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Heri Krupa, Inc. v. Tower Group Companies


March 18, 2013


The opinion of the court was delivered by: Savage, J.


At issue in this insurance dispute is the "pollution" exclusion in a business owner's property insurance policy issued to the owner and operator of a convenience store, car wash, and gas and diesel service station. The plaintiff, Heri Krupa, Inc. ("Krupa"), asserts that the defendant insurer, Preserver Insurance Company*fn1 ("Preserver"), breached the insurance contract when it failed and refused to pay business income loss benefits arising from the shut-down of the business after the release and discharge of diesel fuel from a ruptured hose.*fn2 Preserver contends that the loss is not covered and is specifically excluded by the policy.

The parties disagree what the policy language means and whether the pollution exclusion applies.*fn3 The facts material to the interpretation of the policy are undisputed.

A rupture in a flex hose caused a massive discharge of diesel fuel.*fn4 The released fuel caused contamination at the insured's property, requiring corrective action and temporary closure of the station as ordered by Pennsylvania Department of Environmental Protection ("DEP"). As a result of action taken by DEP, Krupa was forced to shut down its business operations, suffering financial losses. At the time, Krupa was covered by the Preserver policy, which provides business income loss benefits. The policy includes a pollution exclusion. Absent the exclusion, the losses are otherwise covered.

After giving effect to the plain language of the policy and strictly construing the exclusion against Preserver, we conclude that the pollution exclusion applies to the business income loss benefit. Therefore, we shall grant Preserver's motion for summary judgment.

Factual Background

Krupa owned and operated a convenience store, car wash, and retail gasoline and diesel service station in Pottstown, Pennsylvania. In March 2010, Krupa discovered a release of diesel fuel from a rupture in a flex-hose beneath the diesel fuel dispenser. Bristol Environmental and Service Company, Krupa's maintenance firm, notified and filed a Notice of Contamination with DEP identifying the source of contamination as the underground piping system. DEP ordered Krupa to take corrective and remedial action. There followed a series of violation notices from DEP and attempted corrective actions by Krupa and Brilliant Lewis Environmental Services ("Brilliant"), Krupa's contractor.

In July 2010, dissatisfied with Krupa's corrective actions, DEP issued a cease and desist order pursuant to the Storage Tank and Spill Prevention Act. In its findings, DEP determined that there had been a release of more than 7,000 gallons of petroleum that contaminated soil and groundwater at the site, which required an "aggressive interim remedial response" to "protect human health and the environment."*fn5 The cease and desist order required Krupa to stop using its fuel tanks until it completed the corrective action as ordered. In compliance with the order, Krupa emptied its fuel tanks and shut down petroleum service.

Corrective actions continued through 2011 and 2012. The Underground Storage Tank Indemnification Fund paid for all remediation activities at the site. In September 2012, a Remedial Action Plan confirmed a decreasing trend in contamination levels. At his deposition on December 11, 2012, Pritesh Patel, Krupa's president, testified that although the site was no longer contaminated, Krupa still did not have permission to operate a business.*fn6

In the meantime, due to contamination of water at the site, DEP prohibited service of food products at the convenience store. Consequently, Krupa's tenant, Dunkin' Donuts, shut down its operation and canceled its lease.

Krupa submitted a claim under the Preserver policy, which was in effect from December 17, 2009 through December 17, 2010. Relying on the pollution and ordinance exclusions,*fn7 Preserver denied the claim. Krupa then brought this action for breach of the insurance contract and insurance bad faith in state court, seeking damages for loss of rent, loss of business income, loss of inventory and damage to the covered property, and other damages under the policy. Preserver removed the action to this court.

Legal Standard

The interpretation of an insurance contract is a question of law. Am. Auto. Ins. Co. v. Murray, 658 F.3d 311, 320 (3d Cir. 2011) (citations omitted). Whether a claim is within a policy's coverage or barred by an exclusion may be determined on a motion for summary judgment. Bishops, Inc. v. Penn Nat'l Ins., 984 A.2d 982, 989 (Pa. Super. Ct. 2009) (quoting Nationwide Mut. Ins. Co. v. Nixon, 682 A.2d 1310, 1313 (Pa. Super. Ct. 1996)).

