In a recent decision, the Seventh Circuit Court of Appeals provided insurance companies doing business in Indiana with guidance on how to draft pollution exclusion clauses—provisions typically included in commercial general liability (“CGL”) policies that seek to exclude coverage for claims based on environmental contamination. Indiana is known for the tough standards it imposes on insurance companies with respect to withholding coverage based on policy exclusions. Since the Indiana Supreme Court’s 1996 decision in American States Insurance Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996), 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. In West Bend Mutual Insurance Company v. United States Fidelity and Guaranty Company, et al., 598 F.3d 918 (7th Cir. 2010), the Seventh Circuit Court of Appeals confirmed that clear and unambiguous language in pollution exclusion clauses is necessary in order to bar coverage for environmental contamination claims.
The issue in West Bend 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 West Bend Mutual Insurance Company’s (“West Bend”) and Federated’s mutual insured, MDK, who formerly owned and operated the station. After lengthy litigation, MDK eventually settled for $4 million. West Bend sued Federated 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 by arguing that the Federated pollution exclusion clause was similar to the exclusion rejected by the Kiger court.
The Seventh Circuit found that the Federated pollution exclusion clause explicitly excluded “bodily injury” or “property damage” caused by the release of “pollutants” or “motor fuels” from “tanks” and “underground piping.” While the term “pollutants” did not include gasoline or petroleum, the term “motor fuels” did. Moreover, the court 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 court was 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 deny coverage on the basis of the pollution exclusion face an uphill battle in this jurisdiction. 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 may be deemed vague and overly broad. The insurance industry can address the problem posed by Indiana courts by drafting what those courts consider clear and unambiguous contractual pollution exclusions with a precise definition of “pollutants”.