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After a federal judge refused to enforce a “total pollution exclusion” clause, the Reliance Insurance Co. has agreed to tender its full $1 million coverage to the manufacturer of a steam generator that was sued by a Delaware County man who suffered brain damage in a nearly fatal carbon monoxide poisoning. Attorneys Martin K. Brigham, Eunice Trevor and Daniel Bencivenga of Brigham & Trevor filed the suit on behalf of Mark Moessner who was overcome by carbon monoxide produced by a direct-fired steam generator manufactured by the VE Corp. of Arlington, Texas. Known as the Vaporator, the machine is used to cure and strengthen concrete. Moessner claimed that its faulty design caused the accident and his injuries. After the products liability suit began, Reliance, VE’s insurer, denied coverage and filed a declaratory judgment action, claiming that Moessner’s injury was excluded from coverage under the “total pollution exclusion” in its general liability policy. But U.S. Magistrate Judge Peter B. Scuderi refused to enforce the policy, holding in February that the insured manufacturer had a reasonable expectation it would be covered since its previous policy excluded only environmental pollution claims and it wasn’t notified of the change until six months after the policy was renewed. “Under the reasonable expectation doctrine, an insurer may not make unilateral changes to an insurance policy unless it both notifies the policyholder of the changes and ensures that the policyholder understands their significance,” Scuderi wrote in his 27-page opinion in Reliance Insurance Co. v. VE Corp. Scuderi’s opinion was actually the second judgment handed down in the case. Two years earlier, another Eastern District judge had enforced the exclusion, finding that VE’s status as a sophisticated insured, aided by an insurance broker and outside legal counsel who negotiated the terms of its policy, precluded consideration of VE’s reasonable expectations as to the meaning of the policy. But in August 1997, the 3rd U.S. Circuit Court of Appeals reversed, finding that even a sophisticated insured has the right to assert a claim that it reasonably expected coverage despite an unambiguous exclusion. VE, which had filed for bankruptcy in May 1996, assigned its rights to pursue coverage to Moessner. Scuderi held a non-jury trial in December 1999 and issued his findings of fact and conclusions of law in February. The opinion focused first on the purchase of the initial policy and Reliance’s unilateral changes made to the pollution exclusion when it was renewed a year later. The first policy, which ran from May 1991 to May 1992, would have covered claims stemming from carbon monoxide emissions from VE’s Vaporators, such as Moessner’s, because the “absolute pollution exclusion,” or APE, excluded coverage only for pollution-related injuries occurring on property owned or controlled by VE. But when the policy was renewed a year later, Reliance changed the APE to a “total pollution exclusion,’ or TPE, which excluded coverage for all injuries caused by the release of pollutants, including the emission of carbon monoxide. Although the renewal policy became effective in May 1992, VE did not receive the policy until November 1992 – six months after the effective coverage date and just three months before the Moessner accident. Reliance’s lawyer, Steven R. Waxman of Kleinbard Bell & Brecker, argued that the TPE excluded coverage of the Moessner claim. The 3rd Circuit ruled that VE’s status as a sophisticated insured did not render the doctrine of the parties’ reasonable expectations inapplicable under Pennsylvania law and that a genuine issue of material fact exists as to whether VE had a reasonable expectation of coverage for the underlying products liability claim. The appeals court found that the original policy would have covered Moessner’s claim; that VE requested coverage for claims arising from the manufacturing of products; and that VE was never told that the TPE was being included in the renewal policy. As a result, the three-judge panel remanded for trial on the issue of whether VE had a “reasonable expectation” that the renewal policy provided by Reliance would cover Moessner’s claim. “While we predict that Pennsylvania will not make the status of the insured determinative of the applicability of the reasonable expectation doctrine, we also believe that it would deem the insured’s status to be a factor to be considered when resolving whether the insured acted reasonably in expecting a given claim to be covered,” the appeals panel wrote. Scuderi concluded that VE had just such a reasonable expectation because Reliance “unilaterally limited VE’s coverage by inserting the TPE endorsement into the renewal … [and] failed to promptly bring this change to MLW and VE’s attention.” Now the case has settled with Reliance agreeing to tender the full policy amount and drop the appeal it took from Scuderi’s decision. “This is a good result in two ways,” attorney Brigham said. “First, Mark and his family will get a recovery after fighting this insurer for seven years. Second, Judge Scuderi’s decision will continue to provide a vehicle for insureds and plaintiffs to counter restrictive pollution exclusions.” (Copies of the 27-page opinion in Reliance Insurance Co. v. VE Corp., PICS NO. 00-0249, are available from The Legal Intelligencer. Please refer to the Pennsylvania Instant Case Service order form on Page 11.)

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