INSURANCE: Property damage to YMCA caused by employee’s meth “drug den” covered by commercial policy with ambiguous or undefined pollution/criminal act exclusions and vandalism/smoke exceptions… Molloy.
Greater Missoula Family YMCA discovered in 4/18 that an employee was habitually using meth in its daycare center. She had constructed a “drug den” inside a cabinet by installing baffles, a light, shelves, and a lock to secure the door from the inside. Testing revealed that she had also likely used meth in the bathroom, laundry room, and kitchen, and that the HVAC system spread contamination throughout the premises. She subsequently pled guilty to endangering the welfare of a child, drug possession, and criminal mischief. US Fire Ins. seeks a declaration that it has no obligation to pay YMCA’s property damage claim under its commercial policy. YMCA has counterclaimed, and both seek summary judgment.
The material facts are generally undisputed. US Fire and YMCA agree that the damages sustained to the daycare resulted from the habitual use of meth by an employee and that the property was covered by the policy at the time of the incident. They dispute application of the policy’s pollution and criminal acts exclusions.
The pollution exclusion bars coverage for 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.'” “Pollutants” is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” “Specified causes of loss” include “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.” In short, the policy bars a claim for contamination but restores coverage for — relevant here — damage caused by “vandalism” and “smoke.”
US Fire has the burden of proving that the exclusion applies. Ribi (Mont. 2005). YMCA makes a half-hearted attempt to argue that meth contamination does not inherently meet the definition of a “pollutant.” That argument is belied by the plain language of the policy (including “contaminant” in the definition of “pollution”), the undisputed facts agreed to by the parties (describing chemical composition of contamination), and the parties’ extensive argument on the fundamental nature of meth particulate. Because US Fire has met its burden, YMCA must show that the damage is excepted from the exclusionary language. Id. It argues that the damage was caused by “vandalism” or “smoke,” which are both “specified causes of loss” that would restore coverage.
“Vandalism” is not defined in the policy and Montana courts have not addressed or defined it in the context of insurance coverage. It must therefore be assigned its usual meaning. Id. “Vandalism” is commonly understood as the deliberate destruction of or damage to property. Black’s; Webster’s. While the parties largely agree on this definition, US Fire argues that the term requires a specific intent to destroy and that the damage resulting from the employee’s meth use was neither intended nor reasonably expected. While YMCA agrees that vandalism must be malicious or willful to some degree, it argues that the intentional disregard of another’s property interest satisfies the intent requirement.
The parties rely primarily on Livaditis (Ga. 1968) (residential tenant’s moonshine operation), Bowers (Wash. 2000) (covert marijuana grow), and Graff (Wash. 2002) (meth lab). In all 3, smoke, fumes, and vapors from the activity left a residue that was ultimately characterized as contamination. However, the courts determined that the malicious or deliberative component of vandalism is met when one acts with intentional disregard for the property rights of another. See also Louisville (6th Cir. 1985) (“malice may be presumed from the unlawful act itself,” especially if it is evident that the act will result in property damage). Consistent with that conclusion, the employee’s habitual use of meth inside the YMCA satisfies the ordinary meaning of vandalism. The resulting contamination is therefore excepted from the pollution exclusion.
While the parties do not contest that the damage suffered by YMCA was the result of its employee habitually using meth, US Fire characterizes the resulting particulate matter as “fumes” (not covered) while YMCA characterizes it as “smoke” (covered). YMCA has the better argument. The policy does not define “smoke.” Nevertheless, it can be reasonably interpreted to include the particulates that result from meth use. Montana courts have not addressed this question and the limited non-precedential case law provides little guidance. See Farmers (Ore. 1993) (unnecessary to address whether smoke includes vapor because there was evidence of smoke as defined by insurer). Smoke, like vandalism, must therefore be assigned its usual meaning. “Smoke” is generally understood to describe the visible suspension of carbon or other particles in the air emitted from a burning substance. Webster’s (the “gaseous products of burning materials especially of organic origin made visible by the presence of small particles of carbon” and “a suspension of particles in a gas”). The term is often used colloquially to refer to the act of inhaling and exhaling the gaseous product of a burning material, such as smoking a cigarette or other illicit substances. Id.
