Water as a Pollutant

The United States District Court for the Eastern District of Virginia had to consider whether water would be considered a pollutant, and whether the damage claim arising out of the water would not be covered due to the pollution exclusion. This case is Nationwide Mutual Insurance Company v. Boyd Corporation, 2010 WL 331757 (E.D.Va.).

The underlying dispute concerns coverage for alleged damages caused to an adjacent property by land development in Virginia . Boyd, a builder and land developer, developed approximately 100 acres on land owned by Ramblewood Forest , LLC. The Lucks are owners of property adjacent to this land being developed by Boyd. In 2003, the Lucks began expressing concern with the impact of the development on a three acre recreational pond and bordering wetlands on their property. They requested Boyd place a turbidity curtain across the upper end of the pond. Boyd did so but the water runoff continued and the county inspector reported that the turbidity curtain was improperly installed and required repair. Boyd said that it would be corrected, but the problems continued through 2007.

In 2008, lawyers for the Lucks contacted Boyd, threatened a lawsuit, and alternatively, requested mediation. Mediation talks were held through March of 2009 but no acceptable resolution was made. During all this time, Boyd did not inform its insurance carrier, Nationwide, of any communications or actions regarding damages to the Lucks' pond or the threatened lawsuit. In March 2009, the Lucks did file a lawsuit, claiming $2,000,000 in compensatory damages and $350,000 in punitive damages. Boyd then notified Nationwide of the lawsuit. Nationwide denied coverage on several grounds, stating that the claim was not covered due to the pollution exclusion and that the late notice violated the policy provision requiring notice to the insurer as soon as practicable. Nationwide brought this suit against Boyd seeking a declaratory judgment that it had no duty to defend or indemnify Boyd.

Before the District Court, Nationwide argued that the pollution exclusion prevented any coverage in the underlying claim. Boyd countered that the Luck complaint alleges damages from excess water flow and stormwater runoff, and these are not pollutants as defined in the liability policy. When the court reviewed the policy wording, it concluded that a reasonable person would not classify flood waters alone as pollutants and so, the pollution exclusion is not applicable to the underlying claim. Nationwide was not therefore, entitled to a judgment as a matter of law with regards to the pollution exclusion.

Nationwide also argued that Boyd breached the policy terms by failing to notify Nationwide of the dispute and the threatened lawsuit as required by the policy. The policy required notice be given to the insurer as soon as practicable and Nationwide argued that this meant it should have been notified of the details of the dispute immediately following the date that counsel for the Lucks wrote Boyd requesting action be taken over the alleged water damage. Boyd did not state specifically to the court when in its view notice became required.

The District Court said that the duty to notify an insurer arises when an incident occurs that was sufficiently serious to lead a person of ordinary intelligence and prudence to believe that it might give rise to a claim for damages covered by the insurance policy. In this instance, the court noted, the events that led to the eventual claim for damages took place over almost six years. Moreover, the letter from the law firm to Boyd that threatened a lawsuit should have been the serious incident Boyd heeded so as to notify Nationwide. The court found that the delay in notifying the insurer hindered its ability to investigate the claim and prepare for trial. The court said that Nationwide was prejudiced by the delay and Boyd did not submit any extenuating circumstances for the delay in notification. The court found the delay in notification was unreasonable and in violation of the policy requirements and so, the policy did not provide coverage for any liability in the underlying lawsuit against Boyd. Nationwide had no duty to defend or indemnify Boyd.

Editor's Note: This decision from the U.S. District Court shows that coverage may be denied to an insured even if an alleged exclusion is found not to be applicable. An insurance policy contains an insuring agreement, exclusions, conditions, and definitions that all need to be reviewed in any coverage dispute between an insured and an insurer. In this case, it was the notice condition that proved fatal to the insured's claim of coverage.

Most states require that the insurer show prejudice by the insured's filing late notice before denying coverage. Virginia is a state where the insurer need not show prejudice, but here, based on the facts before it, the court did find that the insurer was prejudiced by the delay because it was unable to participate in the mediation between Boyd and the Lucks' attorney, mediation where Nationwide could have assisted in settlement discussions and learn about the strength of the opposing party's case.

Prejudice from a late notice has to be proven by the facts of each situation, but insureds would be wise to notify insurers as soon as an incident arises that could end up in a claim or lawsuit. This would prevent many coverage disputes between an insured and its insurer.