United States 2nd Circuit Court of Appeals Reports
PARKS REAL ESTATE v. ST. PAUL FIRE, 05-5890-cv (2nd Cir.
12-21-2006) PARKS REAL ESTATE PURCHASING GROUP, PARKS
ASSOCIATES REAL ESTATE, INC., PARKS & ASSOCIATES REAL
ESTATE LTD., MAZAL GROUP, L.L.C., PARKS ASSOCIATES REAL
ESTATE, and NEWMARK & COMPANY REAL ESTATE,
Plaintiffs-Appellants, v. ST. PAUL FIRE AND MARINE INSURANCE
COMPANY, Defendant-Appellee, and NATIONAL UNION FIRE
INSURANCE COMPANY OF PITTSBURGH AND GREAT 17 NORTHERN
INSURANCE COMPANY, Defendant. No. 05-5890-cv. United
States Court of Appeals, Second Circuit. Argued: June 22,
2006. Decided: December 21, 2006.
Appeal from a summary judgment entered in the United States
District Court for the 23 Southern District of New York
(Preska, J.) dismissing plaintiffs-appellants’ Complaint in
an 24 action to recover under an insurance policy on a
claim for building damage caused by particulate 25 matter
emanating from the collapse of the World Trade Center Twin
Towers, the court having 26 determined that the claim was
barred by the policy’s contamination exclusion clause.
Vacated and remanded.
JOSHUA L. MALLIN (Lisa N. Wall, on the brief), Weg &
Mybers, PC, New York, New York, for Plaintiffs-Appellants.
ON A. BERK (Syed S. Ahmad, on the brief), 5 Hunton &
Williams, LLP, McLean, Virginia, for Defendant-Appellee.
Before MINER and CALABRESI, Circuit Judges, and RESTANI,
Chief Judge, U.S. Court of 21 Int’l Trade.[fn*]
[fn*] The Honorable Jane A. Restani, Chief Judge of the
United States Court of International Trade, sitting by
designation.
MINER, Circuit Judge
Plaintiffs-appellants Parks Real Estate Purchasing Group,
Parks Associates Real Estate, Inc., Parks & Associates Real
Estate Ltd., Parks Associates Real Estate, Mazal Group,
LLC, Newmark & Company Real Estate (collectively, “Parks”)
appeal from a summary judgment entered in the United States
District Court for the Southern District of New York
(Preska, J.) The action was brought to recover under a
first-party property insurance contract (the “Policy”)
between Parks and defendant-appellee St. Paul Fire and
Marine Insurance Company (“St. Paul”). Among the properties
insured by the Policy was a building at 90-100 John Street
in New York City (the “Building” or “Property”). On
September 11, 2001, as a result of the World Trade Center
collapse, a cloud of noxious particulate matter spread
throughout the downtown New York City area where the
insured Building is located. The particulate matter
apparently penetrated the Building and settled in its
mechanical and electrical systems. In this action, Parks
also sought to recover on claims against defendants
National Union Fire Insurance Company of Pittsburgh,
Pennsylvania, and Great Northern Insurance Company under
policies of insurance issued by those companies, but those
claims were dismissed. Following discovery, St. Paul
submitted a motion for summary judgment, arguing that
Parks’ claims for damage to the insured Building were
foreclosed by the contamination exclusion in the Policy.
Parks argued that the damage to the insured Building was
not caused by contamination within the meaning of the
contamination exclusion provision.
In granting summary judgment in favor of St. Paul, the
District Court determined that the particulate matter from
the World Trade Center collapse created a condition of
impurity that rendered the building unfit for use by the
introduction of unwholesome elements. The court determined
this damage was properly considered contamination for
purposes of the contamination exclusion clause in the
Policy, and St. Paul was entitled to deny coverage for the
loss claimed by Parks. The District Court also found that
the dominant efficient cause of the loss was not the
collapse of the World Trade Center but the infiltration of
the building by the particulate matter created by the
collapse. For the reasons that follow, we vacate the
judgment of the District Court and remand for further
proceedings consistent with this opinion.
BACKGROUND
The collapse of the World Trade Center Twin Towers
occasioned by the terrorist attack of September 11, 2001
caused a cloud of particulate matter consisting of the
pulverized contents of the fallen Towers to spread
throughout downtown Manhattan. The pulverized contents
included “hydroxyls (high pH), chlorides, sulfates,
organics, asbestos, lead, mercury, cadmium, quartz,
beryllium, and mineral wood.” The insured Building was
located a few blocks from the World Trade Center.
At the time of the September 11 attack, the Policy provided
that St. Paul would “[p]rotect covered property against
risks of direct physical loss or damage except as indicated
in the Exclusions — Losses We Won’t Cover section.”
Relevant to this appeal, the Policy went on to state in
pertinent part that St. Paul would cover the Parks’
“financial interest in the covered building or structure,”
and, specifically, “machinery and equipment that are a
permanent part of a building and are used to provide
building services such as elevators and heating equipment.”
Also covered were “fixtures or yard fixtures,” property
owned “to service or maintain” the insured building, and
“construction materials, supplies, and equipment” intended
to be used for repairing, modifying, or expanding the
insured building.
The exclusions listed in the Policy included the
contamination exclusion, which stated that “[St. Paul would
not] cover loss or damage caused by or made worse by any
kind of contamination of . . . products or property covered
by this insuring agreement. If a loss not otherwise
excluded results, [St. Paul will] pay for that resulting
loss.” Further, the Policy contained an exclusion entitled
“Wear — tear — deterioration —
animals” (the “Wear and Tear Exclusion”), which provided, in
material part, that: “[St. Paul will not] cover loss caused
or made worse by . . . corrosion.” Also listed in the
Policy was a mechanical breakdown exclusion (the
“Mechanical Breakdown Exclusion”), providing that St. Paul
would not cover loss of “covered property caused or made
worse by mechanical breakdown or failure.”