US Fire disputes YMCA’s assertion that its employee smoked meth by burning foil, instead arguing that she ingested meth fumes by heating foil. But when applying the ordinary definition of smoke, this distinction is one without a difference. From the viewpoint of a layperson untrained in law or insurance, Giacomelli (Mont. 2009), when she used meth, the resulting by-product resulted in suspension of particles in the air emitted from the heated substance. This is consistent with the ordinary definition of smoke. Moreover, the policy uses the term “smoke” in both defining “pollutants” in the exclusion and “unspecified causes of loss” in the exception, giving rise to ambiguity which must be construed in favor of coverage.
Criminal Act Exclusion.
The criminal act exclusion bars coverage for any “dishonest or criminal act (including theft).” But it “does not apply to acts of destruction by [YMCA] employees….” The policy does not define “acts of destruction.” Montana courts have not had an opportunity to interpret the exception in this context, nor have others applied an analogous clause to similar facts. This case may present a matter of first impression.
US Fire argues that — like the vandalism exception to the pollution exclusion — the acts of destruction exception to the criminal act exclusion requires a showing that the employee acted with an intent to destroy the property that was damaged. According to US Fire, she was acting solely “to get high.” While YMCA does not contest that she was engaged in criminal conduct, it argues that “acts of destruction” contemplates “harm that substantially detracts from the value of the property.” Although a close call, YMCA has the better argument.
The parties only substantively discuss one case that addresses the acts of destruction exception. NMS (4th Cir. 2003) determined that an employee’s act of installing hacking software that destroyed company records was a covered cause of loss. US Fire seizes on specific language in NMS to extrapolate that an acts of destruction exception requires an intent element, highlighting that the employee had a specific “plan” to destroy the files. However, NMS does not squarely address the intent question.
US Fire additionally cites a footnote in SA-OMAX (Tex. 2010) pertaining to an employee’s theft of copper wires. In the “copper crime” cases, some courts have extended coverage for damage resulting from the theft of copper wire and pipe because stealing copper often results in extensive property damage. See Morley Witus, The Paradox of Insurance Coverage for Vandalism but Not Theft, Wayne L. Rev. (2010). But other courts have denied coverage for property damage if the crime was motivated by theft for profit rather than property destruction. Id.
These cases provide limited guidance where it is difficult to discern if one’s actions are motivated by an intent to destroy or whether one is merely indifferent to the property rights of others. For example, the YMCA employee was using meth to get high but concealed her use, “defaced and damaged the inside of a cabinet to make what has been described as a ‘drug den’,” and specifically used it in areas from which the HVAC spread the contamination. Her actions therefore go beyond what was necessary to merely “get high.” And those actions, consistent with YMCA’s argument, “substantially detract from the value of property.” Black’s (defining “destruction”). Although US Fire asserts that a broad interpretation of the exception threatens to swallow the rule, construing the acts of destruction exception to be analogous with the vandalism exception provides greater internal consistency in the policy. The acts of destruction exception can therefore be read to include the YMCA employee’s conduct, and thus the criminal acts exclusion does not bar coverage.
YMCA asserts that it is entitled to fees if it is determined that coverage exists for its claims. US Fire did not address this request. Although it appears that an award of fees may be appropriate under Brewer (Mont. 2003) and Riordan (9th Cir. 2009), this case is somewhat unique. Although YMCA counterclaimed, it has since stipulated to dismissal of its claims potentially related to US Fire’s bad faith. And application of both exceptions raised close questions under Montana insurance law. Thus US Fire shall have the opportunity to address whether fees can or should be awarded.
YMCA’s motion is granted and US Fire’s cross-motion is denied. (Fn. US Fire asserts in a footnote that if YMCA’s motion is granted and coverage is found to exist, further proceedings will be required to establish the scope and value of covered damages. However, such relief is not included in its pleading and is beyond the scope of this litigation.)
United States Fire Ins. v. Greater Missoula Family YMCA, 44 MFR 220, 4/9/20.
Kristin Gallagher & Mark Hamilton (Kennedys CMK), Basking Ridge, NJ, and Shane Macintyre (Brown Law Firm), Missoula, for US Fire Ins.; Leah Handelman & Bradley Luck (Garlington, Lohn & Robinson), Missoula, for YMCA.