SEPTEMBER 2013 BAD FAITH CASES: INSURER PROPERLY DENIED COVERAGE FOR PROPERTY DAMAGE CAUSED BY DECOMPOSING BODY UNDER MICROORGANISM AND SEEPAGE EXCLUSIONS (Philadelphia Federal)
The court was asked to determine whether the defendants “all risk” insurance policy covered claims for property damage and remediation arising from fluids released by a decomposing human body. The insurer asserted that the policy excluded coverage for the property damage and remediation, denied the claim, and brought suit seeking declaratory judgment.
The defendant-policyholders filed cross-claims for compensatory damages, bad faith, and Pennsylvania Unfair Insurance Practices Act violations. Typically in determining coverage under an “all risk” policy, the insured bears the burden of demonstrating a covered loss has occurred, after which the burden shifts to the insurer to demonstrate the loss falls within a policy exclusion.
In this case, however, neither party disputed that the occurrence was covered; rather, the insurer argued it fell within three exclusions: (1) the microorganism exclusion, (2) the seepage exclusion, and (3) the pollutants exclusion.
The insurer first argued bacteria was present in the bodily fluids that caused the damage to the property, excluding the damages because a “microorganism” caused them. Although no testing was done on the fluids, the insurer presented expert testimony that the decomposition indicated signs of bacteria, corroborated by defendant’s own testimony as to the scene of the apartment where the body was discovered, to support its contention bacteria was present in the fluids. Defendant argued the evidence was insufficient because no direct testing had been done on the fluids.
The court disagreed, holding bacteria was present in the fluids and had caused the property damage, causing the occurrence to fall within the microorganism exclusion.
Next the court considered the seepage exclusion, which required showing (1) “seepage” had occurred, defined by an “element of movement” under Pennsylvania case law, and (2) that the fluids themselves were regulated as a hazardous material. The carrier presented evidence the bodily fluids had purged from the deceased body and spread across the decedent’s apartment and into the apartment below.
Furthermore, the Occupational Safety and Health Administration defines bodily fluids as “potentially infectious materials.” The defendants argued there was no evidence the bodily fluids posed a danger to human health. The court found the deceased body’s expulsion of the bodily fluids constituted seepage because there had been “movement” as required by Pennsylvania case law, and that the bodily fluids were a “regulated pollutant” under OSHA regulations. Thus, the court found in favor of the insurer, holding the seepage exclusion applied.
Finally, the court considered the pollutants exclusion, but elected not to rule on whether or not biological material constituted a pollutant as jurisdictions are split on the issue and coverage had already been precluded by the two previous exclusions. Finding there was no coverage available, the court ruled in the insurer’s favor on the defendant’s counterclaim alleging bad faith.
