Is Smoke Pollution? How Low Can Insurance Companies Go?

Brooks Schuelke

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After a 2007 Houston office fire killed three people, the families of the victims have filed suit against the building's owner. The owner thought it was in good hands because it had insurance, but now the insurance company has filed its own lawsuit asking a court to declare that the losses are not covered.

The problem? Like most fire victims, the victims weren't killed by the flames, but died from smoke inhalation. The insurance company is asking the court to declare that the smoke is "pollution." Therefore, the company claims, the section of the insurance policy that excludes payment for pollution --- designed to protect insurance companies from having to pay for costs to cleanup discharges or seepages --- excludes payments for these deaths.

I think this is ridiculous. This exclusion was never intended to be interpreted this far, and the insurance company knows it. And I'm not alone in that thinking. From the article:

Tom Baker, an insurance law expert who teaches at Penn Law school, said property insurance has a long history of being designed for fire coverage and excluding a fire's smoke is applying the law too broadly.

But, he said, smoke can be tricky and Texas may be a state where the literal meaning could be considered rather than common understanding.

"The purpose of a pollution exclusion is not to not cover people who die from smoke inhalation in a fire," Baker said. "I would hope they (the insurers) lose this."

What's the underlying problem? The Texas Supreme Court has spent years issuing rulings that are designed to eliminate common law and statutory bad faith claims against insurance companies. In years' past, the threat of these type of claims, and the accompanying exemplary damages, provided an incentive for insurance companies to do the right things. But after the recent spate of Supreme Court rulings, insurance companies have little to lose by making ridiculous arguments and delaying or not paying on legitimate claims.