The United States Court of Appeals for the Eleventh Circuit has ruled that James River Insurance Company, an excess and surplus lines carrier headquartered in Richmond, Va., was not required to defend Ground Down Engineering, Inc., its insured is a professional negligence action. James River Ins. Co. v. Ground Down Eng’g, Inc., Case No. 07-13207 (11th Cir. Aug. 20, 2008). Ground Down, an environmental inspector, was alleged to have failed to discover fuel tanks and other contaminating debris in a site assessment for Ground Down’s developer client. The Court reversed a decision from the U.S. District Court for the Middle District of Florida.
Priority Development, L.P. hired Ground Down to conduct a Phase I Environmental Site Assessment of property it intended to redevelop. A Phase I Assessment conducted in accordance with industry standards may be used to satisfy the “innocent landowner defense” under the Comprehensive Environmental Response, Compensation and Liability Act. See42 U.S.C. § 9601, et seq. Under the industry standard for Phase I Assessments, the Assessment should identify “Recognized Environmental Conditions.” The American Society for Testing and Material’s standard for a Phase I defines a “Recognized Environmental Condition” as “the presence or likely presence of any Hazardous Substances or Petroleum Products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any Hazardous Substances or Petroleum Products.” Ground Down’s Phase I did not identify any Recognized Environmental Conditions with respect to Priority’s property. Id. at *1.
In the course of redevelopment, Priority discovered construction debris at the site, including 55-gallon drums and a portion of an underground storage tank, which had contained petroleum. The drums, tank and surrounding soil were impacted by petroleum and had to be disposed of at a special waste facility. The construction debris elevated the level of methane gas at the site. Priority incurred costs to monitor both the groundwater at the site for contamination and the levels of methane gas. Priority sought damages for lost profits, lost property value and costs for environmental clean-up from Ground Down (and an individual engineer and employee) under claims of beach of contract, negligent misrepresentation, and negligence. Id.
Ground Down’s professional liability policy provided coverage for wrongful acts in Ground Down’s performance of, or failure to perform, professional services. Id. at *4. “Professional services” were services that Ground Down was qualified to perform in its “capacity as an architect, engineer, landscape architect, land surveyor or planner.” Id. James River defended the suit under a reservation of rights but also sought declaratory judgment that it was not required to cover Ground Down due to the pollution exclusion in Ground Down’s policy. Id.
The district court dismissed James River’s declaratory judgment claim and denied its summary judgment motion. James River Ins. Co. v. Ground Down Eng’g, Inc., Case No. 8:06-CV-1690-T-17-MAP (M.D. Fla. June 14, 2007). The court found that Priority’s claim arose out of a failure to satisfy professional responsibilities, not from pollution itself. The court also held that it would be “unconscionable at best” to interpret the policy to exclude coverage for claims relating to “any form of pollution, regardless of causation” and went on to hold that because Ground Down did not cause the pollution, the exclusion should not apply. Id. at *4. On appeal, Ground Down and Priority argued that the negligence at issue related to the improper performance of a Phase I, instead of to negligently causing pollution. Under Florida law, insurance contracts are construed according to their plain meaning and ambiguities are construed against the insurer. The Florida Supreme Court has interpreted the phase “arising out of” to be broader in meaning than “caused by” or “originating from.” Garcia v. Federal Ins. Co., 969 So.2d 288, 293 (Fla. 2007).
The appellate court found that Priority’s claims for damages “arise directly out of the alleged discovered pollution and are covered explicitly by the exclusion… Priority’s claim depends upon the existence of the environmental contamination.”James River Ins. Co. v. Ground Down Eng’g, Inc., Case No. 07-13207, at *4 (11th Cir. Aug. 20, 2008). The “pollution exclusion” excluded from coverage all “liability and expense arising out of or related to any form of pollution, whether intentional or otherwise.” Id. at *2. In addition, the exclusion barred from coverage “any damages, claim, or suit arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” Id. Finally, the exclusion applied “regardless of whether . . . an alleged cause for the injury or damage is the Insured’s negligent hiring, placement, training, supervision, retention, or wrongful act.” Id.
The appellate court noted that the exclusion contemplated that negligence would be the basis of a claim against the insured and clearly stated that such claims would be excluded. The appellate court distinguished the facts from those inEvanston v. Treister, a district court case from the U.S. Virgin Islands. 794 F. Supp. 560 (D. V.I. 1992). In Evanston, the insurer was an architect, who designed and supervised the construction of sewer and water pipes. The pipes were improperly placed together, and the water line was incorrectly placed below the sewer line. The improper and incorrect placement led to contamination of sewage into the water supply, which caused a typhoid outbreak. The government sued the architect for the cost to replace the water and sewer lines (i.e., the work done negligently by the architect). The cost was not related to the contamination. Id. at 572. The costs for which Priority sought recovery arose from contamination and the resulting clean-up. James River Ins. Co. v. Ground Down Eng’g, Inc., Case No. 07-13207, at *5 (11th Cir. Aug. 20, 2008).
The appellate court gave little weight to the district court’s conclusion that it would be unconscionable to exclude coverage given that the contamination was not caused by Ground Down. The circuit court found that fault was not relevant and dismissed the district court’s concern that the policy would fail of its essential purpose if the claim were excluded by finding numerous professional services that would still be covered. Id.
The appellate court vacated the dismissal and remanded with instructions for the district court to enter an order granting summary judgment to James River. Id. at *6.
Stacey Turner is the Senior Associate in the firm’s Environmental Practice and a member of the firm’s Green Business Practice. Her primary focus is the redevelopment of environmentally impacted properties. She received her bachelor’s degree from the University of Florida, her law degree from the University of Michigan and master’s degree from Columbia University.