On September 18, 2001, Parks provided St. Paul with a Proof
of Loss, notifying St. Paul that the insured Building had
sustained damage in the amount of $16,594,118.00 and a
business interruption loss in the amount of $1,791,002.34.
Parks claimed that the insured Building had sustained
severe and extensive damage resulting from the collapse of
the World Trade Center. Specifically, Parks claimed that
the cloud of particulate matter and dust infiltrated the
interior and exterior of the Property. This damage,
according to Parks, was in the form of “corrosion,
destruction, excessive wear, increased maintenance and
repair of the architectural fa?‡ade, mechanical, electrical,
structural and Heat Ventilation and Air Conditioning
(‘HVAC’) systems and other equipment and machinery
including computers and related hardware pertaining to and
comprising the . . . Property and its surrounding environs.”
Shortly after receipt of the notice of proof of loss, St.
Paul investigated the claim and eventually advanced a
payment of $1,915,914 to Parks. Parks contended that this
payment did not fully cover its losses and that St. Paul
had breached the Policy. Accordingly, Parks filed its
Complaint in the Supreme Court of the State of New York,
County of New York, on January 15, 2004, seeking to recover
the balance of its loss — more than sixteen-million
dollars. After interposing its Answer to the Complaint, St.
Paul filed a Notice of Removal, by which it succeeded in
removing the case to the United States District Court for
the Southern District of New York.
In its Complaint, Parks alleged that the “particulate
matter from the [World Trade Center] infiltrated much of
the . . . Property causing damage in the form of erosion,
corrosion, destruction, excessive wear, increased
maintenance and repair of the architectural fa?‡ade,
mechanical, electrical, structural and Heat Ventilation and
Air Conditioning (‘HVAC’) systems and other equipment and
machinery including computers and related hardware
pertaining to and comprising the . . . Property and its
surrounding environs.” Parks alleged that “the elevators,
electrical and mechanical systems of its property . . .
have been damaged and will continue to be damaged.”
On December 15, 2004, following discovery, St. Paul moved
for summary judgment, arguing inter alia that the alleged
damage was “contamination,” and therefore, that the damage
Parks suffered was excluded from coverage under the Policy,
pursuant to the Contamination Exclusion. In St. Paul’s
motion for summary judgment, it also argued that the
Policy’s “Mechanical Breakdown” and “Wear and Tear”
exclusions also barred coverage of Parks’ losses.
Parks argued to the District Court in its memorandum of law
in opposition to St. Paul’s motion for summary judgment
that two independent reasons required denial of summary
judgment: (1) the Contamination Exclusion is ambiguous, and
the damage sustained was not properly considered caused by
contamination in any event; and (2) the efficient cause of
the damage was the collapse of the World Trade Center, a
covered peril under the Policy.
In opposition to St. Paul’s motion for summary judgment,
Parks referred to the report (the “Report”) prepared by
Parks’ expert, the RJ Lee Group (“RJ Lee”), describing the
causes of damage to the insured Building. RJ Lee was
retained by Parks to investigate the physical and
environmental condition of the Property. In the Report, RJ
Lee concluded that the particulate matter from the World
Trade Center collapse has an “unprecedented complexity and
is pervasively found in all building systems and
components, and presents an ongoing source of
re-entrainment and thus damage to cleaned or newly
installed mechanical systems.” The Report included the
following findings:
The corrosive, abrasive, and hazardous material
includes[,] but is not limited to, hydroxyls (high pH),
chlorides, sulfates, organics, abestos, lead, mercury,
cadmium, quartz, beryllium, and mineral wool, and was
found on all floors and in all building systems sampled,
in concentrations substantially in excess of those found
in non-impacted buildings. Many of these substances are
known toxins or carcinogens individually: little is known
about the magnitude of the collective threat to human
health, except that it will be greater than the threat
from the individual substances. In the Building’s current
condition, accelerated cleaning programs will need to be
employed to ensure that long-term risk to occupants is
minimized.
RJ Lee also noted in its Report that the “functionality of
building systems has been damaged by the infiltration of
corrosive, abrasive, and hazardous [World Trade Center]
[p]articulate forced into the Building by the collapse of
the [World Trade Center].” Thus, the Report found,
“[p]remature equipment failures and incremental maintenance
costs have and will continue to impair the functionality
and value of the Building and its systems.”
The Report highlighted specific damage to building
systems, components, and equipment as follows:
[E]lectronic devices and controls have been and will
continue to be adversely affected by the ionic nature
(i.e., conductivity) of the [World Trade Center]
Particulate, which is responsible for generating leakage
currents in the presence of humidity and are a common
cause of electronic device failures. . . . [T]he [World
Trade Center] Particulate will also chemically and/or
electronically corrode the metallic conductors on
electronic devices and cause component failures.
. . . [T]he quartz, mineral wool, and glass fibers
present in the [World Trade Center] Particulate have been
shown to abrade hard ball bearing steel. Abrasion will
increase the wear of contaminated moving parts and shorten
machinery lifetimes. Smaller affected items such as
switches, outlets, circuit breakers[,] and small motors
cannot be disassembled for remediation without destroying
the equipment. . . . [T]he life of electromechanical
equipment is substantively reduced in abrasive and
corrosive environments like that produced by the [World
Trade Center] event.
Finally, the Report discussed the effects of the particulate
matter on the lubricants of the Property’s equipment and
machinery:
[World Trade Center] Particulate was found in components
of mechanical and electrical systems. The cement dust,
gypsum and chloride present in the particulate will affect
the pH and viscosity versus lubricity of the lubricant.
