Duty To Defend: Under North Carolina Law, Insurer Must Defend Personal Injury Claims Arising From Direct Exposure To AFFF Despite “Hazardous Materials Exclusion” In CGL Policy

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The U.S. District Court in the Western District of North Carolina recently held in Colony Insurance Co. v. Buckeye Fire Equipment Co. that an insurance company must defend personal injury claims arising from direct exposure to Aqueous Film Forming Foams (AFFF) under a Commercial General Liability (CGL) Policy despite the policy containing a “Hazardous Materials Exclusion.” That exclusion requires a discharge into the environment and, generally, may not be applied to injuries caused by something other than traditional environmental pollution.

Defendant Buckeye Fire Equipment Co. (Buckeye) has been sued in hundreds of underlying cases related to Buckeye’s manufacture of fire equipment containing AFFF, which have been consolidated into Multi-District Litigation in the United States District Court for the District of South Carolina (i.e., the AFFF Products Liability Litigation, MDL No. 2873, U.S. Dist. Ct. of S.C., or the “AFFF MDL”). Plaintiffs in the underlying cases have sued Buckeye and others for bodily injury or property damage caused by both “traditional environmental pollution” (e.g., a release into the environment) and direct contact with or exposure to AFFF. Approximately a third of the underlying cases allege harm from both direct and environmental exposure. The District Court provided a representative example of the allegations from one of the underlying cases: “During [underlying plaintiff’s] employment as a firefighter instructor, he was significantly exposed to elevated levels of PFOS and PFOA in their concentrated form as a result of regular contact with [d]efendant’s AFFF products and through PFOS and PFOA having contaminated the Fire College well system.”) (emphasis in original). Buckeye requested insurance coverage for the underlying cases alleging direct exposure. Plaintiff Colony Insurance Co. (Colony) sought a declaratory judgment that it has no duty to defend.

In its Motion for Summary Judgment, Colony alleged that it had no duty to defend any of the underlying lawsuits alleging direct or environmental exposure because the “Hazardous Materials Exclusion” excludes coverage for injuries “which would not have occurred in whole or in part but for actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.”

The District Court disagreed and held that Colony could not deny coverage to the underlying complaints that allege direct exposure because the injuries were caused by “something other than traditional environmental pollution.” Under North Carolina case law, an insurer cannot deny coverage based on a pollution exclusion if the occurrence and resulting injury are not “prototypical environmental harms” to which a pollution exclusion is generally applied. The terms “discharge,” “dispersal,” “release,” and “escape” are particular environmental terms of art in this context, and a “discharge, dispersal, release, or escape” of a pollutant must be into the environment to trigger the pollution exclusion clause and deny coverage. The Court cited to W. Am. Ins. Co. v. Tufco, 409 S.E.2d 692 (N.C. Ct. App. 1991), where it was held that “‘vapors or fumes released from the chemicals used by [the insured] during’ the insured’s routine business operations” were not discharges into the environment and thus not excluded from coverage.

Finally, it is important to note the limitation of the holding. Both parties agreed that the issue of indemnification was not ripe and the District Court limited its analysis to the issue of Colony’s duty to defend underlying cases alleging direct exposure. Buckeye also conceded that Colony has no duty to defend any of the underlying actions that allege solely environmental exposure.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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