Written by Justin Gifford, J.D., General Counsel, EnviroForensics and PolicyFind
The Indiana Court of Appeals’ November opinion in the recent State Automobile Mutual Insurance Co. v Flexdar, Inc. (Ind. App. 2010) comes as good news to business owners like drycleaners who currently or have historically used tetrachlorethene (perc) or petroleum solvents that may have been released into the environment. The Appellate Court’s decision re-examined the landmark American States Insurance Co. v. Kiger (662 N.E.2d 945, Ind. 1996) as well as its progeny and found for Flexdar, Inc., the insured. (Kiger established that the absolute pollution exclusion found in many general commercial liability (GCL) policies is ambiguous and, as a result, ineffective in insulating insurers from their duties to defend and/or indemnify their insureds for claims made by the Indiana Department of Environmental Management that the insureds investigate and clean up releases of perc or other substances into soil and groundwater.)
Although the court’s reasoning was functionally identical to that found in Kiger and later cases like Seymour Manufacturing Co. v. Commercial Union Insurance (665 N.E. 2d 891, Ind. 1996) and Freidline v. Shelby Insurance Co. (774 N.E.2d 37, Ind. 2002), it is of particular significance in the impact that it appears to have on policies covering periods as late as 2004 – State Auto added a policy endorsement that year specifically excluding coverage even if the pollutant (perc, in this case) was used as a part of the insured’s business operations. The Flexdar court was disinclined to accept that the endorsement was effective in limiting State Auto’s obligations and held that unless the contaminant had first been identified as a pollutant and the pollution exclusion was applicable, the endorsement had no effect. “Indiana courts have addressed the exclusion in several contexts and have routinely found it ambiguous and unenforceable.” (Flexdar) The court elaborated in dicta (text in an opinion that is considered “editorial” and is intended to be informative or explanatory rather than part of the legal holding) that to exempt coverage for what is often the riskiest part of a business who seeks insurance against risk is absurd.
In my experience in assisting our clients in securing defense and indemnification from their insurers, the initial responses that they receive from their insurers often leave them disheartened and worried because of the policy language that the insurers quote in their canned-response letters; policy language like State Auto tried to defend in this case that to someone not used to seeing it can appear to be a clear exclusion to the insurer’s duty to defend or indemnify.
The Flexdar policy language had exclusions for pollution and professed to be inapplicable to, “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants [and]…to any loss, cost, or expense arsising out of any request, demand or order that any insured or others test for, monitor, clean up [or] in any way respond to the effects…of pollutants.” That kind of language is common in many of the policies that our clients have and can make them hesitant in believing that their insurer will actually fund investigation and remediation activity mandated by the IDEM…but it’s that kind of language that Flexdar and the cases that lead up to it specifically identified as ambiguous and not excusing insurers from their duty to defend and/or indemnify their insureds when IDEM orders them to address releases of contamination from their businesses.