New York Court Holds Radioactive Materials Exclusion Precludes E&O Coverage for Negligent Phase I Report

By Brian Margolies

In its recent decision in Merritt Environmental Consulting Corp. v. Great Divide Ins. Co., 2018 U.S. Dist. LEXIS 175527 (E.D.N.Y. Oct. 10, 2018), the United States District Court for the Eastern District of New York had occasion to consider the application of a radioactive materials exclusion in a professional liability policy.

Great Divide’s insured, Merritt Environmental, was hired as an environmental consultant by a bank in connection with a mortgage refinance of a property located in Westchester County, New York.  Merritt’s responsibility was to prepare a Phase I environmental report concerning the property, which the bank ultimately relied on in agreeing to the refinance. It was later claimed, however, that Merritt’s report failed to document the full extent of the property’s radium and uranium contamination resulting from its use in the Manhattan Project. Merritt was named in two separate lawsuits as a result of its allegedly faulty report, including one by the bank alleging that Merritt negligently prepared its report.

Merritt sought coverage under the professional liability coverage part of a packaged policy issued by Great Divide.  Great Divide denied coverage on the basis of a policy exclusion barring coverage for “any liability of whatever nature arising out of, resulting from, caused by or contributed by … Radioactive contamination however caused, whenever or wherever happening.”

In considering the exclusion, the court observed that under New York law, the phrase “arising out of” is unambiguous and means “originating from, incident to, or having connection with.” The court further observed that the applicability of an “arising out of” exclusion requires only a “but for” causation. The court concluded that this was satisfied since the claims against Merritt would not exist but for the radioactive materials contaminating the property.  It was not relevant to the court that the suit alleged a cause of action against Merritt based on negligence, “because no liability on the part of Merritt, whether by negligence, professional malpractice or any other theory could exist but for the presence of radioactive contamination.”

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