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In PBM Nutritionals, LLC v. Lexington Ins. Co., No. 110669 (Va. Apr. 20, 2012), the Virginia Supreme Court affirmed the Circuit Court's judgment that pollution exclusions barred coverage for a multi-million dollar loss resulting from a manufacturing incident that contaminated a number of lots of infant formula, which all had to be destroyed as a result.  In so doing, the Court rejected the arguments that the pollution exclusions are ambiguous because they are overly broad and could exclude nearly any loss, and that the Circuit Court erred in failing to limit the scope of the pollution exclusion endorsements to traditional environmental losses in order to avoid the problem of illusory coverage. 

Instead, the Court agreed with the insurers and the Circuit Court that the plain text of the endorsements should be applied.  After citing to City of Chesapeake v. States Self-Insurers Risk Retention Group, 271 Va. 574, 628 S.E.2d 539 (2006), the Court reasoned that none of the pollution exclusions referenced any terms such as "environment", environmental", "industrial," or any other limiting language suggesting that the exclusions are limited to "traditional" rather than "indoor" pollution.  There was no language suggesting that the discharges or dispersals of pollutants or contaminants must be into the environment or atmosphere.    The Court concluded that according to their plain language, the pollution exclusions are not restricted to traditional environmental pollution, and held that the Circuit Court did not err in refusing to limit the insurers' pollution exclusion endorsements to traditional environmental contamination losses.

In PBM Nutritionals, the contamination occurred when superheated water caused water filters to disintegrate into their constituent components of cellulose, melamine, and other materials, which infiltrated the water from which the lots of infant formula were manufactured.  Quality control testing discovered the contamination, and all batches manufactured during that period had to be destroyed.

This decision confirms that Virginia will not follow other jurisdictions which have limited pollution exclusions to traditional, environmental pollution.
 

In Minnesota Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP, No. 10-2404 (4th Cir. March 29, 2012)(unpublished), the Court affirmed the District Court's award of summary judgment to the insurer, holding that the insurer does not have a duty to defend the insured law firm because the complaint falls entirely within the insurance policy's Business Enterprise Exclusion. 

In the underlying suit, the defendant attorneys were alleged to have advised their clients to transfer the ownership of certain patents for wireless email technology to a shell company, NTP, in which the clients held no interest, in order to protect the patents from creditors.  Later, NTP filed a patent infringement action against RIM, alleging that RIM's Blackberry system infringed on the wireless email technology patents.

RIM settled the suit for $612.5 million and received a perpetual license.   When the defendant attorneys refused to share the settlement with the plaintiffs, the plaintiffs sued for breach of fiduciary duty, breach of contract, unjust enrichment, and promissory estoppel.

The Business Enterprise Exclusion  stated that the policy did not provide coverage to:

  any CLAIM arising out of PROFESSIONAL SERVICES rendered by any
  INSURED in connection with any business enterprise:
  (a) owned in whole or part;
  (b) controlled directly or indirectly; or
  (c) managed, by any INSURED, and where the claimed DAMAGES resulted from
  conflicts of interest with the interest of any client or former client or with the
  interest of any person claiming an interest in the same or related business
  enterprise.
 
The Fourth Circuit found that each element of this exclusion was met within the four corners of the Complaint.  There was no dispute that the case arose out of professional services that the insureds provided to the plaintiffs.  Those services included counseling as to changing the ownership of certain patents in order to avoid their creditors.  The Court also found that the professional services were rendered "in connection with" a business enterprise, and that the insureds owned, controlled or managed the business enterprises that were involved.   Finally, the Court found that the asserted damages surely resulted from conflicts of interest, because the defendant attorneys allegedly obtained complete ownership and control of their clients' assets and exploited those assets for personal benefit, violating professional ethics rules governing conflicts of interest.  See Va. R. Prof. Conduct 1.8(a), (b), and (j).

Business Entreprise Exclusions are discussed in more detail here.

To update a previous post dealing with the application of the pollution exclusion in a Chinese drywall case, in Travco Ins. Co. v. Ward, No. 10-1710 (4th Cir. March 1, 2012), an insured had appealed from an order granting summary judgment to his homeowner's insurer in a Chinese drywall case.  The District Court found that the insured had suffered a loss within the policy's coverage, but concluded that coverage was excluded by four provisions:  the latent defect exclusion; the faulty material exclusion; the corrosion exclusion; and the pollution exclusion. 

