Source: http://www.lexology.com, December 31, 2012
By: Brian S. Scarbrough and Jan A. Larson, Jenner & Block
In State Automobile Insurance Co. v. DMY Realty Co., LLP,977 N.E.2d 411 (Ind. Ct. App. Oct. 23, 2012) (No. 49A05-1109-PL-486), the Indiana Court of Appeals relied on a number of other recent Indiana Supreme Court cases in finding an absolute pollution exclusion overbroad and ambiguous such that it did not bar coverage for an environmental contamination and remediation claim. The policyholder, DMY Realty, owned a shopping center in Indiana, which included two retail spaces formerly occupied by dry cleaning facilities. Several environmental site assessments were conducted in connection with the potential purchase of the shopping center. These site assessments uncovered the presence of PCE and TCE, chlorinated solvents commonly used as part of the dry cleaning process, at levels requiring remediation. DMY Realty sought coverage for the contamination and related remediation costs from its insurers. Following the insurers’ coverage denials based on the pollution exclusion, DMY Realty filed a declaratory judgment action. The policies contained an absolute pollution exclusion precluding coverage for “bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.” Id. at *1. The term “pollutants” was further defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.” Id. Many of the policies also contained an Indiana-specific endorsement providing that the pollution exclusion “applies whether or not the irritant or contaminant has any function in your business, operations, premises, site or location.” Id. at *2. The trial court granted summary judgment for DMY Realty, finding the language of the pollution exclusion overbroad and ambiguous such that it did not bar coverage, as well as noting that the endorsement failed to cure the ambiguity and only took effect once the exclusion had been applied. On State Auto’s appeal, the Indiana Court of Appeals affirmed, relying on several recent decisions by the Indiana Supreme Court that found identical or substantially similar pollution exclusions ambiguous. Id. at *7-9 (citing State Auto Mut. Ins. Co. v. Flexdar, Inc., 964 N.E.2d 845 (Ind. 2012); Freidline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002); Am. States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996); Seymour Mfg. Co. v. Commercial Union Ins. Co., 665 N.E.2d 891 (Ind. 1996)). According to the court, “this clause cannot be read literally as it would negate virtually all coverage because practically every substance would qualify as a ‘pollutant’ under this definition, rendering the exclusion meaningless.” Id. at *8 (quoting Kiger, 662 N.E.2d at 948). The court further reasoned under Indiana law, “the insurer can (and should) specify what falls within its pollution exclusion.” Id. at *9.