## Facts

- Stoney Run Company owned, and Larrymore Organization managed, an apartment complex in Kingston, New York.
- Prudential-LMI Commercial Insurance Company issued two commercial general liability policies covering the premises.
- During the policy periods, tenants were killed or injured by inhaling carbon monoxide that entered apartments due to an allegedly faulty heating and ventilation system.
- Tenants or their representatives filed three state-court tort actions seeking damages for carbon monoxide poisoning and related deaths and injuries.
- The insureds tendered the suits to Prudential seeking defense and indemnity; Prudential denied coverage based on an “absolute pollution exclusion.”
- The exclusion barred coverage for bodily injury or property damage arising from the “discharge, dispersal, release or escape” of “pollutants” at or from premises the insured owned, rented, or occupied; “pollutants” included “any ... gaseous ... irritant or contaminant,” including “fumes.”
- The insureds sued in federal court for declaratory relief requiring Prudential to defend and indemnify in the underlying actions.
- The district court granted Prudential’s Rule 12(b)(6) motion to dismiss the coverage claims as to two underlying actions (Gruner and Schomer), concluding the exclusion unambiguously applied; the insureds appealed.

## Issues

1. Whether, under New York law, the policies’ absolute pollution exclusion unambiguously bars coverage for injuries from indoor carbon monoxide emitted by a residential heating and ventilation system.
2. Whether, given the pleadings and New York’s defense standard, Prudential had a duty to defend (and potentially indemnify) the insureds in the Gruner and Schomer actions.

## Decision

- The Second Circuit reversed the dismissal of the Gruner and Schomer coverage claims and remanded.
- The court held the pollution exclusion did not unambiguously apply to indoor carbon monoxide from a building’s heating system and was ambiguous in that context.
- Because the exclusion was ambiguous and the pleadings permitted a reasonable possibility of coverage, Prudential’s duty to defend was triggered.

## Legal Principles

- Insurance policy language is ambiguous under New York law if it is susceptible to more than one reasonable interpretation; ambiguities, particularly in exclusions, are construed against the insurer.
- The insurer bears the burden to show an exclusion applies to the particular circumstances.
- Under New York law, the duty to defend is broader than the duty to indemnify and arises whenever there is a reasonable possibility of coverage.
- A pollution exclusion, though broad in literal terms, may reasonably be read as aimed at traditional environmental pollution rather than ordinary indoor hazards associated with routine building operations; if both readings are reasonable, the exclusion is ambiguous and cannot support dismissal on the pleadings.

## Conclusion

The Second Circuit concluded that an absolute pollution exclusion was ambiguous when applied to injuries from carbon monoxide leaking indoors from an apartment building’s heating and ventilation system; construing the ambiguity against the insurer and applying New York’s broad duty-to-defend rule, the court reinstated the insureds’ declaratory claims for defense coverage and remanded.


Stoney Run Co. v. Prudential-LMI Com. Ins. Co., 47 F.3d 34 (2d Cir. 1995)