Indiana is known for the tough standards it imposes on insurance companies with respect to withholding coverage based on policy exclusions. For example, in environmental contamination cases, insurers often attempt to withhold coverage based on pollution exclusion clauses—provisions typically included in commercial general liability (“CGL”) policies that seek to exclude coverage for claims based on environmental contamination. Since the Indiana Supreme Court’s 1996 decision in American States Insurance Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996), however, Indiana courts will not exclude coverage based on pollution exclusion clauses unless the language of the insurance policy explicitly excludes the “pollutant” at issue. If the policy language is vague as to whether the pollutant is included, then the pollution exclusion clause does not apply.
Recently, although U.S. Court of Appeals for the Seventh Circuit upheld a denial of coverage for environmental contamination based on a pollution exclusion clause, the Court upheld the tough standard imposed by Kiger and its progeny in West Bend Mutual Insurance Company v. United States Fidelity and Guaranty Company, et al. (Cause No. 09-2519). The issue was whether CGL policies issued by Federated Mutual Insurance Company (“Federated”) covered liabilities for petroleum released from underground storage tanks and associated piping from a 7-Eleven gas station in Goshen, Indiana. The petroleum contaminated the groundwater and migrated underneath a nearby residential neighborhood. The contamination vaporized into homes causing property damage and personal injury. The neighborhood residents sued 7-Eleven and Federated’s insured, MDK, who formerly owned and operated the station. After lengthy litigation, MDK eventually settled for $4 million. West Bend sued Federated (and USF&G) to recover its costs of defending MDK.
Federated argued that it owed no duty to defend because it had no duty to indemnify claims arising from petroleum contamination pursuant to the pollution exclusion clause in its policy. West Bend countered arguing that the Federated pollution exclusion clause was similar to the exclusion rejected by Kiger court. The federal district court and the Seventh Circuit sided with West Bend. However, in doing so, the federal bench specifically upheld the Kiger opinion.
The federal judges found that the Federated pollution exclusion clause explicitly excluded “bodily injury” or “property damage” caused by the release “pollutants” or “motor fuels” released from “tanks” and “underground piping.” While the term “pollutants” did not include gasoline or petroleum, the term “motor fuels” did. Moreover, the Seventh Circuit noted that the Federated policy included an “Indiana Changes Endorsement” which emphasized that the pollution exclusion applied even to “pollutants” that had an ongoing function in the business. Thus, the federal judges were convinced that “a gas station owner . . . would know to a certainty that Federated would not be responsible for damage arising out of gasoline leaks taking place during the covered period” after reading these two policy provisions.
While the West Bend decision is one of the only opinions to uphold the denial of coverage for environmental contamination in Indiana, it underscores that insurers who wish to do so still face an uphill battle. The Federated policy explicitly excluded the type of pollutant (i.e., petroleum) and the manner in which it was released (i.e., from USTs and associated piping). Few CGL policies issued in Indiana are drafted with this degree of specificity. Indeed, pollution exclusion endorsements added to Indiana CGL policies even after Kiger still contain pollution exclusion clauses that are vague and overly broad. Therefore, even following this decision precluding coverage, insureds can rest assured that Indiana courts will continue to heavily scrutinize pollution exclusion clauses before precluding coverage.
For more information on how Indiana court interpret insurance contracts, please contact Brad Sugarman, Michael Chambers, or any member of Taft’s environmental practice group.