals for the Eleventh Circuit, applying Alabama law, held that the pollution exclusion applied to the emanation of curry odors from an Indian food restaurant.  Under Alabama law, however, unlike New York law, the pollution exclusion is broadly construed to apply to matters not considered traditional environmental pollution. 

California Court Holds Non-Owned Site Disposal Exclusion Is Ambiguous

In its recent decision Sierra Recycling & Demolition v. Chartis Specialty Insurance Co., 2011 U.S. Dist. LEXIS 127354 (E.D. Cal. Nov. 3, 2011), the United States District Court for the Eastern District of California considered the scope a non-owned site disposal exclusion, a form of exclusion commonly found in pollution liability insurance policies.

Sierra Recycling concerned coverage under a contractors pollution liability insurance policy issued by Chartis (formerly known as American International Specialty Lines Insurance Company) to Sierra, which provided coverage for bodily injury, property damage or environmental damage resulting from pollution conditions caused by Sierra’s contracting operations.  The policy contained a non-owned site disposal exclusion, barring coverage for:

Bodily injury, property damage or environmental damage arising from the final disposal of material and/or substances of any type (including but not limited to any waste) at any site or location which is not owned, leased or rented by you.

Sierra was hired to transport construction debris from a demolition site.  It hauled some three hundred tons of debris to a facility that it did not own, lease or rent.   Of significance, the facility to which Sierra hauled the debris was not a landfill, but instead a recycling facility that sold, recycled, or otherwise transferred all material brought to its facility.  Sometime after Sierra transported the debris, it was advised by the facility that the debris contained elevated levels of zinc and mercury.  Sierra sought coverage for necessary cleanup costs under the Chartis policy, but Chartis disclaimed coverage on the basis of the non-owned site disposal exclusion.

In the ensuing coverage litigation, Chartis moved for summary judgment on the basis of the policy’s non-owned site disposal exclusion. Chartis argued that the exclusion applied to an insured’s “final disposal” of material at any site, regardless of its nature, as long as the site is not owned, leased or rented by Sierra. Sierra relinquishment of the debris at the facility, Chartis asserted, constituted “final disposal” for the purpose of the exclusion.  Sierra, on the other hand, argued that the exclusion was ambiguous, at least as applied to the facts before the court, because “final disposal” connoted disposal at a landfill (i.e. a place of final disposal), not at a recycling facility where material and waste will be resold, recycled or subsequently transferred to another facility or landfill.  Under Sierra’s interpretation, the exclusion does not apply to disposal of waste or material at an intermediary facility, even if the insured has otherwise relinquished control of the waste or material.

Without citing to any particular line of authority, court concluded that Sierra’s construction of the phrase “final disposal” was “in line with the ordinary and popular understanding of the term ‘final disposal, and … therefore reasonable.”  The court further held that Chartis’ construction of the exclusion as applying to an insured’s final relinquishment of waste or material also was reasonable.  Thus, under California law, explained the court, since both sides presented reasonable interpretations of the exclusion, it was necessarily was ambiguous and to be construed against the insurer.

7th Circuit Addresses Coverage for Alleged Antitrust Violation

In its recent decision Rose Acre Farms, Inc. v. Columbia Casualty Co., 2011 U.S. App. LEXIS 22063 (7^th Cir. Nov. 1, 2011), the United States Court of Appeals for the Seventh Circuit, applying Indiana law, had occasion to consider whether an insured was entitled to coverage under its general liability policies for alleged conspiracy to price fix.

The insured, Rose Acre, is one of the nation’s largest producers of eggs and was named as a defendant in a class action alleging violations of the Sherman Act for conspiracy to fix the price of eggs.  Rose Acre sought coverage under its general liability policies’ “personal and advertising injury” coverage for the offense of “use of another’s advertising idea in your ‘advertisement.’”  Specifically, Rose Acre claimed that it belonged to a trade association of egg producers that maintained a website advertising the benefits of free range chickens, which Rose Acre argued could be used to make customers believe that the high price of eggs “was the result not of a conspiracy among egg producers but instead of the chickens’ healthful and humane living conditions.”

Judge Posner, writing the opinion for the court, characterized Rose Acre’s theory as “convoluted,” particularly since the underlying suit contained no mention of Rose Acre’s advertising on any website.  More significantly, Judge Posner explained that even if the underlying suit could be read to allege that advertising was used as part of the antitrust conspiracy, the policies provided coverage only for the offense of misappropriation of another’s advertising idea.  That is the essence of an advertising injury, which the court explained, was not alleged in the underlying suit.  Rather, the underlying suit related to an alleged antitrust violation, which as Judge Posner wrote, is not within the contemplated coverage of a general liability policy:

Antitrust liability … is a major business risk, especially for one of the largest companies in a major market.  It is hardly likely that parties to an insurance contract would seek to cover such a serious risk indirectly through an “advertising injury” provision aimed at misappropriation and other intellectual-property torts.

