In its recent decision in Certain Underwriters at Lloyds v. Creagh, 2014 U.S. App. LEXIS 6853 (3d Cir. Apr. 14, 2014), the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, had occasion to consider the application of a microorganism exclusion and a seepage exclusion to cleanup costs necessitated by discharge of fluids from a decomposing body.
Lloyd’s insured Creagh, a commercial property owner, under an “all risks” commercial property policy. Creagh’s property, located in Philadelphia, was divided into two spaces: an apartment and an office. During the policy period, the tenant in the apartment unit passed away, and the body was not discovered for nearly two weeks. During this period of time, the body began decomposing, resulting in the release of fluid that not only spread throughout the tenant’s apartment, but that also dripped through the tenant’s floor and into the office unit below. The decomposition resulted in a terrible odor permeating the entire building. As a result, Creagh incurred nearly $180,000 in costs to sanitize and clean both units, and he was also required to restore and repair portions of the apartments were damaged as a result of the remediation process.
The Lloyd’s policy contained two exclusions potentially applicable to Creagh’s costs. The first, a microorganism exclusion, stated:
This Policy does not insure any loss, damage, claim, cost, expense or other sum directly or indirectly arising out of or relating to: mold, mildew, fungus, spores or other microorganism of any type, nature, or description . . . .
The second, a “seepage” exclusion, stated:
[T]his Certificate does not insure: (a) any loss, damage, cost or expense, or (b) any increase in insured loss, damage cost or expense . . . which arises from any kind of seepage or any kind of pollution and/or contamination . . . .
The seepage exclusion was written to apply to “any substance designated or defined as toxic, dangerous, hazardous or deleterious to persons or the environment under any . . . Federal, State, Provincial, Municipal or other law, ordinance, or regulation . . .”
On motion for summary judgment, the United States District Court for the Eastern District of Pennsylvania found both exclusions applicable. With respect to the microorganism exclusion, it found evidence to be credible that the fluids released from the decomposing body contained bacteria, a type of microorganism, and that as such, the exclusion applied to the resulting damage. With respect to the seepage exclusion, the court found credible testimony that the bodily fluids qualified as a hazardous material, and thus constituted pollution that had seeped from the tenant’s body.
On appeal, the Third Circuit agreed that the microorganism exclusion applied, rejecting the insured’s unsupported assertion that while although there was bacteria in the body, there was no bacteria in the discharged bodily fluids. The court also rejected the insured’s argument that the restoration costs related solely to removal of the odors rather than treating the bacteria, explaining:
Next, Creagh contends the purpose of the restoration work was to rid the apartment of its smell, and that Creagh did not ask the contractors to remove the bacteria. However, Creagh’s subjective purpose is immaterial to the insurance policy. Under the microorganism exclusion, it suffices that the smell and other damages “directly or indirectly [arose] out of” the bacteria, which caused the fluid to escape the body and grew in the fluid after it left the body.
The court also affirmed the district court’s reasoning that the seepage exclusion applied, rejecting Creagh’s argument that there was no factual support for the conclusion that the bodily fluids were a hazardous substance. As the court explained, “the safety precautions that Creagh’s sanitation contractor took and the classification by the Occupational Safety and Health Administration of such bodily fluids as potentially toxic and hazardous demonstrate the health and safety risk posed by the fluids.”