The leakage current generated by the particulate will
increase the occurrence of motor, switch[,] and circuit
failure in a random, non-reproducible manner. Quartz,
mineral wool[,] and other particles will cause abrasion.
The combination of the above will cause premature
[equipment] failure.
On September 28, 2005, the District Court granted St.
Paul’s motion for summary judgment, finding that the
Policy’s Contamination Exclusion barring coverage for the
Property’s losses was applicable. Parks Real Estate
Purchasing Group v. St. Paul Fire & Marine Ins. Co., No. 04
Civ. 5201, 2005 WL 2414771 (S.D.N.Y. Sept. 28, 2005).
Seeing no ambiguity in the term “contamination,” the
District Court observed that “contamination” is generally
defined as “the introduction of a foreign substance that
injures the usefulness of the object,” citing Hi-G, Inc. v.
St. Paul Fire and Marine Ins. Co., 391 F.2d 924, 925 (1st
Cir. 1968), or “a condition of impurity resulting from the
mixture or contact with a foreign substance,” citing Am.
Cas. Co. of Reading, Pennsylvania v. Myrick, 304 F.3d 179,
183 (5th Cir. 1962). Parks Real Estate, 2005 WL 2414771, at
*3. The District Court found that “[c]ourts have even
favorably viewed both definitions of contamination
simultaneously,” citing Richland Valley Prods., Inc. v. St.
Paul Fire & Cas. Co., 548 N.W.2d 127, 131 (Wis.Ct.App.
1996). Parks Real Estate, 2005 WL 2414771, *3. The District
Court then found in the case at bar that “[u]nder either
definition outlined above, the facts in the record here
describe contamination” because “[t]he airborne particulate
matter created as a result of the [World Trade Center]
collapse is properly considered either a foreign substance
that came into contact with the Property creating a
condition of impurity or a foreign substance that, when
introduced to the Property, injured the Property’s
usefulness.” Id. at *3.
Under the definitions of contamination borrowed from the
First and Fifth Circuits and employed by the District
Court, the court explained how it was clear that the
insured Property in this case was “rendered unfit for use
by the introduction of unwholesome or undesirable elements”
and that the Property “suffers from a condition of impurity
resulting from . . . contact with a foreign substance.” Id.
at *4 (omission in original; quotation marks omitted). The
District Court focused on the effect of the particulate
matter, reasoning that “[w]hether the airborne substance at
issue is considered pulverized, abrasive, corrosive,
erosive, particulate or contaminant, the effect on the
Property was contamination.” Id. at *4.
The District Court next determined that “[w]here an insured
seeks recovery of a loss for which there are several
potential causes, some covered and some not covered under
the insurance policy, it is the efficient cause of the loss
that will be recognized for purposes of insurance
coverage.” Id. at *5. The District Court first determined
that “the specific language of the Contamination Exclusion
makes the actual efficient cause of the loss irrelevant”
because that exclusion barred coverage for “damage caused
by or made worse by any kind of contamination.” Id. at *5.
The District Court concluded that
[e]ven assuming that the efficient cause of [Parks’s]
loss was . . . the collapse of the [World Trade Center]
and not airborne particulate contamination, there is no
doubt that, at the very least, [Parks’s] damages were made
worse by contamination. Pursuant to the clear language of
the exclusion, [St. Paul] will not cover any loss made
worse by contamination.
Id. at *5 (emphasis omitted). The District Court went on to
determine, however, that the collapse of the World Trade
Center was not the efficient cause of the loss to the
insured Property:
[O]n this record it is also clear that the efficient
cause of [Parks’] loss was not the collapse of the [World
Trade Center] as [Parks] contend[s] but rather the
contamination that affected the Property in the wake of
the collapse. [Parks] urge[s] the Court to take the
efficient cause analysis a step backwards, away from the
actual contact of the airborne particulate matter with the
Property, and towards the collapse of the [World Trade
Center]. Nevertheless, [Parks’s] invitation to move
beyond the direct cause of the loss — the
contamination itself — would lead me down a
slippery slope of causation.
Once the efficient cause inquiry passes the airborne
particulate matter, there is no particular reason to stop
at the collapse of the [World Trade Center]. The efficient
cause of [Parks’] loss could be the first hijacked plane
that struck the [World Trade Center]; it could also be the
second. It could be the explosion of the airplanes’ fuel
tanks, or the resulting fires which caused the [World
Trade Center’s] structural supports to buckle, or the
design of those very supports. It could even be the
prevailing winds, or lack thereof, which allowed the
particulate matter to reach the Property instead of being
held up or indeed sent in the opposite direction. . . .
Because efficient cause analysis can become so easily and
obviously attenuated, courts look for the dominant, direct
cause of the loss, not an event that is merely connected
to a result.
Id. at *5.
The District Court also concluded that the proper efficient
cause analysis did not involve a “look at the efficient
cause of the contamination” but an examination into the
“efficient cause of the loss,” which the court found to be
the contamination itself — i.e., “the actual contact
between the Particulate and the Property.” Id. at *6. In
other words, the court found that the dominant and efficient
cause of the loss was the contamination in and of itself.
The District Court also determined that neither the
Mechanical Breakdown nor the Wear and Tear Exclusions were
applicable. Regarding the Mechanical Breakdown Exclusion,
the court found that Parks was not “seeking coverage for
loss caused by a mechanical breakdown or failure but for
damage caused by a ‘corrosive and abrasive particulate’
which has infiltrated the interior and exterior of the
[Property].” Id. at *1 n. 1. As to the Wear and Tear
Exclusion, the District Court held that that exclusion was
also not applicable to bar coverage, as “[t]he damage was
the alleged result of an unexpected and sudden event rather
than gradual wear-and-tear.” Id.
