On March 17, 2011, an Indiana trial court found that an insurance company acted in bad faith as a matter of law when it refused to defend its insured, 1100 West, LLC (“1100 West”), against two third-party claims seeking the cleanup of environmental contamination on 1100 West’s property. The finding was made by the Environmental Division trial court of the Marion County Superior Court in an order granting partial summary judgment in favor of 1100 West and against the insurance company on the issue of liability for breach of the duty to defend and bad faith.

The facts behind this ruling originated in an underlying case between 1100 West and its adjacent property owner, Red Spot Paint & Varnish Company (“Red Spot”). Initially, 1100 West sued Red Spot to remediate contamination on the 1100 West property. However, Red Spot later filed a counterclaim alleging that 1100 West was liable for the TCE contamination on the 1100 West property, and Red Spot notified the Indiana Department of Environmental Management (“IDEM”) that there had been a release of TCE on the 1100 West property. IDEM then sent 1100 West a PRP letter demanding that it investigate and remediate the TCE contamination. 1100 West tendered Red Spot’s counterclaim and IDEM’s claim to its insurance company in 2006, for defense under commercial general liability and umbrella policies.

The insurance company refused to defend 1100 West against both the Red Spot counterclaim and the IDEM claim. The insurer denied coverage of both claims on the basis of the pollution exclusions in its policies, and it denied coverage as to the IDEM claim on grounds that it was not a “suit”. Prior to receiving the insurer’s denial of coverage, 1100 West warned the insurance company that its pollution exclusions were invalid and cited two Indiana appellate cases in which similar pollution exclusions and an insurer’s “no-suit” defense to a PRP letter had been rejected.

Finding that the insurer breached its duty to defend and acted in bad faith in asserting these defenses, the court noted that the insurance company’s pollution exclusions contained the identical, overly broad definitions of “pollutants” that the Indiana appellate courts consistently rejected as ambiguous and unenforceable five times starting with the Indiana Supreme Court’s decision in American States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996). Similarly, the court noted that the insurer’s “no-suit” defense had been rejected twice by the Indiana appellate courts over seven years earlier because PRP letters from a government agency involve the “cognizable degree of coerciveness” necessary to be considered a suit triggering insurance coverage. Because the insurer ignored a decade of precedent in asserting its pollution exclusion and over seven years of precedent in asserting its “no-suit” defense, the court found that there was clear and convincing evidence that the insurer had no rational, principled basis for denying coverage. Therefore, the court found that the insurance company acted in bad faith as a matter of law, thereby entitling 1100 West to partial summary judgment in its favor as to liability for the insurer’s breach of the duty to defend and bad faith. The court stated that the insurance company could have avoided this result had it simply defended 1100 West under a reservation of rights.