by George M. Plews, Donna C. Marron & Jeffrey D. Featherstun
The Indiana Supreme Court has summarily affirmed a ruling by the Court of Appeals that the "absolute pollution exclusion" does not block coverage for claims involving exposure to toxic fumes.
The case involved claims by occupants of an office building in South Bend who complained they were injured by fumes from substances used to install carpet. When the building owners’ insurance carrier refused to defend or indemnify them, the owners sued the insurer to enforce their rights under the policy. The building owners also alleged the insurance carrier’s denial of coverage constituted bad faith in light of previous decisions to the contrary by Indiana courts.
For the third time, Indiana’s highest court has ruled that such policies – generally issued 1986 and after – cover environmental claims. While the Court also reversed a bad-faith judgment against the insurer arising from its denial of the claims, the ruling strongly suggests insurance companies may face such liability if in the future they continue to assert invalidated defenses such as the "absolute pollution exclusion." Freidline v. Shelby Ins. Co., Cause No. 71S03-0107-CV-355 (August 28, 2002).
There were two main issues in the case: coverage and bad faith. In unqualified terms, the Court found the insurer owed full coverage for the claim. It summarily affirmed that the standard form "absolute pollution exclusion" – which bars coverage for injuries arising out of the release of "pollutants" – is ambiguous and does not exclude coverage for the injuries at issue. It based its ruling on Indiana legal precedent. In American States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996), Seymour Mfg. Co. v. CommercialUnion Ins. Co., 665 N.E.2d 891 (Ind. 1996) and Travelers Indem. Co. v. Summit Corp. of Am., 715 N.E.2d 926 (Ind. Ct. App. 1999), Indiana’s appellate courts had ruled the exclusion is ambiguous and does not bar coverage, respectively, for petroleum from a leaking underground storage tank; hazardous materials spilling, leaking and oozing from containers; and soil and groundwater cleanup claims. The Court affirmed these decisions and found they applied with equal force to the claims at issue. After Seymour, Kiger, Summit and now Freidline, an insurance company cannot reasonably continue to contend that the "absolute pollution exclusion" is somehow enforceable under Indiana law.
Having found that the insurer was obligated to defend and indemnify, the Court turned to the question of whether the insurer’s incorrect denial of coverage was done in bad faith. It expained the issue is whether the insurer had a rational, principled basis for denying liability. Although the insurer’s denial was wrong, the Court cited the fact the pollution exclusion has been heavily litigated and assigned differing interpretations in other states as well as the fact the trial court found the insurer’s arguments persuasive as mitigating factors for the insurer in this case. Implicit in the Court’s reasoning – as well as in an explicit warning to insurers that fail to file a declaratory action or defend the policyholder under a reservation of rights that they will lose their rights to raise policy defenses – is that insurers after Freidline will not be able to avail themselves of this excuse now that the law has been clarified.
Freidline leaves no doubt that the "absolute pollution exclusion" is not a bar to coverage for environmental claims. It also strongly suggests that future denials of coverage under this exclusion may bedealt with harshly given the clarity of Indiana law on the subject.
Plews Shadley Racher & Braun represented amicus curiae the Indiana Manufacturers Association in this case.
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