Lymtal Int’l Inc. v. Chubb Custom Ins. Co. (United States District Court, Western District of Oklahoma, February 15, 2011)
This environmental coverage dispute stems from a dispute as to the applicability of the Total Pollution Exclusion contained in Lymtal’s commercial liability policy. The policyholder filed a breach of contract and bad faith action against its insurer, Chubb, for failing to provide it with a defense in a state court products liability action. Chubb moved for summary judgment arguing that the pollution exclusion applied to bar coverage, and therefore did not breach its contractual obligations under the insurance contract.
The policyholder manufactured chemicals that when mixed together formed an rubberized industrial coating. The product was distributed through retailers to professionals, who applied the product using a high pressure paint sprayer. An individual who purchased the product sued the retailer in Oklahoma district court, asserting claims of defective design and manufacturing and failure to warn due to bodily injuries sustained when he was exposed to airborne particles during the spraying process.
The LymTal policy contained an exclusion for “bodily injury, property damage, advertising injury or personal injury arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” When the insurer denied LymTal's request for defense and indemnification, relying on the policy's pollution exclusion, plaintiff filed this breach of contract action.
Specifically, the insurer asserted that it did not breach its contractual obligations because the pollution exclusion “unambiguously precludes coverage for bodily injury arising from the discharge, release or escape of pollutants which explicitly includes vapors, fumes or chemicals.” Significantly, Chubb further argued that Michigan, unlike some jurisdictions, interpreted the pollution exclusion to preclude coverage for non-traditional exposure to pollutants. Conversely, the policyholder contended that the court must defer its ruling on Chubb's motion because it was entitled, under Michigan law, to conduct discovery regarding the existence of a latent ambiguity in the exclusion.
The district court, in relying on Shay v. Aldrich, 487 Mich. 648, (Mich. 2010), stated, "[a] latent ambiguity … is one that does not readily appear in the language of a document, but instead arises from a collateral matter when the document's terms are applied or executed." The district court further noted that the Michigan Supreme Court has applied the latent-ambiguity doctrine when extrinsic evidence demonstrated that there was an ambiguity concerning the identity of the intended beneficiary of a promise in a contract.
Chubb argued that the controlling precedent of Shay should be limited to its facts and not applied universally. However, the district court held that while the full extent and application of the Shay holding was unclear, the policyholder had made a sufficient showing to invoke that aspect of Michigan law which allowed the use of extrinsic evidence to identify the existence of a latent ambiguity. The court further noted that the policyholder asserted that the construction of the contract urged by Chubb would “eviscerate coverage for the sole product LymTal manufactured and render coverage illusory.” Consequently, based on the Michigan precedent, plaintiff made a “credible claim that the pollution exclusion rendered coverage under the policy illusory,” and that a different interpretation from an otherwise unambiguous policy/exclusion language was possible. Based on these facts, the district court held that the policyholder was entitled to conduct discovery as to this issue.
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Paul Steck and Joanna Roberto