Judgment was entered on September 30, 2005. Parks’ timely
Notice of Appeal was filed on October 27, 2005. This Court
has jurisdiction pursuant to 28 U.S.C. § 1291.
DISCUSSION
I. Standard of Review
A district court’s grant of summary judgment is reviewed de
novo. Allianz Ins. Co. v. Lerner, 416 F.3d 109, 113 (2d
Cir. 2005). This Court “utilizes the same standard as the
district court: summary judgment is appropriate where there
exists no genuine issue of material fact and, based on the
undisputed facts, the moving party is entitled to judgment
as a matter of law.” D’Amico v. City of New York, 132 F.3d
145, 149 (2d Cir. 1998). A material fact is one that would
“affect the outcome of the suit under the governing law,”
and a dispute about a genuine issue of material fact occurs
if the evidence is such that “a reasonable [factfinder]
could return a verdict for the nonmoving party.” Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see R.B.
Ventures, Ltd. v. Shane, 112 F.3d 54, 57 (2d Cir. 1997). In
determining whether there is a genuine issue of material
fact, the court must resolve all ambiguities, and draw all
inferences, against the moving party. United States v.
Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam);
Donahue v. Windsor Locks Bd. of Fire Comm’rs, 834 F.2d 54,
57 (2d Cir. 1987). However, with respect to a properly
supported summary judgment motion, the party opposing
summary judgment “may not rest upon the mere allegations or
denials of the adverse party’s pleading, but . . . must set
forth specific facts showing that there is a genuine issue
for trial.” Fed.R.Civ.P. 56(e). This Court reviews a
district court’s interpretation of a contract de novo.
E.g., Lee v. BSB Greenwich Mortgage L.P., 267 F.3d 172, 178
(2d Cir. 2001). Questions of law or mixed questions of fact
and law are also reviewed de novo. E.g., Hirschfeld v.
Spanakos, 104 F.3d 16, 19 (2d Cir. 1997).
II. Interpretation of Insurance Contracts Under New York
Law
In this case, St. Paul provided Parks with first-party
coverage, which means that the Policy is designed to
compensate Parks for damage to its own property. See 2
Ostrager & Newman, Insurance Coverage Disputes §
21.01[a], at 1303 (13th ed. 2006) (citing Newmont Mines Ltd.
v. Hanover Ins. Co., 784 F.2d 127, 136 (2d Cir. 1986)
(stating that first-party property insurance policies
“provide financial protection against damage to
property”)). Commercial property insurance generally is
offered in the form of either an “all-risk” policy or a
“named perils” policy. Under an all-risk policy, “losses
caused by any fortuitous peril not specifically excluded
under the policy will be covered.” Id. § 21.02[a],
at 1306 (emphasis supplied) (citing Ingersoll Milling
Machine Co. v. M/V Bodena, 829 F.2d 293, 307 (2d Cir.
1987)); see also Murray v. State Farm Fire and Cas. Co., 509
S.E.2d 1, 7 (W.Va. 1998) (“Under an all[-]risk policy,
recovery is allowed for all losses arising from any
fortuitous cause, unless the policy contains an express
provision excluding loss from coverage.”). See generally J.
Draper, Coverage Under All-Risk Insurance, 30 A.L.R. 5th 170
(1995). “By contrast a ‘named perils’ policy covers only
losses suffered from an enumerated peril.” Id. (citing
Opera Boats, Inc. v. La Reunion Francaise, 893 F.2d 103,
105 (5th Cir. 1990)).
Here, St. Paul issued to Parks an “all-risk” property
insurance policy providing that St. Paul would “[p]rotect
covered property against risks of direct physical loss or
damage except as indicated in the Exclusions —
Losses We Won’t Cover section.” In this case, we are asked
primarily to review the parties’ dispute surrounding, and
the District Court’s interpretation of, one of the
exclusions — to wit, the Contamination Exclusion
— contained in the all-risk Policy.
When a dispute arises involving the terms of an insurance
contract, New York insurance law provides that “‘an
insurance contract is interpreted to give effect to the
intent of the parties as expressed in the clear language of
the contract.'” Morgan Stanley Group Inc. v. New England
Ins. Co., 225 F.3d 270, 275 (2d Cir. 2000) (quoting Village
of Sylvan Beach v. Travelers Indem. Co., 55 F.3d 114, 115
(2d Cir. 1995)); see also Goldberger v. Paul Revere Life
Ins. Co., 165 F.3d 180, 182 (2d Cir. 1999). When the
provisions are unambiguous and understandable, courts are
to enforce them as written. See Goldberger, 165 F.3d at
182. “[T]he initial interpretation of a contract is a
matter of law for the court to decide.” Morgan Stanley
Group Inc., 225 F.3d at 275 (internal quotation marks
omitted).
Whether a contract is ambiguous, however, is a “threshold
question of law to be determined by the court.” Duane Reade
Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384,
390 (2d Cir. 2005); see also Morgan Stanley Group, Inc.,
225 F.3d at 275 (“Part of this threshold interpretation is
the question of whether the terms of the insurance contract
are ambiguous.” (citing Alexander & Alexander Servs., Inc.
v. These Certain Underwriters at Lloyd’s, 136 F.3d 82, 86
(2d Cir.1998))). “An ambiguity exists where the terms of an
insurance contract could suggest ‘more than one meaning
when viewed objectively by a reasonably intelligent person
who has examined the context of the entire integrated
agreement and who is cognizant of the customs, practices,
usages and terminology as generally understood in the
particular trade or business.'” Morgan Stanley Group Inc.,
225 F.3d at 275 (quoting Lightfoot v. Union Carbide Corp.,
110 F.3d 898, 906 (2d Cir.1997)); see also Duane Reade
Inc., 411 F.3d at 390 (quoting Morgan Stanley Group Inc.
for same). “An insurance policy should be read in light of
common speech and the reasonable expectations of a
businessperson.” Pepsico, Inc. v. Winterthur Int’l Am. Ins.
