In a recent opinion, the Indiana Court of Appeals examined and provided significant analyses of a number of fundamental concepts in insurance law, including the definition of “property damage,” the concept of “occurrence,” the expected-or-intended exclusion, the contractual-liability exclusion and the common-law known-loss doctrine. Indiana Insurance v. Kopetsky, No. 49A02-1304-PL-340 (June 4, 2014). The opinion affords policyholders considerable guidance on, and assistance with regard to, seeking coverage under commercial general liability insurance for environmental liabilities.

KB Home Indiana, a residential home builder, entered into an agreement with George Kopetsky to purchase lots in Cedar Park, a housing development being built by Kopetsky, for the purpose of constructing and selling single-family residences. In the agreement, Kopetsky represented that he was unaware of any contamination in Cedar Park and that at the closing for each lot sold to KB Home he would certify that he had not received notice that the lot was contaminated.  

Subsequent to purchasing over 60 lots from Kopetsky, KB Home learned that some of the lots were contaminated. KB Home sued Kopetsky alleging, inter alia, that he breached the agreement and negligently failed to notify KB Home of environmental issues in Cedar Park. Kopetsky tendered a claim to his insurer, Indiana Insurance Company, and the insurer filed suit against Kopetsky requesting a declaration that it had no duty to defend or indemnify Kopetsky with regard to the KB Home suit. 

The trial court entered summary judgment in favor of Kopetsky. Indiana Insurance appealed, arguing the trial court erred because, inter alia, the damages alleged by KB Home did not constitute “property damage” and were not the result of an “occurrence,” and also because the expected-or-intended exclusion, the contractual-liability exclusion and the known-loss doctrine each barred coverage.

Property Damage

Kopetsky was a named insured under four commercial general liability policies issued by Indiana Insurance. The policies define “property damage,” in part, as “[p]hysical injury to tangible property, including all resulting loss of use of that property.” Indiana Insurance argued the allegations in the KB Home suit do not support a claim for “property damage” because KB Home did not assert that the lots it purchased from Kopetsky damaged or caused injury to any third party; rather, KB Home only alleged that the lots themselves are contaminated and, as a result, have caused economic loss for KB Home. 

As an initial matter, the court rejected Indiana Insurance’s claim that the economic-loss doctrine prevents a commercial general liability policy from covering losses only recoverable in contract. The proper analysis, according to the court, is to examine the language of the insuring agreement and then evaluate whether any exclusions apply to bar coverage. 

The insuring agreement in the policies states, in part, that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The court concluded “that the contaminated Cedar Park lots KB Home purchased suffered property damage pursuant to the [p]olicies[] because the lots, which are ‘tangible property,’ have suffered ‘physical injury.’” Further, the court concluded that there were no exclusions that functioned to bar coverage. Accordingly, the court determined the damages alleged in the KB Home suit do qualify as “property damage.” 

Occurrence

The policies define “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Indiana Insurance argued the only “occurrence” alleged in the KB Home suit was Kopetsky’s failure to notify KB Home of the contamination and that any putative “property damage” (i.e., the contamination) was not caused by Kopetsky’s failure to notify KB Home of the contamination in Cedar Park. 

The court rejected Indiana Insurance’s analysis and pointed out that, in the suit, KB Home alleged the contamination was the result of the migration of contamination from the property immediately adjacent to the Cedar Park development. The problem with Indiana Insurance’s analysis, according to the court, is that it is “premised on the idea that the occurrence in question has to have been caused by the insured.” The court highlighted the fact that the contractual provisions in the insurance policies “do not contain any language requiring that the ‘occurrence’ in question be the insured’s fault.” In other words, the contractual language “does not address the source of the accident or require that it be any particular party’s responsibility.” Accordingly, the court determined that the allegations in the suit, namely, that the property damage in Cedar Park was the result of the migration of contamination from the adjacent property, properly pled an “occurrence” as that term is defined in the policies. 

Indiana Insurance also argued that Kopetsky’s failure to notify KB Home of the contamination was intentional and, therefore, could not constitute an “occurrence” because it was not an “accident.” The court rejected this argument because “the actual occurrence pled by KB Home [i.e., the migration of contamination from the adjacent property] was not something [Kopetsky] actually did.”  

Expected-or-Intended Exclusion

The policies exclude coverage for property damage that is expected or intended from the standpoint of the insured. Indiana Insurance argued that the expected-or-intended exclusion barred coverage for Kopetsky with regard to the KB Home suit. The court emphasized that coverage is undermined under the expected-or-intended exclusion if and only if, at the time of the acts causing the injury, the insured expected or intended the injury. The court pointed out that Kopetsky could not have expected or intended the property damage at the time of the acts causing it because “he had nothing to do with the actual contamination of Cedar Park when it occurred.” Accordingly, the court determined that the “exclusion does not work to bar coverage in this case.”  

Contractual-Liability Exclusion

The policies exclude coverage for property damage for which the insured is responsible due to the assumption of liability in a contract. Indiana Insurance argued that the contractual-liability exclusion barred coverage for Kopetsky “because KB Home’s allegations all pertain to [Kopetsky’s] alleged failure to inform it of potential contamination, in breach of the [a]greement, under which [Indiana Insurance argued Kopetsky] ‘assumed’ liability.” 

According to the court, the problem with Indiana Insurance’s analysis is that it is “premised on the notion that you ‘assume’ liability every time you sign a contract because you may be held liable for breaching it.” The court declared that “[a]lthough our research has uncovered no Indiana case precisely on point, today we explicitly endorse the proposition that ‘assumed’ liability is liability originally incurred by a third party but then taken on by another.” The court further declared that “[t]oday we join those jurisdictions who have held that contractual liability exclusions in [commercial general liability] policies bar coverage not for liability incurred by a contract breach but, rather, for liability assumed from a third party.” 

According to the court, while Kopetsky may be liable for entering into the agreement and subsequently breaching it, “this is not the same as assuming liability pursuant to it.” Therefore, the court concluded that “coverage is not barred by the [p]olicies’ contractual liability exclusion.” 

Known-Loss Doctrine

Under the known-loss doctrine, if an insured has actual knowledge that a loss has occurred, is occurring, or is substantially certain to occur on or before the effective date of an insurance policy, coverage for the loss is barred. In other words, the known-loss doctrine bars coverage for a loss that has already taken place. The known-loss doctrine is explicitly adopted in the insuring agreement of the policies issued to Kopetsky by Indiana Insurance. 

Indiana Insurance argued that the known-loss doctrine bars coverage for Kopetsky with regard to the KB Home suit because he was aware of the contamination in Cedar Park before the effective date of the first policy. The court pointed out that before the first policy went into effect, Kopetsky had been informed that the adjacent property was contaminated and that he had given permission to an environmental consultant for the property’s owner to perform soil and groundwater testing in Cedar Park. Further, the court noted that while Kopetsky denied knowing of any contamination in Cedar Park before the effective date of the first policy, “absolute certainty is not required.” Therefore, the court remanded for trial the question of whether Kopetsky had actual knowledge that a loss had occurred, was occurring, or was substantially certain to occur on or before the effective date of the first policy issued to him by Indiana Insurance. 

Conclusion

In Indiana Insurance v. Kopetsky,  the court charts the parameters of “property damage,” details the requirements for establishing an “occurrence,” clarifies the limits of the expected-or-intended exclusion, establishes the principles governing the contractual-liability exclusion and details the application of the known-loss doctrine. The opinion’s substantial analyses of these insurance-law concepts provide policyholders essential guidance on seeking coverage under commercial general liability insurance for environmental liabilities.