Canadian Underwriter

Insurer argues smoke from fire is pollution to avoid payout

May 21, 2015   by Alan Prochoroff

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A Michigan court didn’t like how an insurance company was blowing smoke up its bench as a defence. In the case of Hobson v. Indian Harbor Ins Co, lawyers for the insurer actually suggested that smoke is pollution, so it should be excluded from the policy.

In the case, Charlie and Mary Hobson sued for damages after they were injured in their apartment building by smoke from a fire, which was negligently caused by the property owners’ employees. Indian Harbor wrote the commercial general liability policy for the building and sought to escape payment by saying the Hobsons’ injuries included smoke inhalation injuries, which was excluded under the policy’s pollution exclusion.

This didn’t carry much weight with the trial court, and you can see from the exchanges between the trial court and Indian Harbor’s counsel that this was never going to fly.

The Court: “Why would this person buy your insurance?… And then he has a fire and somebody is injured and you say, ‘Oh you’re not covered.’”

[Counsel for insurance defendants]: “What’s critical here is the injury that’s being alleged in the underlying complaint is about the inhalation of the smoke.”

The Court: “Which happens in fires.”

And when the company’s counsel admitted the Hobsons would be covered if they had been burned… well, the trial court just found that reasoning interesting, to say the least.

The Court: “That’s an absurd result in reading this policy. They couldn’t have intended this when you have this total pollution exclusion endorsement which refers to pollution as being something that has to be discharged, dispersed, seeped, migrated, releases [sic] or escaped. None of which happened here; it was a fire. A fire has smoke.”

The Michigan Court of Appeals didn’t agree with the company’s logic either, agreeing with the trial court that the Hobsons’ injuries allegedly arose from the negligence of the insured, which resulted in a fire.

Pollution exclusions, the higher court noted, are intended to protect insurers from having to pay for the enormous expense of reversing more than 100 years of industrial pollution.

Trying to hang smoke on a pollution exclusion, the appellate court reasoned, amounted to extending the scope of the pollution exclusion beyond the scope of its original intent and beyond the plain meaning of the language contained in the exclusion. “Indeed, it is impossible to separate smoke from fire in instances where the fire breaks out within the premises of the insured.”

And besides, the appellate court said, the Hobsons were saying their injuries resulted from the negligence that resulted in the fire, not from pollution. “Plaintiffs were injured when the fire and smoke engulfed them. It did not pollute them.”

Judge Peter O’Connell, writing in a separate opinion, concurred, affirming “the ageold relationship” between smoke and fire. “The insurance defendants’ entire argument regarding the change in the pollution clause constitutes smoke and mirrors,” he wrote. “Where there is fire, there is smoke.”

Besides, O’Connell pointed out, if Indian Harbor’s argument were to carry the day, its “unique interpretation of the policy would certainly lead to coverage disputes when a fire smolders but does not ignite, causing smoke damage but no damage by flames.

“The insurance [company’s] interpretation of its fire insurance policy would arguably negate liability for smoke damage from all fires they purportedly insure against,” O’Connell reasoned.

Copyright 2015 Rogers Publishing Ltd. This article first appeared in the May 2015 edition of Canadian Insurance Top Broker magazine

This story was originally published by Canadian Insurance Top Broker.