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First Realty, Ltd., v. Frontier Ins. Co.: Brokerage Entitled to Insurance Coverage

A federal appellate court has considered whether an insurance company properly denied coverage to a claim submitted by a real estate brokerage based on a pollution exclusion found in the policy.

First Realty, Ltd. (“Brokerage”) filed a claim with its insurance carrier, Frontier Insurance Company (“Insurer”), based on a lawsuit naming the Brokerage alleging that the Brokerage failed to disclose the presence of a former municipal solid waste disposal site and hazardous materials on the required disclosure form. The lawsuit also alleged that the Brokerage misrepresented that the site had not been a solid waste disposal site or contained other environmental concerns.

The Insurer denied coverage for the lawsuit, concluding that the claim was barred by a policy exclusion (“Exclusion”). The Exclusion stated, in relevant part, that “claims arising out of, relating to or based upon the…presence of storage tanks, ... hazardous materials, radon, gases or other material, irritant, contaminant, [or] pollutant.” Following the denial, the Brokerage submitted deposition testimony from the plaintiff’s expert that there was no hazardous waste or gasses emanating from the premises, but the Insurer continued to deny coverage. The jury rejected the fraud allegations against the Brokerage, but did determine that the Brokerage had misrepresented the condition of the property to the plaintiffs. However, the jury declined to award the plaintiff any damages.

Following the resolution of the underlying action, the Brokerage filed a lawsuit against the Insurer, alleging breach of contract and bad faith (a tort). The trial court entered judgment in favor of the Insurer, finding the Exclusion precluded coverage. The Brokerage appealed.

The United States Court of Appeals for the Eighth Circuit reversed the trial court and sent the case back to the trial court for further proceedings. The court found that the rule in Iowa is that if any alleged claim “can rationally be said to fall within [the policy’s] coverage, the insurer must defend the entire action.” Any doubt as to whether the claim fails within the policy’s coverage is to be resolved in favor of the insured, especially when the policy uses ambiguous language.

The Brokerage argued that the Exclusion was ambiguous and so the Insurer was required to defend the Brokerage. The court determined that the terms “other material”, “irritant”, and “contaminant” as used in the Exclusion were ambiguous, as these terms could include “innocuous rubbish” or other discarded trash. Therefore, those terms would be construed in favor of the Brokerage.

Next, the court looked at the allegations in the lawsuit to determine if the Insurer was required to defend the Brokerage. The Brokerage conceded that the Exclusion covered the presence of hazardous materials on the property, but argued that the Insurer was required to defend the misrepresentation allegations. The lawsuit’s allegations had stated that the Brokerage had misrepresented on the disclosure form that the property did not contain hazardous waste or other area environmental concerns. Since the court had already determined the Exclusion was ambiguous and must be read in favor of the Brokerage, the court found that at least some of the lawsuit’s allegations were broader than the Exclusion and so the Insurer was obligated to defend the entire action.

The court also found that the duty to defend the Brokerage clearly arose when the Brokerage had given the Insurer the plaintiff’s evidence that the there was no hazardous waste or gasses on the property. Therefore, the court reversed the trial court’s ruling in favor of the Insurer on the duty to defend claim, and sent the case back to the trial court to assess damages as well as to reassess the “bad faith” allegations the Brokerage had made against the Insurer.

First Realty, Ltd., v. Frontier Ins. Co., 378 F.3d 729 (8th Cir. 2004).