Pollution Exclusion’s Ambiguity Thwarts Insurer’s Attempt to Deny Coverage

December 17, 2010

Courts around the country continue to split over the scope of the absolute pollution exclusion. At least for policyholders in Indiana, it appears the question has been finally answered in favor of policyholders. A recent opinion from the Indiana Court of Appeals traces the history of courts’ interpretations of the absolute pollution exclusion over the last 14 years, and it’s clear that the exclusion is ambiguous. State Automobile Mut. Ins. Co. v. Flexdar, Inc., 2010 Ind. App. LEXIS 2170 (Nov. 22, 2010).

Opinions interpreting the exclusion break along two lines: (1) a broad interpretation that can seem limitless, and (2) a more narrow reading limited to traditional pollution. In Flexdar, the insured was faced with a traditional pollution situation. Its operations required the use of trichloroethylene (TCE). The used TCE, along with other waste, was collected in 55 gallon drums for subsequent disposal. As Flexdar wound down operations in 2003, investigators discovered possible leaks of TCE contaminating the groundwater and soil.

The Indiana Department of Environmental Management ordered Flexdar to conduct further studies of contamination, and warned that the company could be liable for cleanup costs. Flexdar submitted a claim to State Automobile for coverage under its CGL policies. Subsequently, State Automobile filed a declaratory judgment action to deny coverage based on the absolute pollution exclusion.

In a traditional pollution scenario, one would expect the insurer to have the upper hand in a coverage dispute, but the trial court found the exclusion ambiguous. In Indiana, there is a line of case law going back 14 years, repeatedly finding the absolute pollution exclusion ambiguous. On appeal, the court had little trouble dismissing State Automobile’s argument that the prior cases were distinguishable and limited to their facts.

In analyzing the trouble with the exclusion, the appellate court cited to a prior Indiana Supreme Court opinion that noted, “Clearly, [the pollution exclusion] clause cannot be read literally as it would negate virtually all coverage. For example, if a visitor slips on a grease spill then, since grease is a ‘chemical,’ there would be no insurance coverage.” Citing American States Insurance Co. v. Kiger, 662 N.E.2d 945, 948-49 (Ind. 1996).

This example demonstrates the problem with the exclusion as currently written, and why the broad application of it is extremely troubling to policyholders. Unfortunately, the broader interpretation is the law in many jurisdictions to the detriment of insureds.

In the end, the Indiana Court of Appeals held, “We conclude, pursuant to the last 14 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.” It does not get any better for a policyholder than that kind of ruling when facing the denial of coverage based on the pollution exclusion found in most insurance policies. At least for those looking for coverage in Indiana, prospects are brighter when dealing with environmental situations of this sort.

For more information on this issue and how McGuireWoods assists policyholders in protecting and recovering their insurance rights, please contact the author.