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The Pollution Exclusion: Is the Crack in Drywall Widening?

Last week's opinion in Auto Owner's relied in part on an unpublished opinion from late last year - Scottsdale Ins. Co. v American Safety Indem. Co., No. 1:10-cv-00445-WS-N (S.D. Ala.., Nov. 10, 2010).  Scottsdale, like Auto-Owners, held that the Pollution Exclusion did not apply because the pollution release did not occur while the contractors were performing operations.  The main difference between the two cases appears to be that Scottsdale arose from a coverage dispute between a builder and its a carrier while Auto-Owners involved a coverage dispute between a builder and the carrier for its subcontractor, for which policy the builder was listed as an additional insured.  This important case, which together with Auto-Owners, may well signal the eventual demise of the pollution exclusion in the CDW litigation, can no longer be overlooked.

Both Auto-Owners and Scottsdale implicate identical provisions which the courts find did not work to exclude coverage for the same reason -  the release of pollutants did not occur (in whole or in part) during the time in which the insured was "performing operations."  As the Court stated in Scottsdale:

A reasonable interpretation of the plain words found in subsection f.(1)(d)(i) is that the release of pollutants and the insured's performance of operations must occur contemporaneously for the Pollution Exclusion to apply. After all, the Pollution Exclusion is not worded to bar coverage for losses from pollutant releases at locations where the insured or its contractors "are performing or have previously performed operations," but instead only excludes losses from pollutant releases at locations where the insured or its contractors "are performing operations." That distinction may be critically  important here. The Underlying Actions appear to relate, at least in part, to pollutant discharge from Chinese drywall occurring long after Mitchell's operations at the construction site subsided.

Could this be a harbinger of the day when insurance carrier's will start indemnifying builders and suppliers of CDW for the claims of homeowners?  We think so.  

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