A court must give effect to the plain language of the insurance contract read in its entirety. Am. Auto Ins. Co., 658 F.3d at 320 (citation omitted). When the policy language is ambiguous, the provision is construed in favor of the insured. Id. (quoting Med. Protective Co. v. Watkins, 198 F.3d 100, 104 (3d Cir. 1999)); 401 Fourth St., Inc. v. Investors Ins. Grp., 879 A.2d 166, 174 (Pa. 2005) (citing Mohn v. Am. Cas. Co. of Reading, 326 A.2d 346, 352 (Pa. 1974)). Contract language is ambiguous if it is reasonably susceptible to more than one construction and meaning. 401 Fourth St., Inc., 879 A.2d at 171 (quoting Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 106 (1999)). However, policy language may not be stretched beyond its plain meaning to create an ambiguity. Trizechahn Gateway LLC v. Titus, 976 A.2d 474, 483 (Pa. 2009) (citation omitted).

The insured has the initial burden of establishing coverage under the policy. State Farm Fire & Cas. Co. v. Estate of Mehlman, 589 F.3d 105, 111 (3d Cir. 2009) (citing Koppers Co. v. Aetna Cas. and Sur. Co., 98 F.3d 1440, 1446 (3d Cir. 1996)). Where the insured meets that burden and the insurer relies on a policy exclusion as an affirmative defense as the basis for denying coverage, the insurer has the burden of proving, by uncontradicted facts, that the exclusion applies. Id.; Mistick, Inc. v. Nw. Nat'l Cas. Co., 806 A.2d 39, 42 (Pa. Super. Ct. 2002). Policy exclusions are strictly construed against the insurer. Nationwide Mut. Ins. Co. v. Cosenza, 258 F.3d 197, 206-07 (3d Cir. 2001)(citing Selko v. Home Ins. Co., 139 F.3d 146, 152 n.3 (3d Cir. 1998)).


Krupa made a claim for loss of income resulting from the closing of his business and the tenant's canceling of its lease under the Businessowners endorsement, which provided coverage for twelve months of lost income.*fn8 This provision in the Businessowners Property Coverage Form reads:

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your "operations or restoration". The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within one hundred feet of the site at which the described premises are located.*fn9

By definition, the business interruption must be caused by a "Covered Cause of Loss." Thus, we must determine whether the ruptured fuel line was a covered cause.

As in any other typical "all-risk" policy, a covered cause of loss is defined in the Preserver policy as "risks of direct physical loss unless the loss is" excluded or limited in the policy.*fn10 In other words, unless specifically excluded, the loss is covered.

The Businessowners Property Coverage provides coverage for physical loss of or damage to "covered property" caused by or resulting from a "covered cause of loss."*fn11 It provides:

We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.*fn12

The "Covered Property" under the Businessowners Property Coverage, as modified by the Property Extension Endorsement, includes "[a]bove and below ground gasoline, diesel or kerosene fuel storage tanks, pumps, hoses, nozzles, piping and other related equipment pertaining to the transfer of fuel from the tank to the pump . . ." and "[g]asoline, diesel or kerosene fuel held for sale located in above and below ground storage tanks . . . ."*fn13 The ruptured hose was used to transfer diesel fuel from a tank to a pump. It was clearly "covered property" as defined in the policy.

This does not conclude the analysis. We now must determine whether the loss or damage was caused by a "covered cause of loss."

Preserver agreed to pay for actual loss of business income sustained due to the "necessary suspension" of operations during the "period of restoration."*fn14 The policy reads, "[t]he suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss."*fn15

Because the physical damage was to covered property and the interruption was related to that damage, the business income loss is covered unless it is excluded. Among the policy exclusions is the pollution exclusion, which states:

We will not pay for loss or damage caused by or resulting from the discharge, dispersal, seepage, migration, release or escape of "pollutants" unless the discharge, dispersal, seepage, migration, release or escape is itself caused by any of the "specified causes of loss." But if the discharge, dispersal, seepage, migration, release or escape of "pollutants" results in a "specified cause of loss," we will pay for the loss or damage caused by that "specified cause of loss.*fn16

According to this provision, loss or damage caused by a pollutant is not covered unless the release of the pollutant was caused by a "specified cause of loss." A "specified cause of loss" is defined as "fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage."*fn17 None of these occurrences caused the fuel release. Although the cause of the rupture has not been definitively identified, there is no question that the rupture of a flex hose is not a "specified cause of loss" as defined in the policy.*fn18 Thus, if the discharged fuel is a "pollutant" as defined in the policy, the loss caused by it is excluded.