The Fourth Circuit in Travco recently certified the coverage issues to the Supreme Court of Virginia, including the following: for purposes of interpreting an "all risk" homeowners insurance policy, is any damage resulting from the Chinese drywall unambiguously excluded from coverage under the policy because it is loss caused by: . . . ('pollutants,', where pollutant is defined as 'any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste'?

On appeal, the insured's argument on the pollution exclusion is that it is ambiguous in the context of product liability claims, because the exclusion was intended to limit or exclude coverage for past environmental contamination.  The insured relies on Unisun Ins. Co. v Schulwolf, 53 Va. Cir. 220 (Va. Cir. 2000), in which the Circuit Court declined to apply a pollution exclusion to lead-based paint.

A very similar issue was certified in Nationwide Mut. Ins. co. v. Overlook, but the Supreme Court of Virginia declined to accept the certified question of law, .  See Builders Mut. Ins. Co. v. Parallel Design & Dev. LLC, 785 F. Supp. 2d 535, 545 n. 5 (E.D. Va. 2011). 

 In First American Title Insurance Company v. Western Surety Company, No. 111394 (March 2, 2012), the Virginia Supreme Court addressed three questions of law certified by the United States Court of Appeals for the Fourth Circuit.  The Court held: (1) that the Virginia Consumer Real Estate Settlement Protection Act ("CRESPA") does not provide for a private cause of action against a surety and surety bond executed pursuant to CRESPA; (2) that Virginia law nonetheless permits a common law breach of contract cause of action against a CRESPA surety and surety bond; and (3) that a title insurance company has standing as subrogee of its insured to maintain a cause of action against a CRESPA surety and surety bond.

 
The case arose out of a real estate transaction involving an owner who sought to refinance his existing mortgage through SunTrust Mortgage, Inc.  First American Title Insurance Company ("FATIC") provided title insurance for the refinancing through its title agent, First Alliance Title Company ("First Alliance").  Pursuant to CRESPA requirements, First Alliance obtained a $100,000 surety bond from defendant Western Surety Company ("Western").  At settlement, funds which were designated to pay off the original mortgages on the property were diverted.  The original mortgages were not paid, and the original deeds of trust were not released. As a result, SunTrust's deeds securing the refinance indebtedness were behind the original deeds in priority. 

The property owner subsequently defaulted, and the original mortgagor foreclosed, resulting in a loss of $734,296.09 to SunTrust.  FATIC paid SunTrust the full amount of the loss pursuant to the title insurance policy, and made a formal demand upon Western for the full $100,000 of the CRESPA surety bond.  Western refused to pay, asserting that FATIC could not bring a private cause of action against a statutory CRESPA surety bond.  FATIC brought this action against Western on its own behalf, and also as a subrogee of SunTrust, asserting that it became subrogated to SunTrust's right after paying in full SunTrust's claim under the title insurance policy.

 
The parties disputed that FATIC could bring a common law claim against the CRESPA surety bond, and also that FATIC had standing to assert the cause of action.  At trial, the District Court found in favor of FATIC, and entered judgment in its favor for the full $100,000 amount of the CRESPA bond.  On appeal, the Fourth Circuit certified the three questions of law to the Supreme Court of Virginia.

 
The Court first held that CRESPA does not provide for a private cause of action.  CRESPA expressly authorizes only licensing authorities to fine or otherwise penalize a settlement agent that violates its provisions.  Accordingly, the Court found that CRESPA does not recognize a private cause of action against a surety or surety bond executed pursuant to its provisions. 
Next, the Court found that under certain circumstances, Virginia common law does allow for a cause of action to be maintained against a CRESPA surety or surety bond.  The Court noted that the express language of a statute must expressly state that the statute abrogates a common law cause of action.  CRESPA contains no such express language.  The general rule in Virginia that any bond required of a surety is at least as good as a common law voluntary contractual obligation.  Accordingly, the Court held that while CRESPA does not expressly authorize a private cause of action against surety bonds, Virginia common law does permit the assertion of a common law breach of contract claim.

