Hunton Insurance Recovery Blog

In a victory for policyholders, and an honorable mention for Merriam-Webster’s Dictionary, a federal judge in Virginia ruled that the dispersal of concrete dust that damaged inventory stored in an aircraft part distributor’s warehouse was a pollutant, as defined by the policy, but that it also constituted “smoke” as that term was defined in the dictionary, thereby implicating an exception to the policy’s pollution exclusion.  The Court then granted summary judgment for the policyholder, who had suffered a $3.2 million loss.[1]

In Allied Property and Casualty Insurance Company v. Zenith Aviation, Inc., the policyholder, Zenith, an aircraft parts distributor, hired a construction company to install an elevator in its distribution warehouse. While digging the pit for the elevator, concrete dust caused by the contractor’s improper use of a wet saw damaged Zenith’s inventory of airplane parts and an electronic retrieval system.

Zenith sought coverage for the losses caused by the concrete dust under its commercial insurance policy with Allied. The policy contained a standard pollution exclusion that removed coverage for loss or damage resulting, in pertinent part, from the “discharge, dispersal, seepage, migration, release or escape of pollutants.”  However, “if the discharge, dispersal, seepage, migration, release or escape . . . results in a specified cause of loss,” the policy afforded coverage for the ensuing loss or damage.  The policy afforded coverage for the peril of smoke.  Notably, however, the term “smoke,” which appears in both the definition of “pollutant” and as a “specified cause of loss in the policy,” was not defined.

Allied denied coverage based on the pollution exclusion. Allied argued that the concrete dust met the policy definition of pollutant and the exception to the pollution exclusion did not apply. Allied advanced a narrow definition of smoke and argued that, within the context of the policy, smoke meant “visible products of combustion.”  Zenith, in contrast, argued that the pollution exclusion did not apply because of the causative role played by smoke, a specified cause of loss.  Zenith urged the Court to accept a broader definition of smoke to include “any visible suspension of solid particles in a gaseous medium, whether they are the results of combustion or simply dust that has been agitated into the air,” and further argued that, at a minimum, the term “smoke” was ambiguous as to the scope of its definition in the policy and the ambiguity had to be resolved in favor of coverage.

The Court agreed with Zenith and found the text and structure of the policy, particularly as it pertained to specified causes of loss, insufficient to conclude that the policy intended the more narrow, limited definition of smoke for the purposes of the pollution exclusion. Relying on the definition of smoke in Merriam-Webster’s Dictionary, which included “gaseous products of burning materials” and “suspension of particles in a gas,” the Court ruled that Zenith’s loss resulting from the dispersal or migration of the concrete particulate was caused by the smoke from which it settled, which fell within the plain text of the pollution exclusion.  In a footnote, the Court observed that falling objects was another specified cause of loss and an alternative analysis could arguably result in coverage from the concrete dust falling onto the warehouse inventory.

Allied is a reminder of the importance of reading your insurance policies thoroughly and not merely accepting of insurers narrow interpretations and constructions.  In Allied, it was the insurance company’s own chosen wording that ultimately provided the basis for coverage; yet the insurance company read it in such a way as to negate it.  Often overlooked, dictionaries can provide policyholders with some of the best evidence of an insurance policy’s plain meaning and should not be overlooked.

[1] Zenith’s counterclaims for breach of contract and breach of implied duty of good faith and dealing on the grounds that Allied failed to adequately investigate Zenith’s claims are still pending.