September 25, 2014 Articles

    Asbestos Plaintiffs May Still Collect on a Dissolved Corporation's Insurance

    After a corporation dies, its liability and therefore its insurers’ liability die too, right? Not under Delaware corporate law

    by Kenneth M. Gorenberg

    The Third Circuit recently decided whether coverage exists under a commercial and general liability policy for the damage caused by a decomposing body. In Creagh, the Third Circuit rejected the insureds’ claim that the repressive and permeating odor from decomposition was responsible for their loss. Certain Underwriters at Lloyds of London Subscribing to Policy No. SMP3781 v. Creagh, 563 F.App’x 209 (3d Cir. 2014) (unpublished). Instead, the Third Circuit relied on broad exclusionary language in ruling that the exclusions for seepage and microogranisms barred recovery for the damage to an insureds’ building that was caused by a tenant’s decomposing body.

    Background

    In Creagh, a property owner and building manager purchased a CGL policy for a four story building containing apartments and offices. In one of the second floor apartments, the insureds’ tenant collapsed over his toilet and died without detection. Nearly two weeks passed before the body was discovered. In the meantime, the tenant’s body began to decompose and the accumulation of bacteria expelled biological material from the deceased’s body. The biological material infiltrated the kitchen and bedroom of the deceased’s apartment. It also leaked into the bathroom of a different tenant located directly below the deceased’s apartment. The biological material caused extensive damage to the apartment building, which required renovations totaling $180,000. When the insureds submitted a claim for this amount, the insurer denied it under the exclusions for microorganisms, seepage, and pollution. The insurer sought a declaration that the policy did not cover the damage. The U.S. District Court for the Eastern District of Pennsylvania noted that there was no dispute that the insureds met their initial burden of showing a loss within the scope of the policy. Instead, the case focused on whether the exclusions precluded recovery.

    Exclusion for Microorganisms

    The insurer asserted that three exclusions applied: microorganisms, seepage, and pollution. The exclusion for microorganisms provided: “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, including but not limited to any substance whose presence poses an actual or potential threat to human health.” The Third Circuit affirmed the district court, finding that contamination resulted from the deceased’s bodily fluid, which contained bacteria and microorganisms. The insurer presented expert testimony that bowel bacteria turned natural fluids into purged fluids. The court held that it was uncontroverted that the purged fluids caused the extensive damage and that the purged fluid was caused by microorganisms. As a result, the court found the exclusion for microorganisms applied to the loss.

    Exclusion for Seepage

    The court then considered the seepage exclusion. The seepage exclusion provided in pertinent part that “this 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 policy further stated that the term “any kind of seepage” includes “the presence, existence, or release of anything which endangers or threatens to endanger the health, safety, or welfare of persons or the environment.” The policy also excluded “coverage for losses caused by seepage of, inter alia, ‘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.’” 

    The Third Circuit concluded that bodily fluids are regulated by OSHA as hazardous and dangerous materials. As a result, the court held that the loss unambiguously fell under the exclusion for seepage. The pollution exclusion was not considered, since the court found that the exclusions for microorganisms and seepage applied.

    Insureds’ Attempt to Circumvent the Exclusions Rejected by Court

    In response, the insureds attempted to argue that the decomposing body caused damage to the buildings not only through the deceased’s bodily fluids but also by the smell caused by decomposition. The Third Circuit rejected this claim and applied the broad language found in the microorganism exclusion: “loss . . . directly or indirectly arising out of or relating to . . . microorganisms.” The Third Circuit stated that “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.” As a result of the broad language, the court applied the phrase “directly or indirectly arising” to bar coverage for other kinds of losses. In addition, the court applied the broad language in the seepage exclusion: “loss . . . which arises from any kind of seepage” in a similar way. 

    Keywords: insurance; coverage; microorganisms; seepage; exclusions; decomposition; Third Circuit

    Peter J. Mitchell is an associate with Podvey, Meanor, Catenacci, Hildner, Cocoziello & Chattman, P.C., Newark, New Jersey.

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