Ludwig Wittgenstein famously declared that “[t]he world is everything that is the case.” In three recent cases involving liability policies, courts remind us that injury can occur beyond the limits of the world that consists of “property”—or even of “substance.”
1. PPI Technology Services, L.P., was hired to “assist in well-planning” on three oil leases in Boudreaux, Louisiana. Its responsibilities included overseeing the drilling of wells. When PPI dug an empty well, which had to be plugged and abandoned, it turned out that the company had been working on the wrong lease. In lawsuits in the 347th District Court of Nueces County, Texas, and the 32nd District Court of Terrebonne Parish, Louisiana, the operator of the leases, together with certain non-operating interests, alleged that PPI’s negligence in towing the drilling rig had produced a “dry hole” and “property damage.”
PPI sued its liability insurer for coverage. The case was governed by Texas law, which applies the “eight corners” rule to decide whether an insurer has a duty to defend: Coverage is decided solely by the facts alleged in the underlying complaint and the language of the liability policy. In this case, the underlying plaintiffs alleged, in effect, that they had wasted millions of dollars drilling for oil in the wrong location, but the policy defined “property damage” as “physical injury to tangible property including the loss of use of that property.” Although the complaints also used the term “property damage,” the Court of Appeals for the Fifth Circuit held that this phrase, in the absence of meaningful factual allegations, did not establish damage to property. In PPI Technology Services, L.P. v. Liberty Mut. Ins. Co., No. 12-40189 (5th Cir. Nov. 29, 2012), the court affirmed dismissal of the coverage action.
2. In Arizona, an insured polluter settled a class action by nearby property owners, who did not allege that their properties had been physically affected by the pollution, but who claimed they would now have difficulty selling them, because they were above or near a plume of pollutants in the groundwater. In Nucor Corp. v. Employers Ins. Co. of Wausau, Nos. 1 Ca-CV-10-0174 and 1 Ca-CV-10-0454 (Ariz. App. Ct. Nov. 23, 2012), an Arizona court found that the property owners’ suit did not assert a claim that they had been injured “because of property damage” within the meaning of the polluter’s liability policy.
The court acknowledged several cases in which coverage for “property damage” was extended to claims for economic losses that arise out of damage to the property of a third party. But where, as here, there had been no “actual encroachment” onto the plaintiffs’ property, the court held that the connection between the economic loss and the third-party property damage was simply “too attenuated.”
3. Three guests at a Quality Suites hotel in Orlando, Florida, were exposed to Legionnaire’s Disease while using the hotel’s outdoor spa. All three contracted the disease, and one of them died. The hotel’s liability insurer disclaimed any duty to defend or indemnify, on the ground of two exclusions: a “pollution exclusion,” which covered bodily injury claims based on the release or dispersal of “any solid, liquid, gaseous or thermal irritant or contaminant,” and a “fungi/bacteria” exclusion, which covered injury “which would not have occurred . . . but for exposure to . . . bacteria on or within a building or structure.”
In Westport Ins. Corp. v. VN Hotel Group, LLC, No. 11-14883 (11th Cir. Oct. 25, 2012), the Eleventh Circuit found, as a matter of law, that the insurer was responsible both to defend and to indemnify. It held that the pollution exclusion did not apply to bacteria, because a bacterium is neither an “irritant or contaminant” nor “a ‘solid, liquid, gaseous, or thermal’ substance.” (No, really.) It also found that applying the pollution exclusion to bacteria would render the fungi/ bacteria exclusion superfluous.
The non-superfluous fungi/bacteria exclusion did not apply, however, because the court found that the hotel’s outdoor spa did not qualify as a “building or structure” within the meaning of the exclusion. Under Florida law, exclusions must be construed against the insurer, even more strictly than coverage clauses. On that basis, the court found that the disjunctive phrase, “building or structure,” had to be construed in this way: “[T]he term ‘building’ modifies the term ‘structure’ and shows that ‘structure’ is to be narrowly construed.”
When a court is determined to find coverage, it seems, all that is solid melts into air.