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New Hampshire Finds That Physical Loss Doesn’t Have To Be Tangible

Blogs, Insurance Coverage

In a recent ruling, the New Hampshire Supreme Court extended the scope of what constitutes “physical loss” in the context of property insurance coverage by ruling that a pervasive cat urine odor may be sufficient to demonstrate a change in the condition of the property sufficient to constitute a “physical loss.” Mellin v. Northern Security Insurance Company, Inc. (N.H. 2015).

Doug and Gayle Mellin (“Plaintiffs”) owned a condo in Epping, NH. They leased the condo to a tenant who discovered that the neighbor in the apartment below owned two cats. The tenant moved out in November 2010 because of the pervasive smell of cat urine coming from the apartment below. Plaintiffs investigated the odor and found that the odor came from an open plumping chase in the kitchen that connected the two condos. Epping’s health inspector sent Plaintiffs a letter that indicated the odor was a health problem and the unit needed to be vacated until the odor was eliminated. Plaintiffs filed a claim under their insurance policy which was subsequently denied. Plaintiffs had moved into the unit after the tenant vacated and lived in the unit on and off until February 2011. Plaintiffs felt they had to sell the unit because they could not rent it out in the current odorous condition. They were forced to sell the condo at below market value due to the smell. Plaintiffs filed suit against their insurer alleging that they were entitled to coverage.

Northern Security Insurance Company (“Northern”) argued that Plaintiffs were not covered for three reasons. First, Plaintiffs suffered no physical loss to a property because of the odor. Second, the Policy included a Pollution Exclusion Clause that would have included events like pervasive cat urine odor. Third, the cat urine odor did not fall under any of the enumerated perils.

On the first issue, the New Hampshire Supreme Court held that physical loss “may include not only tangible changes…but also changes that are perceived by sense of smell and that exist in the absence of structural damage.” The Court held that the property must show a distinct and demonstrable change from the property’s original, satisfactory state. The Court went on to hold that any evidence that the property was unusable, whether temporary or permanent would support a finding of physical loss. The Court then remanded the first issue to the trial court to determine whether Plaintiffs suffered a physical loss because of the cat urine odor.

On the second issue, Northern argued that the Pollution Exclusion Clause included in the policy barred coverage. Northern argued that the cat urine odor falls directly within the exclusion because the smell was a “pollutant.” The smell was described as a “toxic odor” and “a chemical smell similar to ammonia.” Plaintiffs argued that the exclusion was meant to exclude coverage for environmental pollution not cat urine odor in a residential condominium. The Court relied on its holding in Weaver v. Royal Insurance Co. of America, 140 N.H. 780 (N.H. 1996), in rejecting Northern’s application of the pollution exclusion. In Weaver, the Court ruled that a Pollution Exclusion Pollution clause did not preclude coverage where it was subject to two reasonable interpretations.

Northern finally argued that Plaintiffs were not entitled to coverage because the cat urine odor did not fall within the enumerated perils listed in Coverage D. However, the court held that the section did not limit coverage if Plaintiffs were entitled to coverage under Coverage A. The Court held that Plaintiffs could be covered under Coverage A, because the section described coverage as “Perils Insured Against We insure against risk of direct loss to property described in Coverage A, only if that loss is a physical loss to property.” The Court remanded on the third issue as it was contingent on whether pervasive cat urine odor constitutes a physical loss to property