Judge Posner further noted that the policies’ personal and advertising injury coverage contained exclusions applicable to knowing and criminal conduct, both of which necessarily are present in an alleged conspiracy to violate federal antitrust law. 

Statutory Duty of Care

Morsi v. Femer Paving Ltd. [2011] O.J. No. 3960

This is an appeal from a trial decision that held York Region and Femer Paving Ltd each 25 % liable for a single car motor vehicle accident. The deceased was driving in excess of the speed limit, ignoring speed and construction signs and lost control of his vehicle when the road surface changed from fresh pavement to gravel.

The trial judge held that the plaintiff was 50% to blame for the accident, leaving the defendants with the other 50%.

York Region and Femer Paving appealed the decision.

York Region’s main submission was that after the trial Judge correctly stated the main issue and the test for resolving the issue …

“Whether at the material time Major Mackenzie drive was in a state of repair that was reasonable in the circumstances such that users of the road, exercising ordinary care, could travel upon it safely.”

… that he did not apply the test to the facts of the case.

“The evidence of Detective Stock and the Varicom tests as well as the evidence of Constable Herbert and the various engineering experts establishes that if Mark Morsi had operated his vehicle at the posted speed or even a speed modestly above it, he would have been able to successfully negotiate the transition area.”

The Ontario Court of Appeal found the driver to be reckless having accelerated to 117 km/h through a long curve and straightaway and ignoring two 60km/h speed signs, a reverse curve sign, a 40 km/h advisory sign and two construction signs. This was not a driver exercising ordinary care.

The appeal was allowed and the action by the driver’s family was dismissed.

- Alison McBurney

New Minor Injury Guideline

The new Statutory Accident Benefits Schedule (SABS) came into effect September 1, 2010. Among the key amendments, there has been a reduction of medical and rehabilitation benefits from $100,000.00 to $50,000.00. In some cases, this will be further reduced to $3,500.00 under the new Minor Injury Guideline (MIG).

The MIG applies to accidents that occurred on or after September 1, 2010, and replaces the Pre Authorized Framework for Grade I and II whiplash associated disorders. Section 268.3 of the Insurance Act requires that the MIG be considered in any determination involving the interpretation of the SABS.

An insured person’s impairment comes within this Guideline if the impairment is predominantly a minor injury. “Minor injury” is defined in the new SABS as a “sprain, strain, whiplash associated disorder, contusion, abrasion, laceration or subluxation and any clinically associate sequelae”. Each of these conditions are further defined to specify the severity of each to move it out of the “minor injury” category. For example, “whiplash associated disorder” is defined as “a whiplash injury that does not exhibit objective, demonstrative, definable and clinically relevant neurological signs, and does not exhibit a fracture in or dislocation of the spine”.

The objectives of the MIG are to speed access to rehabilitation for persons who sustain minor injuries in auto accidents, improve utilization of health care resources, provide certainty around cost and payment for insurers and regulated health professionals, and be more inclusive in providing immediate access to treatment without insurer approval for those persons with minor injuries.

Many accident victims may now find their benefits reduced to $3,500.00 and if they do not have a tort claim, they may have little alternative for additional medical coverage. The Financial Services Commission of Ontario expects the MIG to capture 30%-40% of accident claims.

Section 18(2) provides for an exclusion from MIG if the insured person’s health practitioner determines and provides compelling evidence that the insured person has a pre-existing medical condition that will prevent the insured person from achieving maximal recovery from the minor injury if subject to the $3,500.00 limit. This exception raises the question of what the courts will consider to be “compelling evidence”.

- Kristen Dearlove, Student-at-Law

Alabama Supreme Court Addresses Coverage for Faulty Workmanship

In its recent decision Town & Country Prop., L.L.C. v. Amerisure Ins. Co., 2011 Ala. LEXIS 183 (Ala. Oct. 21, 2011), the Supreme Court of Alabama had occasion to consider whether an underlying suit for defective workmanship triggered coverage under a general liability policy.

The insured, a general contractor, had been hired to construct an automobile sales and service facility.  Shortly after completion of the project, the project owner discovered several defects.  Frustrated by the insured’s subsequent inability to repair the defects, the owner commenced suit, alleging various causes of action based on theories of tort and breach of contract.  Amerisure provided a defense to its insured under a reservation of rights.  The matter ultimately resulted in a judgment against the insured for approximately $650,000.  Shortly after judgment was rendered, Amerisure denied a liability to indemnify its insured on the basis that the suit did not allege an occurrence, and that even if it did, the policy’s exclusion applicable to property damage to “your work” barred coverage.  Plaintiffs in the underlying matter, standing in the shoes of the insured, contended that the allegations of faulty workmanship constituted an occurrence and that the exclusion was inapplicable because the property damage alleged was caused by the insured’s subcontractors rather than by work actually performed by the insured. 

