Illustrating how an insured can counter the insurer’s pollution exclusion arguments in coverage disputes, a federal court in Illinois held that an insured chemical company succeeded in raising genuine issues of material fact on three alleged exceptions to a pollution exclusion provision in an insurance policy. The court denied the insurer’s summary judgment motion in the insurance defense and indemnity case arising from numerous underlying environmental and personal injury claims against the insured party. Velsicol Chemical, LLC. v. Westchester Fire Ins. Co., No. 15-CV-2534 (N.D. Ill. Sept. 7, 2017).

Plaintiff Velsicol Chemical, LLC (“Velsicol”) held an excess insurance policy from Defendant Westchester Fire Insurance Company (“Westchester”). The policy included two pollution exclusion clauses, which purported to preclude coverage of environmental liabilities as well as liabilities for bodily injury or property damages arising out of environmental releases. For more than two decades, Velsicol was subject to judicial and administrative actions for environmental and personal injury claims relating to a range of sites. Velsicol filed a federal lawsuit in 2015, alleging that the underlying general liability policies had been exhausted, that the incidents at issue were not precluded from coverage under the pollution exclusion clauses, and that Westchester therefore should defend and indemnify Velsicol.

The insurer moved for summary judgment, arguing that the pollution exclusion clauses in the policy precluded Velsicol’s recovery. Velsicol countered that three exceptions to the pollution exclusions applied: “products hazard,” “permitted use,” and “sudden and accidental.” The court found that plaintiffs had raised sufficient material facts related to all three exceptions and denied the insurer’s motion.

The court first addressed the “products hazard” exception, which covers claims related to the handling of Velsicol’s products away from Velsicol’s facilities and out of its control. The court found that the insurer did not offer any factual allegations to refute Velsicol’s assertion that some of its costs arose from such use and handling. The court noted that the facts were at best “ambiguous” and that the insured should enjoy the benefit of the doubt. The court next found genuine issues of material fact related to the “permitted use” exclusion, under which Velsicol asserted it operated its plants in compliance with state environmental permits. The court noted that while compliance with the permits was uncontested, it was unclear whether the permits would allow discharges of the specific pollutants. Finally Westchester argued that pollution came from Velsicol’s ordinary operation and was not “sudden and accidental.” The court disagreed. It held that under Illinois law “sudden and accidental” meant “unexpected or unintended.” The court then noted that Velsicol’s witnesses testified multiple times that the spills were sudden, not intended, or not routine business practices or operations. Thus Velsicol raised genuine issues of material fact to survive summary judgment.