In Mellen v. Northern Security Insurance Co., Inc., 2015 WL 1869572 (N.H. April 24, 2015), the Supreme Court of New Hampshire issued a declaratory judgment that a homeowners policyholder was entitled to first-party coverage for cat urine odor. The court further held that coverage was not barred by the pollution exclusion.
The policyholders leased an apartment unit, but the tenant moved out in the middle of the lease term due to cat urine odor from the policyholders’ downstairs neighbor. After the tenant moved out, the policyholders occupied their unit and also noticed the odor and filed a claim. Thereafter, a health inspector determined that the odor constituted a “health problem,” requiring the policyholders to temporarily move out of their apartment until the issue could be resolved. Although the policyholders eventually sold the unit, they contended that the sale price was significantly reduced as a result of the odor. The carrier denied the policyholders’ claim on the bases that: (1) cat urine odor did not constitute “physical loss” to the insured property; and (2) coverage was otherwise excluded by the pollution exclusion.
The issue before the court was whether the odor, which did not cause any structural damage, constituted “direct physical loss” within the meaning of the relevant policy language. The court first noted that the term “direct physical loss” was not defined by the policy and, therefore, was to be given its ordinary meaning. Relying on the dictionary definition of “physical”, i.e., “of or pertaining to matter, or the world as perceived by the senses; material as [opposed] to mental or spiritual”, the court held that odor could constitute “direct physical loss”. The court reasoned that the term was not restricted to tangible changes that could be seen or touched; it was broad enough to encompass tangible changes that could be smelled. The court cautioned that these types of losses must be “distinct and demonstrable” in order to come within the coverage. The court remanded the issue to the trial court to determine whether the cat urine odor constituted a “distinct and demonstrable” physical change to the insured premises.
The court also found that the pollution exclusion did not preclude coverage for this matter. Finding first that the definition of “pollutant” as “any … irritant or chemical” was too broad, potentially rendering the clause ambiguous. Thus, the court construed the policy as a whole. Based on the exclusion’s use of words such as “discharge,” “dispersal,” “release,” and “escape,” which “are terms of art in environmental law which generally are used with reference to damage or injury caused by improper disposal of containment of hazardous waste”, the court agreed with the policyholders that the exclusion was ambiguous and did not preclude coverage.
Although the court’s interpretation of the pollution exclusion is generally consistent with other jurisdictions’ interpretations, the holding with respect to whether the cat urine odor constitutes “direct physical loss” is a fascinating development. The court’s determination not only means that intangible physical changes such as odor may implicate first-party coverage, but also that such a loss can be caused by damage originating outside of the insured premises.