The Court looked to its two prior decisions on the issue of what constitutes an occurrence in the context of faulty workmanship claims.  In United States Fid. & Guar. Co. v. Warwick Dev. Co., 446 So. 2d 1021 (Ala. 1984), the Court had held that an underlying claim did not allege an occurrence where the damage alleged was limited solely to faulty workmanship.  By contrast, in Moss v. Champion Ins. Co., 442 So. 2d 26 (Ala. 1983), the Court found an occurrence where the insured’s failure to properly construct a roof allowed for water intrusion to the plaintiff’s home, causing damage to plaintiff’s attic and ceilings.  The Court harmonized these two decisions by explaining that “faulty workmanship itself is not an occurrence but that faulty workmanship may lead to an occurrence if it subjects personal property or other parts of the structure to "continuous or repeated exposure" to some other "general harmful condition" (e.g., the rain in Moss) and, as a result of that exposure, personal property or other parts of the structure are damaged.”

The Court therefore held that to the extent that the underlying suit was limited to allegations of faulty workmanship, there could be no occurrence.  It nevertheless remanded the matter for further findings to determine whether the plaintiffs experienced any subsequent property damage, such as resulting damage to computers or furnishings.  In passing, the Court noted that if plaintiff did experience such property damage, it would necessarily follow that such damage was caused by an occurrence, and that the policy’s “your work” exclusion would not apply because of the exception applicable to work performed by subcontractors.

 

Application of Exclusion to Drywall Claim Does Not Render Coverage Illusory

The United States District Court for the Southern District of Florida has held on several occasions that the pollution exclusion applies to Chinese drywall claims.  See, e.g., CDC Builders, Inc. v. Amerisure Mut. Ins. Co., 2011 U.S. Dist. LEXIS 114509 (S.D. Fla. Aug. 16, 2011); Gen. Fid. Ins. Co. v. Foster, 2011 U.S. Dist. LEXIS 103618 (S.D. Fla. Mar. 24, 2011).  In its recent decision Colony Ins. Co. v. Total Contracting & Roofing, Inc., 2011 U.S. Dist. LEXIS 129269 (S.D. Fla. Oct. 18, 2011), the Southern District of Florida added to this line of cases by holding that a hazardous materials exclusion applied to drywall claims.  In doing so, the court rejected the insured’s argument that application of the exclusion rendered coverage illusory.

The insured, Total Contracting, was sued for having allegedly installed defective drywall in a home that it renovated.  Underlying plaintiffs alleged that the drywall emitted sulfides and other noxious gases, resulting in property damage and bodily injury.  Total Contracting’s insurer, Colony, denied coverage under a series of consecutively renewed general liability policies on the basis of a hazardous materials exclusion, applicable to bodily injury or property damage “which would not have occurred in whole or in part but for the actual or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.”  “Hazardous materials” was defined as “‘pollutants’, lead, asbestos, silica and materials containing them.”  Thus, the exclusion tracked the language of a total pollution exclusion, but applied to a broader range of substances.

The underlying plaintiffs, who were parties to the declaratory judgment action, essentially conceded that the hazardous materials exclusion applied, as their suit against Total Contracting alleged that the drywall emitted gases that resulted in bodily injury and property damage.  Instead of challenging the applicability of the exclusion, underlying plaintiffs argued that application of the exclusion under the circumstances would render the policies illusory and thus violative of public policy.  The basis for this argument was that the exclusion contradicted in whole the coverage otherwise afforded under the policies.

The court initially agreed that based on Florida law concerning the pollution exclusion, as well as case law applying the pollution exclusion in the context of Chinese drywall, the policies’ hazardous materials exclusion had clear application to the underlying suit.  The court went on to hold that the exclusion did not render coverage illusory, since the policies provided “coverage for a seemingly wide-range of business activities described as ‘the contractors-subcontractors work.’”  The hazardous materials exclusion barred coverage for only a small portion of claims that otherwise fell within this coverage, and as such the exclusion could not be said to completely “contradict” the policies’ insuring agreements.  In other words, the exclusion did not completely negate coverage under the policies.  In passing, the court noted that if underlying plaintiffs’ argument were correct, then any policy with a hazardous materials exclusion (or a pollution exclusion) must be considered illusory, which would be an absurd result.