By David A. O’Neill, J.D., Director of Investigations, Policy Find
The question of how broadly the Indiana Supreme Court’s ruling in American States Insurance Company v. Kiger, 662 N.E. 2d 945 (Ind. 1996) can be interpreted was further decided on March 25, 2010 when the United States Court of Appeals, Seventh Circuit reached a decision in the West Bend Mutual Insurance Company v. U.S. Fidelity and Guaranty Company case. This appellate decision is a caution to those owners and operators of retail gasoline service stations, who have been waiting to have their properties tested for pollutants in reliance on the effect of the Kiger ruling. They will now be carefully reviewing the pollution exclusionary and definitions clauses in their policies to determine whether the Kiger or West Bend rules apply to their situations.
In its published opinion, the Seventh Circuit explained its decision to affirm the U.S. District Court’s interpretation of a Federated Mutual Insurance Company umbrella liability policy which had been found to exclude coverage for pollution of neighboring property occasioned by leaking underground gasoline storage tanks.
The lower court had ruled that the insurer had no duty to defend because the pollution exclusion in the Federated policy precluded coverage. The appellants argued that the Indiana Supreme Court’s decision in American States Insurance Company v. Kiger, 662 N.E. 2d 945 (Ind. 1996) compelled a different result and framed the issue to the appellate court as whether the Federated policy satisfied the Kiger ruling’s requirement for explicit contract language to avoid ambiguity. The appellants suggested that the Federated policy had not defined “pollutant” to include gasoline and therefore was ambiguous under the Kiger rule.
In its West Bend Mutual Insurance Company decision, the Seventh Circuit explained that the Kiger court had determined that the policy’s ambiguity had rested on whether the pollution exclusion could apply to a substance that was not a pollutant. Gasoline is a gasoline station’s product and not a pollutant until it escapes the storage tanks. The Kiger court, it continued, determined that the policy did not resolve this ambiguity and so the pollution exclusion’s ambiguity was interpreted against the drafter as not excluding coverage.
Although both the policies at issue in Kiger and West Bend had identical pollution exclusions, and both policyholders had been gasoline retailers, the Seventh Circuit found specific enough language in the Federated policy’s “Motor Fuels” definition to resolve the ambiguities fatal to the Kiger policy. It found that the “Motor Fuels” definition included gasoline and therefore applied the pollution exclusion to the release of gasoline. The court stated that “The plain language of the contract thus explains that Federated will not cover property damage or personal injuries related to gasoline.”
The court found its conclusion further buttressed by the “Indiana Changes Endorsement” in the Federated policy which states that the pollution exclusion applies “whether or not such irritant or contaminant has any function in (the policyholder’s) business, operations, premises, site or location.”