Co., 788 N.Y.S.2d 142, 144 (N.Y.App.Div. 2004) (internal
quotation marks omitted); accord Throgs Neck Bagels, Inc.
v. GA Ins. Co. of N.Y., 671 N.Y.S.2d 66, 68-69
(N.Y.App.Div. 1998) (stating that courts are to construe the
terms of an insurance contract as they are used in common
speech).
Moreover, to “negate coverage by virtue of an exclusion, an
insurer must establish that the exclusion is stated in
clear and unmistakable language, is subject to no other
reasonable interpretation, and applies in the particular
case and that its interpretation of the exclusion is the
only construction that [could] fairly be placed thereon.”
Throgs Neck Bagels, Inc., 671 N.Y.S.2d at 71 (internal
quotation marks and citation omitted; alteration in
original). Under New York insurance law, “[t]he burden, a
heavy one, is on the insurer, and [i]f the language of the
policy is doubtful or uncertain in its meaning, any
ambiguity must be resolved in favor of the insured and
against the insurer.” Pepsico, Inc., 788 N.Y.S.2d at 144
(internal citations and quotations omitted; second
alternation in original); see Seaboard Sur. Co. v. Gillette
Co., 486 N.Y.S.2d 873, 876 (N.Y. 1984) (holding that policy
exclusions “are not to be extended by interpretation or
implication but are to be accorded a strict and narrow
construction” and that any ambiguity will be resolved
against the insurer); see also Olin Corp. v. Certain
Underwriters at Lloyd’s London, 468 F.3d 120, 129 (2d Cir.
2006) (examining whether “migrating contamination
constitutes additional property damage to trigger liability
coverage” and recognizing the general “tenet under New York
law that where the precise meaning of insurance policies is
ambiguous, their provisions are to be construed in favor of
finding coverage”).
“Once a court concludes that an insurance provision is
ambiguous, ‘the court may accept any available extrinsic
evidence to ascertain the meaning intended by the parties
during the formation of the contract.'” Morgan Stanley
Group Inc., 225 F.3d at 275-76 (quoting Alexander &
Alexander, 136 F.3d at 86; see also Seiden Assocs. v. ANC
Holdings, Inc., 959 F.2d 425, 428-29 (2d Cir.1992)). “If
the court concludes that an insurance policy is ambiguous,
then the burden shifts to the insurer to prove that its
interpretation is correct: if extrinsic evidence is
available but inconclusive, the burden shifts at the trial
stage.” Morgan Stanely Group Inc., 225 F.3d at 276 (citing
Union Ins. Soc’y v. William Gluckin & Co., 353 F.2d 946,
951-52 (2d Cir. 1965) (remanding for trial in order to
allow district court to consider extrinsic evidence before
applying contra proferentem)). “[I]n the absence of
extrinsic evidence, the burden shifts [to the insurer] at
the summary judgment stage.” Id. (citing Twombly v. AIG
Life Ins. Co., 199 F.3d 20, 25-26 (1st Cir. 1999)). Thus,
“‘[i]f the extrinsic evidence does not yield a conclusive
answer as to the parties’ intent,’ a court may apply other
rules of contract construction, including the rule of
contra proferentem, which generally provides that where an
insurer drafts a policy ‘any ambiguity in [the] . . .
policy should be resolved in favor of the insured.'” Id. at
276 (quoting McCostis v. Home Ins. Co., 31 F.3d 110, 113
(2d Cir. 1994)).
III. The Contamination Exclusion Under the Contract
Under the “all-risk” Policy in this case, Parks may seek
compensation for loss or damage not otherwise excluded.
Here, St. Paul asserts that the claimed loss falls under
the Contamination Exclusion and therefore is excluded from
coverage. The parties agree, as they must, that the term
“contamination” is not further defined in the Policy.
We recognize that some courts have used the same
definitions as the District Court in applying contamination
exclusions — i.e., the introduction of a foreign
substance that injures the usefulness of the object, see
Hi-G, Inc. v. St. Paul Fire & Marine Ins. Co., 391 F.2d
924, 925 (1st Cir. 1968) (holding that “a product is
commonly spoken of as contaminated when the foreign
substance merely injures its usefulness without affecting
the original physical characteristics”); J.L. French Auto.
Castings, Inc. v. Factory Mut. Ins. Co., No. 1:02CV09479,
2003 WL 21730127 (N.D. Ill. July 23, 2003) (concluding that
“contamination — the presence of human remains in
the die lubricant — was caused by the operator being
crushed in the press”), or “a condition of impurity
resulting from the mixture or contact with a foreign
substance,” see American Cas. Co. of Reading, Pa. v.
Myrick, 304 F.2d 179, 184 (5th Cir. 1962) (holding that
there was a “contamination” of refrigerated foodstuffs that
had been “rendered impure” when they came “in contact” with
ammonia gas as a result of a broken commercial refrigerator
— rendering the foodstuffs unfit for consumption);
Auten v. Employers Nat. Ins. Co., 722 S.W.2d 468, 469
(Tex.App. 1986) (finding that “[c]ontamination occurs when
a condition of impairment or impurity results from mixture
or contact with a foreign substance”); Richland Valley
Prods., 548 N.W.2d at 130 (stating that contamination
“connotes a condition of impurity resulting from mixture or
contact with a foreign substance, and that it means to make
inferior or impure by mixture; an impairment of impurity;
loss of purity resulting from mixture or contact” (internal
quotation and citation marks omitted)).
