Contamination Is Not Pollution

In August, the Superior Court of Massachusetts, in an act of linguistic legerdemain, held that contamination of a building by carbon monoxide constituted direct physical loss within the meaning of a property insurance policy covering the building and was not pollution within the meaning of an exclusionary clause in the policy.

The case, Matzner v. SEACO Insurance Co., Civ. A. 96-0498-8, 1998 WL 566658 (Mass. Super. Aug. 12, 1998), arose out of the build-up of carbon monoxide at an apartment building owned by the plaintiffs, Joseph and Alexander Matzner. In February 1995, the Boston Fire Department responded to a call from a tenant in the building who reported that her carbon monoxide detector had sounded. Upon arrival the Fire Department documented a high level of carbon monoxide in the building.

A chimneysweep service subsequently investigated and determined that an old galvanized pipe had blocked the top of the chimney and had caused the carbon monoxide build-up.

SEACO Insurance Company insured the Matzners under a Businessowners' Insurance Policy that covered "direct physical loss of or damage to Covered Property." The Matzners sought recovery under the SEACO policy. SEACO ultimately denied the claim, relying on the policy's exclusions for pollution and "ordinance or law."

The Matzners brought suit, and both parties moved for summary judgment. The trial Court granted the Matzners' motion and denied SEACO' s motion, holding that the build-up of carbon monoxide gas caused direct physical loss or damage and that the two policy exclusions, pollution and "ordinance or law," did not apply to the loss.

First, the Court noted that the policy failed to define the term "direct physical loss or damage" and found the term ambiguous in that it was susceptible to at least two interpretations. Under one interpretation, the policy would cover only actual damage to the physical structure. Another interpretation would cover a wider category of loss. The Court then followed the typical rule of policy interpretation that construes ambiguities against the insurer. See e.g., Citation Ins. Co. v. Gomez, 426 Mass. 379, 381, 688 N.E.2d 951 (1998).

The Court found no Massachusetts case that interpreted the phrase "direct physical loss or damage," and it relied on the reasoning in a Colorado case, Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d (1968), which held that "direct physical loss" occurred when gasoline vapors infiltrated a building and rendered it uninhabitable and dangerous.

As for the pollution exclusion, the Court noted that the Massachusetts appeals court had not resolved the issue of whether property insurance policies cover losses that result from carbon monoxide contamination. Instead, the Court cited two liability insurance cases holding that those pollution exclusions did not apply to preclude recovery for contamination.

Each case held that a reasonable insured would consider the pollution exclusions to apply to industrial pollution, not to the presence of certain contaminants in a private residence.

In the first case, Atlantic Mut. Ins. Co. v. McFadden, 413 Mass. 90, 595 N.E.2d 762 (1992), the Supreme Judicial Court held that a pollution exclusion would not preclude coverage for contamination of a residential property caused by lead paint. The Supreme Judicial Court reaffirmed this holding in Western Alliance Ins. Co. v. Gill, 426 Mass. 115, 686 N.E.2d 997 (1997). There, the Court held that the pollution exclusion did not bar coverage for carbon monoxide contamination that occurred in a restaurant.

SEACO argued that these cases should not apply because property insurance covers a narrower category of loss than does general liability insurance. While acknowledging this difference, the Court concluded that the Matzners had likely purchased their policy for the same reason as the insureds in McFadden and Gill. Thus, the Court held that both McFadden and Gill applied and rejected SEACO's arguments.

The Court likewise rejected SEACO's contention that the "law or ordinance" exclusion precluded recovery. This provision excluded losses caused by the enforcement of any ordinance or law. The Court held that SEACO had not met its burden of proving the loss was caused by the Fire Department's enforcement of a particular law or ordinance in responding to the complaint of carbon monoxide. Similarly, the Court held that SEACO had not met its burden of proving that the "Negligent Work Exclusion" applied, because it had not provided sufficient evidence that negligent construction or maintenance of the chimney caused the carbon monoxide contamination.

Finally, the Court found for SEACO on the Matzners' claim that SEACO violated Massachusetts' insurance laws barring unfair or deceptive practices, finding insufficient evidence that SEACO failed to conduct a reasonable investigation as required by law.