It is undisputed that Krupa suffered business income loss because of the release of more than 7,000 gallons of diesel fuel. Preserver asserts that diesel fuel is a pollutant.*fn19 It cites to the report prepared by Brilliant, Krupa's contractor, identifying the hazardous components of unleaded gasoline. In response, Krupa summarily asserts that this case is about diesel fuel, not gasoline, suggesting that diesel fuel is not a pollutant.*fn20 However, at oral argument, Krupa's counsel conceded that diesel fuel can be a pollutant. In any event, we conclude that diesel fuel is a pollutant.

The term "pollutant" is defined in the policy as "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed."*fn21 "Irritant" has been defined as "a biological, chemical, or physical agent that stimulates a characteristic function or elicits a response, especially an inflammatory response." See, e.g., Municipality of Mt. Lebanon v. Reliance Ins. Co., 778 A.2d 1228, 1233 (Pa. Super. 2001) (quoting Webster's New Universal Unabridged Dictionary (1989)). A medical dictionary defines "irritant" as "an agent that is toxic, bacterial, physical, or chemical and is capable of inducing functional derangements or organic lesions of the tissues." Mosby's Medical Dictionary, 8th ed. 2009, Elsevier. A "contaminant" is defined as "an agent that causes contamination, pollution, or spoilage."


Although Pennsylvania courts have not addressed whether diesel fuel is a pollutant, they have held that gasoline, another petroleum distillate product, is a pollutant. See e.g., Wagner v. Erie Ins. Co., 801 A.2d 1226, 1232 (Pa. Super. 2002) (holding gasoline was a "pollutant"); see also W. World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118 (2d Cir. 1990) (holding that pollution exclusion included fuel oil spill); Guilford Indus. Inc. v. Liberty Mut. Ins. Co., 688 F. Supp. 792 (D. Me. 1988) (ruling that property damage from rupture of oil tanks was within the pollution exclusion), Aeroquip Corp. v. Aetna Cas. & Sur. Co.,26 F.3d 893, 894 (9th Cir. 1994) (assuming without explanation that diesel fuel is a pollutant); Breese v. Hadson Petroleum (USA), Inc.,955 F. Supp. 648, 651 (M.D. La. 1996) (finding that diesel fuel is a "liquid contaminant" under the policy's pollution exclusion language); Owners Ins. Co. v. Farmer, 173 F. Supp. 2d 1330, 1333 (N.D. Ga. 2001) (holding that diesel fuel is a "pollutant" under the policy).

In this case, DEP determined that the discharge of the diesel fuel contaminated the soil and groundwater at the site, and entered a drainage basin on the property, impacting a tributary of a local creek.*fn23 The release necessitated "an aggressive remedial response . . . to protect human health and the environment."*fn24 The groundwater samples collected by Brilliant revealed the presence of benzene, 1,2,4-trimethylbenzene, and naphthalene at the site and adjacent properties. All three of these chemicals are classified as "hazardous substances" by the Environmental Protection Agency and the Commonwealth of Pennsylvania. 40 C.F.R. § 302.4; 35 P.S. § 7303. Due to their toxic effects, they are governed by federal and state regulation. Based upon governmental classification of the components of diesel fuel as hazardous and toxic chemicals, DEP's implicit finding that it endangered human health and the environment, and that its mixing with the soil and water contaminated the soil and water, and the ordinary definition of "contaminant," we conclude that diesel fuel fits the policy definition of "pollutant." Therefore, by virtue of the pollution exclusion, the loss of business income during the time Krupa was shut down to perform remediation and restoration is not covered.

Krupa next argues that the equipment breakdown coverage endorsement and the pollution and cleanup removal coverage apply. Krupa contends that a rupture of the flex-hose constitutes an equipment breakdown. It ignores the specific exclusion of underground piping.

