State Automobile Mut. Ins. Co. v. Flexdar, Inc. (Supreme Court of Indiana, March 22, 2012)
This environmental coverage dispute arises from an insurer’s declaratory action contending that coverage for Trichloroethylene (TCE) contamination of soil and groundwater by policyholder Flexdar at its property was excluded pursuant to the pollution exclusion in the policy.
The insurer denied coverage and filed the subject declaratory action. In moving for summary judgment, Flexdar argued that language of the pollution exclusion was ambiguous under Indiana law and should be construed in its favor. The trial court agreed and entered summary judgment for Flexdar. The Court of Appeals affirmed holding the pollution exclusion is ambiguous and therefore must be construed in favor of coverage and the Indiana business operations endorsement language did not cure the ambiguity. The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including some, vapor, soot, fumes, acids, alkalis, chemicals and waste.”
In taking an extremely narrow and conservative approach on the interpretation of the provision, the Indiana Supreme Court held pursuant to its previous decision in American States Ins. Co. v. Kiger, 662 NE2d 945 (Ind. 1996) and its progeny, that the provision was ambiguous because it did not specifically identify the chemical at issue. It further noted that “this clause cannot be read literally as it would negate virtually all coverage.” “In other words, practically every substance could qualify as a pollutant under this definition rendering the exclusion meaningless.” The court specifically acknowledged that with regard to interpretation of the applicability of this exclusion, “Indiana has taken a different direction” than other jurisdictions and noted the existence of two fundamental jurisdictional views in interpreting these clauses: the “literal approach” and the “situational approach.” The literal approach applies in non-traditional settings and generally holds that the exclusion is unambiguous in all circumstances, whereas the situational approach applies in “traditional” contamination settings.
Significantly, the court also noted that due to the conservative interpretation of this provision in Indiana, over the years the insurer has modified the provision and promulgated an Indiana business operations endorsement and an Indiana endorsement defining “pollutant” which identifies specific chemicals associated with common pollution releases, including TCE, as well as many others listed on the CERCLA Hazardous Substances Priority List. As such, the Supreme Court noted that because this policy did not contain these revised endorsements the court did not feel compelled to modify its prior precedent. Specifically, in holding the exclusion was ambiguous, the court noted “Indiana decisions have been consistent in recognizing the requirement that language of a pollution exclusion be explicit.” Further, “‘[t]o unsettle the law … would show scant respect for the principle of stare decis.’”
In a rather critical dissent, Justice Sullivan noted that this holding renders the seminal Kiger case as demanding that the pollution exclusion found in most general liability policies be ignored. The dissent further notes this decision is completely contrary to the sound rationale posited in a recent 7th Circuit decision Scottsdale Indem. Co. v. Vill. Of Crestwood, 2012 US App. Lexis 5069 (7th Cir. Mar. 12, 2012) published just a few days before this court’s decision which enforced a pollution exclusion essentially the same as presented in this case. Extensive portions of Crestwood decision are quoted by the dissent “both for its clarity and applicability.”
For a copy of the decision, click here.