 
Finally, the Court found that title insurance companies may have standing as subrogees of their insureds to maintain a common law cause of action against a CRESPA surety bond.    CRESPA's surety bond requirement exists to protect parties with an interest in real estate transactions.  Title insurers are not parties to real estate transactions and thus are not among the parties CRESPA surety bonds are intended to protect.  Because a title insurer is not a protected party under CRESPA, it does not have standing in its own right to maintain a cause of action.  However, the Court nonetheless concluded that a title insurer has standing, not in its own right but as a subrogee of its insured, to maintain a cause of action against a CRESPA surety bond.

 
Therefore, under its ruling in First American Title,  the Supreme Court recognized that certain entities may bring a common law cause of action for breach of contract against a CRESPA surety bond.  Additionally, the Court recognized that certain parties may have standing to bring such actions, not in their own right, but as subrogees of their insureds.

In Christy v. Mercury Casualty Company, No. 102138 (March 2, 2012), the Supreme Court of Virginia held that an exclusion in an automobile insurance policy barred the insured from receiving any payment for medical expenses where a portion of medical expenses had already been paid by workers' compensation benefits.

 
The plaintiff police officer was a passenger in a car driven by a Washington County sheriff's deputy.  The car was struck from behind, and the plaintiff sustained a number of injuries.  The parties did not dispute that the accident arose out of and occurred during the course of the plaintiff’s employment with the town.  Among other injuries, the plaintiff’s physician opined that he experienced a tear of the labrum in his left shoulder as a result of the accident, that required surgery.

 
At the time of the accident, the plaintiff was covered by three different insurance policies.  The Town of Abington obtained its workers’ compensation coverage through the Virginia Municipal League Insurance Programs ("VMLI").  The plaintiff received his primary health insurance coverage through a physician-hospital organization ("PHO").  Additionally, the plaintiff was insured under an automobile liability policy issued by Mercury Casualty Company.  The Mercury policy included coverage for medical expenses incurred as a result of injuries arising out of the use of a motor vehicle.  In relevant part, the policy provided that it did not apply "to bodily injury sustained by any person to the extent that benefits therefor[] are in whole or in part payable under any [workers'] compensation law."

 
The workers’ compensation insurance carrier, VMLI, paid a portion of the plaintiff's total medical expenses.  However, VMLI denied claims for the plaintiff’s surgery to repair his labrum, asserting that the injury was a pre-existing condition and therefore not compensable under the workers’ compensation policy.  The balance of the plaintiff's medical expenses was either paid or resolved by the plaintiff and the PHO.

  
The plaintiff subsequently submitted a claim to Mercury demanding payment under the medical expense coverage of his policy.  Mercury denied the claim, asserting that the exclusion provision barred coverage due to the fact that some of the plaintiff’s medical expenses were, in part, payable under workers’ compensation law.

 
On appeal, the plaintiff argued that the exclusion applied only “to the extent” that some portion of his medical expenses were paid by workers' compensation benefits.  The plaintiff argued that the exclusion acted only to offset any amount actually paid by the workers' compensation carrier, without regard to whether he successfully pursued a claim for all medical expenses.  In doing so, the plaintiff argued that the policy language operates to prevent a "double recovery" by not allowing the insured to receive full payment for medical expenses from both a workers' compensation provider as well as an automobile insurance provider.

 
Defendant Mercury argued its interpretation of the exclusion, asserting that it excluded all coverage if any portion of plaintiff’s medical expenses were subject to workers’ compensation.

   
The Court ultimately found in favor of defendant Mercury Casualty, holding that the policy exclusion limited the scope of coverage for medical expenses, rather than the amount of coverage in the form of a set-off against workers’ compensation benefits.  The court noted the fact that VMLI did pay a portion of plaintiff’s medical expenses pursuant to its workers' compensation policy.   The court also noted that there was no dispute over whether the accident arose out of and in the course of the plaintiff's employment.  Accordingly, the Court held that the clear and unambiguous language of the exclusion permitted defendant Mercury Casualty to deny coverage where the expenses were payable under workers’ compensation law.   Thus, the exclusion permitted Mercury Casualty to deny coverage for any expenses which would have been subject to workers' compensation coverage by VMLI without regard to whether all of those expenses were actually paid by VMLI.

Whenever any insurer on a policy of liability insurance discovers a breach of the terms or conditions of the insurance contract by the insured, the insurer shall notify the claimant or the claimant's counsel of the breach. Notification shall be given within forty-five days after discovery by the insurer of the breach or of the claim, whichever is later. . . . Failure to give the notice within forty-five days will result in a waiver of the defense based on such breach to the extent of the claim by operation of law.