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The Villa Los Alamos Homeowners Association v. State Farm General Insurance Company

August 17, 2011


(Sonoma County Super. Ct. No. SCV243013) ]Trial Court: Sonoma County Superior Court Trial Judge: The Honorable Elaine Rushing

The opinion of the court was delivered by: Reardon, J.


In MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635 (MacKinnon), our Supreme Court determined that the standard pollution exclusion clause in a comprehensive general liability (CGL) policy was intended to exclude coverage for injuries resulting from events commonly regarded as environmental pollution. The court therefore rejected a broader, literal interpretation of the clause that would foreclose coverage for any and all injuries arising from harmful substances. (Id. at pp. 649, 653.) So construed, the court further held that it was unlikely a reasonable policyholder would think that the activity in question--namely, the normal but negligent spraying of pesticides around an apartment building in order to kill yellow jackets--was an act of pollution. (Id. at p. 654.)

Today we are asked to decide whether MacKinnon's interpretation limiting the scope of the pollution exclusion in a standard CGL policy to environmental pollution also governs the interpretation of a comparable pollution exclusion in a first party property insurance policy. We conclude that it does.

We must further decide whether the disturbing of asbestos during the scraping of acoustical "popcorn" ceilings in a three-story, 18-unit residential building, in which asbestos fibers were released into the air, the common area hallways and stairwells, individual units, and out to the common areas and public spaces and a private street outside building, constitutes environmental pollution. We likewise conclude that it does, and hence the pollution exclusion in the first party property insurance policy of appellant The Villa Los Alamos Homeowners Association (Association) did apply to preclude coverage for remediation cleanup work. Accordingly, we affirm the judgment in favor of respondent State Farm General Insurance Company (State Farm).


A. The Association and its Policy

The Association is a California nonprofit corporation whose purpose is to manage, operate, maintain and repair the Association's 94-unit condominium complex. State Farm insured the Association under a "Condominium/Association Policy" for the period January 15, 2006 through January 15, 2007. This was a comprehensive policy that provided both coverage for first party property losses, as well as third party business liability claims, subject to the policy's exclusions and limitations.

Under section I of the policy, State Farm agreed to insure "for accidental direct physical loss" to buildings and structures and business personal property owned by the Association and caused by an insured loss, unless specifically limited or excluded by the policy. This is an " 'open peril' " form of policy, analogous to an " 'all-risk' " policy, in which the insurer provides coverage for all losses not specifically excluded by the policy. (Julian v. Hartford Underwriters Ins. Co. (2005) 35 Cal.4th 747, 751 & fn. 2.) The coverage language in this type of policy is thus deemed to be quite broad. (E.M.M.I. Inc. v. Zurich American Ins. Co. (2004) 32 Cal.4th 465, 470 (E.M.M.I).) Section I exclusions included the following pollution exclusion: "2. We do not insure under any coverage for any loss caused by one or more of the items below: . . . l. the presence, release, discharge or dispersal of pollutants, meaning any solid, liquid, gaseous or thermal irritant or contaminant, including vapor, soot, fumes, acids, alkalis, chemicals and waste . . . ."

B. Scraping of Acoustical Ceiling

In 2006 the Association contracted with Cal Coast Construction (Cal Coast) to scrape the "acoustical (popcorn) ceilings and stairways" in building 300, a three-story, 18-unit affair. The Association leadership was aware that there was some asbestos in the ceiling, and a resident was privy to a report that alleged the spray-applied acoustical material (SAAM) contained less than one percent asbestos. Cal Coast commenced its work in June 2006 and in the process disturbed asbestos contained in the acoustical ceilings, releasing asbestos fibers into the air, the common area hallways and stairwells, individual units in building 300, and the common areas and public spaces outside the building. The Bay Area Air Quality Management District (District) responded to building 300, cited Cal Coast and removed the company from the project. It ordered the Association to perform a comprehensive abatement of the building, including all common areas and separate interest areas, individual units, and residents' personal property.

The Association retained Forensic Analytical to investigate the nature and extent of the contamination and to make recommendations for remediation. The firm confirmed that comprehensive abatement was needed. Its investigation revealed the presence of SAAM debris throughout building 300, "including corridors, stairwells, in the residential units, HVAC system, and in the front portion of the exterior grounds of the building." The SAAM debris outside building 300 was present in the rock gardens, on sidewalks, in bushes and grass in front of the building, and in parking lots and a private street. "Laboratory testing confirmed the debris contain[ed] asbestos (trace to 2% chrysotile)."

Forensic Analytical recommended evacuation of all tenants in building 300; the cleaning and testing of all contents; removal and proper disposal of all carpets; removal of remaining SAAM in the hallways and stairwells; the cleaning of all vertical and horizontal surfaces as well as the HVAC systems; and the cleaning of the front areas of the building (rock garden, sidewalks, parking lot, and street).

The Association hired a contractor to perform the clean-up protocol outlined by Forensic Analytical, and pursuant to District requirements.

C. Litigation

Meanwhile, the Association demanded that Cal Coast retain an environmental hygienist and abatement company to clean and abate building 300, but the company refused. Without success the Association also tendered claims to State Farm, its insurance carrier. The insurer denied coverage under the first party property provisions as well as the business liability portion of the policy. Ultimately the Association paid $650,000 to fully clean and abate building 300.

The Association sued Cal Coast; Cal Coast cross-complained against the Association and Golden Pacific Association Management (Golden Pacific), the Association's property manager; and Golden Pacific tendered the cross-complaint to the Association for defense. The Association in turn tendered the cross-complaint, and Golden Pacific's request for defense, to State Farm, and asked for reconsideration of the initial denial of the first party coverage claim for remediation expenses. Correspondence flurried back and forth from mid-2007 through early 2008, with the Association repeatedly providing additional requested information and asking State Farm to accept tender of the third party claims and reevaluate first party coverage. In the end State Farm denied coverage for both sets of claims, asserting as to the property damage claims that the total pollution exclusion and faulty workmanship exclusion barred coverage.

Thereafter the Association sued State Farm, asserting causes of action for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief. In the meantime, the Association's action against Cal Coast went to trial; it won a judgment of over $600,000, but the contractor was insolvent and its insurance carrier denied coverage because the policy contained an asbestos exclusion disclaiming coverage for any "asbestos-related injury. . . ."

State Farm moved successfully for summary adjudication in the instant action as to the first party claims. The trial court granted summary adjudication on the first party claims, ruling that "the test for whether the pollution exclusion excludes coverage is based upon the type of pollutant and whether it is released in a way that constitutes (environmental) pollution." According to the court, this state considers asbestos to be a pollutant, and more significantly, that it is a pollutant "is a fact of common knowledge of which the court . . . may take judicial notice." As to the manner in which the asbestos was released, the court concluded "it is irrelevant whether it was negligent or intentional or a one-time incident. What appears relevant is the scope of the degradation--i.e., was it contained inside or did it reach the outside environment? The undisputed facts . . . establish that the asbestos release created 'environmental pollution' as it was airborne and was found in the street, driveways, gardens, sidewalk, etc."

The Association dismissed with prejudice its third party claims, the parties stipulated to the dismissal and the court entered judgment in ...

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