Other courts have eschewed the foregoing definitions,
opting to define the term “contamination” contextually. In
Enron Oil Trading & Transp. Co. v. Walbrook Ins. Co., 132
F.3d 526 (9th Cir. 1997), our sister Circuit addressed the
insurers’ contention that the “pollution exclusion” in a
commercial general liability policy applied in that case so
as to exclude coverage for losses sustained as a result of
the addition of a foreign substance to crude oil
transported in a pipeline. 132 F.3d at 528. In that case,
the at-issue policy excluded coverage for loss resulting
from “pollution or contamination.” Id. at 529. Recognizing
that an “insurance policy clause is ambiguous when
different persons looking at the clause in light of its
purpose cannot agree upon its meaning,” id. at 530
(quotation marks omitted), the Ninth Circuit agreed with
the district court in determining that “although
‘contamination’ is not defined in the policy, it must be
construed within the context of the pollution exclusion.”
Id. (emphasis supplied). The term “contamination,” the
court explained, “is an environmental term of art and
applies only to discharges of pollutants into the
environment.” Id. The court also agreed with the district
court’s rejection of the insurers’ common-sense approach to
defining “contamination,” as that approach would render an
interpretation that was “virtually boundless” and would
reach “far beyond the reasonable expectations of the
insured.” Id.
The Enron Oil court found that the insurers’ expansive
definition of “contamination” demonstrated the “ambiguity
convincingly; under their interpretation, the
[contamination] exclusion would be virtually limitless,
extending to claims for product liability (for example, a
bottle manufactured with impure glass) or for negligence
(for example, spoilt food served in a restaurant) that
arguably involved an impurity resulting from contact with a
foreign substance.” Id. The Ninth Circuit concluded that
the use of the words “‘seepage, pollution and
contamination,’ together with the specific exclusion of ‘the
cost of removing, nullifying or cleaning-up seeping
polluting or contaminating substances,’ sends an
unmistakable message to the reasonable reader that the
exclusion deals with environmental-type harms.” Id. The
Ninth Circuit thus opted for a contextual definition of
contamination, an approach with which we agree.
Similarly, in Pipefitters Welfare Educ. Fund v. Westchester
Fire Ins. Co., 976 F.2d 1037 (7th Cir. 1992), the Seventh
Circuit examined an insurance policy’s pollution exclusion
clause, in which the definition of pollutant included “any
. . . thermal irritant or contaminant.” 976 F.2d at 1043.
The court held that the “terms ‘irritant’ and
‘contaminant,’ when viewed in isolation, are virtually
boundless, for ‘there is virtually no substance or chemical
in existence that would not irritate or damage some person
or property.'” Id. at 1043 (quoting Westchester Fire Ins.
Co. v. City of Pittsburgh, 768 F. Supp. 1463, 1470 (D. Kan.
1991). Further analyzing the expansive definition of
contaminant sought by the insurer in the pollution context,
the Seventh Circuit explained:
[W]ithout some limiting principle, the pollution
exclusion clause would extend far beyond its intended
scope, and lead to some absurd results. To take but two
simple examples, reading the clause broadly would bar
coverage for bodily injuries suffered by one who slips and
falls on the spilled contents of a bottle of Drano, and
for bodily injury caused by an allergic reaction to
chlorine in a public pool. Although Drano and chlorine are
both irritants or contaminants that cause, under certain
conditions, bodily injury or property damage, one would
not ordinarily characterize these events as pollution.
976 F.3d at 1043.
In McConnell Constr. Co. v. Ins. Co. of St. Louis, 428
S.W.2d 659 (Tex. 1968), the Texas Supreme Court affirmed
the judgment of the trial court (and reversed the judgment
of the intermediate appellate court) in determining that
the damage claimed was not the result of contamination. In
McConnell, “muriatic acid was applied to the brick and
mortar of a new floor” of a new house. Id. at 660. By
virtue of that application, a chemical reaction occurred,
resulting in fumes and gases arising from the floor. Those
gases damaged the metal parts of the house —
doorknobs, metal fixtures, aluminum window frames, and the
like — by causing corrosion. Id. The Texas Supreme
Court held:
Corrosion and contamination are not synonymous terms. The
connotation of contamination is a mixing of substances
like dirt and water which results in an impure mixture.
Corrosion on the other hand connotes disintegration,
oxidation, decay of metal and the like. While it may be
possible that under certain situations, a corrosion may
also be classified as a contamination, that is not the
situation here. We have no mixing of substances resulting
in impurity. We have a pitting, a destruction and a
disintegration of metal caused by chemical fumes and a
resultant degenerative reaction adversely affecting the
structure of metal. We hold that the loss in this case was
comprehended by the insuring clause of the policy and was
not excluded therefrom.
Id. at 661 (emphasis supplied). McConnell amply illustrates
how the term “contamination” may be used improperly as a
synonym for various types of damage and chemical processes,
which may or may not properly be classified as
contamination or excluded from coverage under the terms of
a policy.
We find that the term “contamination” is ambiguous in the
context of the St. Paul Policy, because the common
definition of the term that the District Court employed
— the “introduction of a foreign substance that
injures the usefulness of the object” or “a condition of
impurity resulting from the mixture or contact with a
foreign substance” — would allow the contamination
exclusion in the Policy to be applied in a limitless
variety of situations.
An illustration of a how the term “contamination” may have
a virtually boundless set of applications in the all-risk
policy context may be served by example. Consider the
situation if the Twin Towers had collapsed directly on top
of the Property, causing substantial damage. In such an
instance, the Property surely would be insured for that
loss under the all-risk commercial insurance Policy.
