In an insurance coverage dispute involving the interpretation of the modified pollution exclusion, the Indiana Court of Appeals has ruled that it is ambiguous and unenforceable.
In State Automobile Mutual Insurance Company v. Flexdar, Inc., No. 49A02-1002-PL-00111, 2010 WL 4723188 (Ind. Ct. App. Nov. 22, 2010), State Automobile Mutual Insurance Company (“State Auto”) issued commercial general liability insurance to Flexdar, Inc. (“Flexdar”). Flexdar manufactured rubber stamps and printing plates at a factory in Indianapolis, Indiana. The machinery used in Flexdar’s manufacturing processes employed the chemical solvent trichloroethylene, which leaked from the machinery and contaminated the subsoil and groundwater at and around the factory. The Indiana Department of Environmental Management ordered Flexdar to investigate and remediate the trichloroethylene contamination.
Flexdar requested defense and indemnification from State Auto pursuant to the commercial general liability policies (the “CGL Policies”) it issued to Flexdar. The CGL Policies included an absolute pollution exclusion, excluding coverage for:
“‘Bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, disposal, dispersal, seepage, migration, release or escape of pollutants.
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
The CGL Policies also included an additional policy endorsement – the “function in your business” modification to the pollution exclusion – providing that the pollution exclusion “applies whether or not such irritant or contaminant has any function in your business, operations, premises, site or location.” Relying upon the modified pollution exclusion in the CGL Policies, State Auto denied coverage to Flexdar.
Citing American States Insurance Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996), Seymour Manufacturing Co. Inc. v. Commercial Union Insurance Co., 665 N.E.2d 891 (Ind. 1996), Travelers Indemnity Co. v. Summit Corp. of America, N.E.2d 926 (Ind. Ct. App. 1999), and Freidline v. Shelby Insurance Co., 774 N.E. 2d 37 (Ind. 2002), the court found the former three cases extend Kiger beyond its facts and affirm generally the ambiguity of the absolute pollution exclusion.
“We conclude, pursuant to the last fourteen years of precedent, that State Auto’s absolute pollution exclusion is ambiguous, must be construed in favor of the insured, and therefore will not operate to preclude coverage in connection with Flexdar’s TCE leakage. Under Kiger and its progeny . . . an insurance policy must be specific if it wishes to except from coverage claims relating a particular alleged contaminant.”
“[A]ny solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste” is the language that makes the pollution exclusion ambiguous. This definition essentially includes all types of matter found in nearly any condition or state. The “function in your business” modification to the pollution exclusion merely adds the caveat that the exclusion “applies whether or not the irritant or contaminant has any function in your business, operations, premises, site, or location.” Quite obviously, this clause does nothing to change the definition of “pollutants,” which a substance must be for the pollution exclusion to apply in the first place. Accordingly, the court concluded “[w]e see no reason that endorsement form is of any consequence here.”
Since the Indiana Supreme Court’s 1996 decision in Kiger, 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.