Indiana Supreme Court Clarifies Coverage for Environmental Claims

Co-written by Frederick D. Emhardt & Jeffrey D. Featherstun

Indiana’s appellate courts have issued a number of opinions in recent years that have sustained claims for cover-age for environmental liabilities under the comprehensive general liability ("CGL") policies purchased by virtually every Indiana business. Several of these decisions, such as American States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996) and Travelers Indemnity Co. v. Summit Corp of America, 715 N.E.2d 926 (In. Ct. App. 1999) have drawn national attention in vindicating the rights of policyholders under broad form CGL policies. On December 20, 2001, the Indiana Supreme Court issued an-other such decision, Allstate Ins. Co. v. Dana Corp., Cause No. 49S02- 0105-CV-231 ("Dana II"). In Dana II, authored by Justice Theodore Boehm, the Court decided two crucial issues of first impression that continually arise in environmental insurance coverage cases.

First, Dana II holds that the "all sums" language which exists in the insuring clauses of most CGL policies allows a policyholder facing environmental liabilities to freely select which of the policies involved in a multi-year occurrence to use to respond to a loss. The insurer’s promise in such policies is to pay "all sums" the policyholder becomes obligated to pay as damages on account of property damage or bodily injuries caused by an occurrence. Thus, when multiple insurance policies are activated by an occurrence spanning several years - which is typical in cases involving environmental contamination - the insurers are jointly and severally liable for the loss, subject only to policy limits. The "all sums" holding will greatly aid policyholders in instances where some triggered policies have been lost, where some insurers have become insolvent, or where there are high or multiple deductibles or settled or exhausted coverages. The ruling also places a premium on early resolution of claims, as recalcitrant insurers may be "left holding the bag."

Second, Dana II holds that the "owned property" exclusion which exists in CGL policies is inapplicable to environmental liability claims. Dana II approves the analysis of Judge Posner in Patz v. St. Paul Fire & Marine Ins. Co., 15 F.3d 699, 705 (7th Cir. 1994). Patz and Dana II reason that such environmental claims are based on a policyholder’s liability to third parties, which they find is the very purpose for which the policies were purchased. Any exclusion for damage to "property owned by an insured" must be construed narrowly and in light of the purpose of CGL insurance, making the exclusion inapplicable to such claims. When combined with Dana I, any cleanup ordered on or below property of the policyholder, whether or not groundwater is involved, constitutes "damages" and generally is covered by form CGL policies. Dana II did distinguish between CGL policies where "property damage" was specifically defined as damage to property "other than property owned by an insured" and those policies where "owned property" limitations are mere exclusions. Under the former - very unusual - provisions, Dana II holds the insurer’s duty to indemnify is limited to claims for contamination escaping the policyholder’s property.

Dana II was the latest published appellate opinion in this multi-site environmental coverage case which has been pending in the Marion Superior Court since January 1993. Dana is one of the world’s largest suppliers of components, modules, and systems to vehicle manufacturers. Dana sued 56 of its insurers for $60 million in environmental claims at 65 sites. In the first published opinion, Hartford Accident & Indemnity Co. v. Dana Corp., 690 N.E.2d 285 (Ind. Ct. App. 1997), transfer denied (Ind. 1998) ("Dana I"), the Indiana Court of Appeals deter-mined, among other things, that "suits" requiring a defense under comprehensive general liability policies were not limited to traditional courthouse lawsuits, but also included administrative proceedings alleging liability against a policyholder, and that cleanup costs incurred by a policyholder as a result of governmental cleanup orders were covered "damages."

Dana II also slightly trims the scope of coverage for environmental liability under the separate "personal injury" coverage portion in most CGL policies, but coverage is still available under the earlier Summit decision under "personal injury" terms in most policy forms. The case also analyzes the relationship between primary and excess carriers and the existence of aggregate limits in the available coverages for environmental liabilities. These holdings, however, turn in large part on stipulations made by the parties or specific facts about the policies at issue in the case.

This was the Indiana Supreme Court’s third recent decision in favor of policyholders seeking coverage for environmental liabilities. In the landmark Kiger decision, it ruled the "sudden and accidental" pollution exclusion does not bar coverage for gradual gasoline releases because "sudden" reasonably can be construed to mean "unexpected." The court also ruled the "absolute" pollution exclusion does not bar coverage because it does not specifically exclude gasoline and is so broad that to construe it literally would produce absurd results. In Seymour Mfg. Co. v. Commercial Union Ins. Co., 665 N.E.2d 891 (Ind. 1996), a companion case to Kiger involving chemical wastes and other substances at a nationally-known Superfund site, the Court affirmed its decision in Kiger on the "absolute" pollution exclusion with the Chief Justice adding to the majority. In addition, the Seymour court found a duty to defend as a matter of law even where several coverage defenses had been asserted with some factual basis.

The Supreme Court issued Dana II even though Allstate, the last remaining party in the litigation, and Dana had settled and reported the settlement to the Court. The opinion was issued because the Court wished to guide similarly situated parties in the future.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.