However, St. Paul, taking the position that it does here,
could argue that the damage to the building in this example
resulted from the introduction of a foreign substance that
injures the usefulness of the object, see Hi-G, Inc., 391
F.2d at 925, or “a condition of impurity resulting from the
mixture or contact with a foreign substance,” Myrick, 304
F.2d at 183, the definitions applied by the District Court
in the case at bar.
Consider also the example of a fire, an insurable event or
peril. The ash and soot from the fire could arguably be
considered a foreign substance injuring the usefulness of a
building or object. Certainly, soot and ash could also be
considered an “impurity” in a building that has suffered a
fire. Indeed, the insurer made precisely this argument in
Cantrell v. Farm Bureau Town & Country Ins. Co. of
Missouri, 876 S.W.2d 660 (Mo.Ct.App. 1994). In Cantrell,
the insured’s home was damaged by a fire, which resulted in
the release of toxic chemicals and fumes throughout the
home. The home was rendered uninhabitable as a consequence.
The all-risk fire insurance policy issued to the insured in
that case excluded coverage for “contamination” but
specifically covered losses from “fire” and “smoke.” Id. at
662. The insurer denied coverage of the insured’s claim
under the policy’s contamination exclusion, explaining that
contamination, undefined in the policy, meant “to make
inferior or impure by admixture.” Id. at 664 (internal
quotation marks omitted). The court found that the word
“contamination” was “not unambiguous” and had a broad
meaning that encompassed at least four types of damage.
The court identified the four types of contamination as
(i) “[g]radual contamination” from natural sources or
“unknown or various external sources,” such as pollution,
contamination from radon or other noxious natural sources,
or exposure to raw sewage or chemicals used as pesticides
or herbicides; (ii) contamination from “activities or
events not occurring on the insured’s property, such as
nuclear radiation, or toxic gas resulting from an accident
or mishap”; (iii) contamination resulting from an
“uncovered event or activity occurring on the insured’s
property, such as the negligent or malicious saturation of
a floor or wall with chemicals designed for use as
pesticides or fertilizers”; (iv) contamination resulting
from a “covered event occurring on the insured’s premises,”
such as smoke damage to unburned parts of a house damaged
by fire. See id. at 664 (emphases in original). The court
explained, however, that smoke damage, identified by the
court as a fourth type of contamination, would ordinarily
not fall within the ambit of what the reasonable person
would consider to be excluded damage under an insurance
Policy’s contamination exclusion:
Permeation of the house with toxic or noxious smoke
and/or fumes would fit this very broad definition.
However, there may be many conceivable types and sources
of contamination. . . .
Smoke damage, by the definition cited by Farm Bureau,
would be contamination. The smoke has made the other parts
or contents of the house “inferior or impure by
admixture.” If the word contamination were to be given the
broad, all-encompassing definition advanced by Farm
Bureau, smoke damage of any type would have to be excluded
from Farm Bureau’s type three coverage. The policy states:
“We cover direct loss not otherwise excluded in this
policy, that follows caused by fire, smoke (but not smoke
from agricultural smudging or industrial operations) . .
. .” If contamination were intended to include any
impurity caused by admixture, smoke damage could never be
covered because of the “not otherwise excluded” language.
The exclusion section does not clearly exclude
contamination resulting from a covered event. A reasonable
person reading the exclusion would expect the first two
types of contamination to be the types of contamination
excluded. The other types of items listed in the
exclusions section are of similar nature to the first and
second types listed above. Whether the third type of
contamination is covered is less certain, but an argument
can be made that a reasonable person would also understand
the third type of contamination would not be covered. The
first three types of contamination involve contamination
without occurrence of a covered event. However, a
reasonable person would not determine that smoke damage
caused by a covered fire, would be excluded from coverage.
Id. at 664-65 (footnotes omitted).
In the context of a liability insurance policy, at least
one New York State court has also found the term
“contamination” or “contaminant” to be ambiguous. In
Pepsico, Inc., the insured used faulty raw ingredients in
its soft drink products, which caused the products to have
an unintended taste and which necessitated the destruction
of the damaged products. 788 N.Y.S.2d at 143. The insurance
carrier in that case disclaimed coverage, relying on the
policy’s contamination exclusion. The carrier claimed that
contamination meant “to make inferior or impure by
mixture.” Id. at 144. The New York State Supreme Court,
Appellate Division, however, determined that
[t]o accept [the insurance carrier’s] interpretation
would require that the term “contamination” be read
literally, whereas New York courts, in construing terms in
pollution exclusions, favor a commonsense approach over a
literal approach. [The insurance carrier’s] reading also
ignores the general purpose of pollution exclusions, which
is to exclude coverage for environmental pollution.
. . . . At best, there being more than one reasonable
interpretation to the meaning of the term “contamination,”
the exclusion is ambiguous. Since it is ambiguous, the
exclusion must be construed in favor of the insured. To
accept [the insurer’s] reading would also contradict the
“common speech” and “reasonable expectations of a
businessperson” who has come to understand standard
pollution exclusions as exclusions addressing
environmental-type harms.
Id. (internal citations omitted); cf. Nautilus Ins. Co. v.