The equipment breakdown coverage endorsement extends "Covered Causes of Loss" as follows:

We will pay for direct physical damage to Covered Property that is the direct result of an "accident." As used in this Additional Coverage, "accident" means a fortuitous event that causes direct physical damage to 'covered equipment.'" The event must be one of the following: a. mechanical breakdown, including rupture or bursting caused by centrifugal force . . . .*fn25

"Underground vessels or piping" are excluded from the definition of "covered equipment."*fn26

To overcome Preserver's assertion that the ruptured flex-hose "ran underground," Krupa argues that the flex hose "is a short piece that is located just below the surface of the ground."*fn27 No matter how close it is to the surface of the ground, it is still underground. Consequently, because the "flex hose" is not "covered equipment," the covered equipment coverage does not apply.

Krupa also requests coverage pursuant to the Pollutant Clean Up and Removal provision. This provision states as follows:

We will pay your expense to extract "pollutants" from land or water at the described premises if the discharge, dispersal, seepage, migration, release or escape of the "pollutants" is caused by or results from a Covered Cause of Loss that occurs during the policy period.*fn28

The maximum amount Preserver agreed to pay pursuant to this provision is $25,000. The Underground Storage Tank Indemnification Fund ("USTIF") paid for all remediation activities at the site. Krupa is not presenting a claim for the clean-up costs, other than the USTIF deductible.*fn29 Because USTIF paid for all extraction and remediation expenses, and because business income losses are not covered by the "pollutant clean up and removal" provision, this provision is inapplicable to Krupa's claim for those losses.

Reasonable Expectations

Krupa argues that this interpretation frustrates its reasonable expectations. We conclude that the undisputed facts show that it did not reasonably expect the coverage it now asserts exists.

The guiding principle in interpreting an insurance contract is to effectuate the reasonable expectations of the insured. Reliance Ins. Co. v. Moessner, 121 F.3d 895, 903 (3d Cir. 1997) (citations omitted); Safe Auto Ins. Co. v. Berlin, 991 A.2d 327, 331 (Pa. Super. Ct. 2010) (citation omitted). Under Pennsylvania law, even if the terms of the insurance contract are clear and unambiguous, the insured's reasonable expectations may prevail over the express terms of the contract. Bensalem Twp. v. Int'l Surplus Lines Ins. Co., 38 F.3d 1303, 1309 (3d Cir. 1994); see also Safe Auto Ins. Co., 991 A.2d at 331 ("[A] court's decision to look beyond the policy language is not erroneous under all circumstances." (citation omitted)). Nonetheless, the language of the insurance contract itself serves as the best evidence of the parties' reasonable expectations. Safe Auto Ins. Co., 991 A.2d at 332 (quoting Allstate Ins. Co. v. McGovern, No. 07-2486, 2008 WL 2120722, at *2 (E.D. Pa. May 20, 2008)).*fn30

Krupa contends that it intended to purchase an all-risk policy covering all losses related to the business of operating a gas station. It asserts that it expected to be covered because Preserver's agent represented that the policy was "all-risk" and did not mention any exclusions.*fn31 Krupa did get an all-risk policy as promised. An all-risk policy covers all losses except those specifically excluded. Spece v. Erie Ins. Grp., 850 A.2d 679, 683 (Pa. Super. Ct. 2004). Thus, like any other all-risk policy, the Preserver policy included exclusions, in particular, the pollution exclusion.

Significantly, following Patel's deposition, during which he asserted that he never received a copy of the policy, Krupa produced its older policy, the 2007-2008 Nationwide Businessowners Policy endorsed with a pollution exclusion identical to the one in the Preserver policy.*fn32 Krupa, unable to locate a copy of its Nationwide policy for the 2008-2009 year, conceded that it would likely have the same terms as the 2007-2008 policy.*fn33 Krupa does not dispute that the Nationwide policy contained the pollution exclusion. The pollution exclusion in the Preserver policy, which replaced the Nationwide Businessowners Policy, is identical to the one in the Nationwide policy.

There is no evidence that Krupa specifically sought or expected pollution coverage when it shopped for and secured coverage to replace the Nationwide policy. On the contrary, Krupa sought and received precisely what he requested, an all-risk insurance policy.*fn34 Considering the language in Krupa's previous policy and the Preserver policy, together with Patel's testimony, there is no genuine issue of fact about whether Krupa had a reasonable expectation of coverage for loss of income due to pollution.


The pollution exclusion applies to Krupa's business income losses. Even if Krupa did not receive the policy, it could not have reasonably expected coverage under the Preserver policy when its previous "all-risk" policy included an identical pollution exclusion provision. Therefore, we shall grant the defendant's motion for summary judgment.

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