Jabar, 188 F.3d 27, 30 (1st Cir. 1999) (“We also find
ambiguity in the exclusion’s definition of ‘pollutant.’ The
. . . policy defines ‘pollutant’ as ‘any solid, liquid,
gaseous, or thermal irritant or contaminant.’ As other
courts have observed, the terms ‘irritant’ and ‘contaminant’
are virtually boundless, for ‘there is no substance or
chemical in existence that would not irritate or damage
some person or property.'” (quoting Pipefitters, 976 F.3d
at 1043)); Herald Square Loft Corp. v. Merrimack Mut. Fire
Ins. Co., 344 F. Supp. 2d 915, 919-20 (S.D.N.Y. 2004) (“The
language of the pollution exclusion clause of the 2002
policy is so broad that it cannot literally mean what it
says. As defined, ‘pollutants’ is so broad that ambiguity
is created. Literally construed, the words would encompass
the ‘release’ or ‘dispersal’ of ordinary household dust,
for household dust is arguably a ‘solid . . . irritant or
contaminant, including . . . waste’. . . . [T]he term
‘pollutant’ is ambiguous because there is virtually no
substance or chemical in existence that is not an ‘irritant
or contaminant.'” (quoting Pipefitters, 976 F.3d at 1043;
Roofers’ Joint Training, Apprentice & Educ. Comm. of
Western N.Y. v. Gen. Accident Ins. Co. of Am., 713 N.Y.S.2d
615 (N.Y.App.Div. (2000))).
Without doubt, there are many situations where an insured’s
property is rendered “impure” or is damaged by “the
introduction of a foreign substance.” Under an all-risk
policy, almost any unintended damage to a building or its
contents could be considered contamination within these
broad definitions of the term. Under such a construction,
the all-risk policy would insure against virtually nothing.
Accordingly, we find that the term “contamination” is
ambiguous in the context of the all-risk Policy that we are
considering. The District Court concluded “[w]hether the
airborne substance at issue is considered pulverized,
abrasive, corrosive, erosive, particulate or contaminant,
the effect on the Property was contamination.” Parks Real
Estate, 2005 WL 2414771, at *4. We are not so sure that the
damage caused by the settling of the airborne matter into
Parks’ Building, machinery, and equipment was intended by
the parties to constitute contamination excluded from the
Policy’s coverage. Because of the “virtually boundless”
array of possible applications of the term contamination in
the contamination exclusion provision, we think that the
parties should be allowed to introduce evidence of what was
intended by the use of this ambiguous term. See Morgan
Stanley Group Inc., 225 F.3d at 275-76. Opting for the
contextual approach, we think that questions of material
fact pertaining to the meaning of the term contamination
under this all-risk Policy remain for resolution by the
trier of fact. Accordingly, a remand for that purpose is
indicated in this case.
IV. Efficient Causation
Parks claims that the District Court’s “most critical
error” was its determination that the particulate cloud
resulting from the collapse of the World Trade Center was
the “efficient cause” of alleged loss and therefore was not
covered by the Policy. “In order to obtain coverage under a
first-party [insurance] policy, the insured must suffer a
loss caused by a covered peril (in a named perils policy)
or suffer a loss not caused by an excluded peril (in an all
risk policy). A covered peril and an excluded peril can
combine to cause a covered loss.” Ostrager & Newman, supra,
§ 21.02[c], at 1313 (citing Shelter Mut. Ins. Co. v.
Maples, 309 F.3d 1068, 1070-71 (8th Cir. 2002)). In a case
where a covered and excluded peril combine to cause a
covered loss, courts typically apply the efficient
proximate cause rule — meaning, that the insured is
entitled to coverage only if the covered peril is the
“predominant cause of the loss or damage.” Id.
“The efficient proximate cause of a loss is the cause that
originally sets other events in motion.” Kula v. State Farm
Fire & Cas. Co., 628 N.Y.S.2d 988, 991 (N.Y.App.Div. 1995).
A court must not, however, examine or identify “the event
that merely set[s] the stage for [a] later event.” Kosich
v. Metro. Prop. & Cas. Ins. Co., 626 N.Y.S.2d 618, 618
(N.Y.App.Div. 1995) (internal quotation marks omitted).
“Only the most direct and obvious [efficient] cause should
be looked to for purposes of the exclusionary clause.”
Kula, 628 N.Y.S.2d at 991. “When the court interprets an
insurance policy excluding from coverage any injuries
’caused by’ a certain class of conditions, the causation
inquiry stops at the efficient physical cause of the loss;
it does not trace events back to their metaphysical
beginnings.” Kimmins Indus. Serv. Corp. v. Reliance Ins.
Co., 19 F.3d 78, 81 (2d Cir. 1994) (internal citations and
selected quotation marks omitted).
Parks contends that the efficient cause of its loss was the
collapse of the Twin Towers in the first instance, an event
that the parties agree would be covered under the Policy.
In rejecting Parks’ argument, the District Court found that
while the collapse of the World Trade Center was the
efficient cause of the particulate cloud, it was not the
efficient cause of the damage to the building: “the
efficient cause of [Parks’] loss was not the collapse of
the [World Trade Center] as [Parks] contend[s] but rather
the contamination that affected the Property in the wake of
the collapse.” Parks Real Estate, 2005 WL 2414771, at *5.
The court further determined that “contamination” occurred
with “the actual contact between the Particulate and the
Property — an occurrence that is excluded under the
Policy’s Contamination Exclusion.” Id. at *6.
We agree with the District Court to the extent that it
found that “the actual contact of the airborne particulate
matter with the Property,” id. at *5, was the efficient
cause of damage to the insured Building. The cloud of
particulate matter was capable of producing damage only
upon contact with the insured Property. At best,
contamination was not the cause of the damage that resulted
from contact between the cloud of particulate matter and
the Building, but the resulting damage itself. Whether that
damage is “contamination,” however, is a question yet to be
resolved in this case. Said differently, while the cloud of
particulate matter caused damage to the insured Property,
coverage will depend upon whether that damage was
“contamination” within the meaning of this Policy. Insofar
as the damage constituted contamination, it is excluded
from coverage. Insofar as the damage was not contamination,
however, it is covered.
CONCLUSION
The summary judgment granted by the District Court is
vacated, and the case is remanded for proceedings
consistent with the foregoing.