In American States Insurance Co. v. Koloms, 177 Ill. 2d 473, 489 (1997), the Illinois Supreme Court determined that the pollution exclusion only applies to  injuries caused by “traditional environmental pollution.”  If the emissions released by the insured are under a permit issued by the Illinois Protection Agency, are they still “pollutants”? Even if “pollutants,” can it be argued that such emissions are not “traditional environmental pollution?"  The outcome might depend on whether the action is pending in state or federal court.

Yesterday, the Seventh Circuit held the pollution exclusion precluded coverage for claims  against a municipality that had supplied contaminated water (containing perc) to its residents, notwithstanding the insured’s argument that the amount of perc in the water supply was below the maximum level permitted by environmental regulations. The Court in Scottsdale Indemnity Co. v. Village of Crestwood, Nos. 11-2385 et al. cons. (7th Cir. March 12, 2012), began its analysis with a lengthy discussion concerning the source and reason for the pollution exclusion, the rationale for its limitation to traditional environmental pollution, and the difficulty that insurers have in calculating losses stemming from pollution.

 In upholding the pollution exclusion’s applicability to the facts at issue, the Court found irrelevant that the municipality itself did not contaminate the wells from which it pumped the water. The Court reasoned: “The exclusion is for liability for harms resulting from the “dispersal,” “migration” or “release” of contaminants, not their creation or just their first distribution.” The Court also rejected the Village’s “core business activity” argument in which the insured suggested that where its core business activity consists of the manufacture or distribution of the contaminated product that the pollution exclusion should not apply, as otherwise the policy would not protect the insured against foreseeable risks run by such a supplier. Finally, the Court determined that the fact that the amount of perc in the Village’s water supply was below the maximum level permitted by environmental regulations did not affect the application of the pollution exclusion or its determination that the complaint filed against the insured municipality did not trigger a duty to defend.  The complaint alleged that the perc caused injuries for which the plaintiffs were seeking damages. The duty to defend is based on the allegations of the complaint and not on the facts that emerge over the course of the litigation that might or might not give rise to a duty to indemnify. 

The Seventh Circuit’s ruling (which this blogger believes was correct) could “arguably” be viewed as inconsistent with the September 14, 2011 Second District Illinois Appellate court decision in Erie Ins. Exchange v. Imperial Marble Corp., 2011 IL App (3d) 100380 (2nd Dist., Sept. 15, 2011). In that case the court found that the   policy’s pollution exclusion was “arguably ambiguous” and, therefore, the insurer owed a duty to defend the class action suit filed against the insured that alleged personal injuries and property damage resulting from the invasion of the plaintiffs’ person and property "by noxious odors, volatile organic materials and hazardous air pollutants including, but not limited to STYRENE and Methyl Methacrylate (MMA), air contaminants and other hazardous material" in the emissions generated as part of Imperial’s normal business operations." The insured, Imperial Marble, manufactured cultured marble vanities, countertops and other synthetic products at its facility. Along with other chemicals, it used styrene and MMA in its manufacturing processes which created odorous emissions that were dispersed into the atmosphere. The emissions were authorized under a permit issued by the Illinois Environmental Protection Agency (IEPA) in compliance with the federal Clean Air Act. 

The insured argued that its emissions did not fall within the policy’s pollution exclusion because the emissions were not pollution due to the fact that they were allowed under a permit issued by the Illinois Environmental Protection.   The insured also argued that the pollution exclusion was inapplicable because the underlying complaint alleged, in part, injury resulting from its normal business operations conducted in accordance with its permit. [The court did not comment on the fact that the complaint itself alleged that the insured emitted VOMs and HAPs in violation of the IEPA regulations and in amounts in excess of that allowed under its permit.]        

The insurer maintained that the emissions constituted “traditional environmental pollution” and that coverage was precluded under the terms of the policy’s pollution exclusion.   The Appellate Court held that the policy’s pollution exclusion was arguably ambiguous as to whether the emission of hazardous materials in levels permitted by an IEPA permit constitute traditional environmental pollution excluded under the policy. Because the court determined it must resolve ambiguities in the complaint and policy in favor of the insured, it found that the insurer owed a duty to defend. 

Interestingly, a month after the Imperial Marble decision was issued, the Second District Illinois Appellate Court, in Pekin Insurance Co. v. Pharmasyn, Inc., No 2-10-1000, (2nd Dist. Oct. 19, 2011)( ) issued an unpublished opinion, finding that the same pollution exclusion was not ambiguous, albeit in a scenario that did not involve emissions allowed by IEPA permit. The court held that the pollution exclusion applied to preclude coverage to an insured organic compound maker for several personal injury lawsuits filed by individuals who either worked for or in the same building as the insured. The insured was alleged to have negligently allowed “dangerous and toxic substances, including but not limited to, isocyanate chemicals to be released from open containers at the property, creating toxic fumes and seepage of hazardous material into the common areas, the environment, and into the premises occupied by the Plaintiffs.” 

The insured argued that the underlying complaint did not allege “traditional environmental pollution” and that the pollution exclusion should not bar its claims. The court held that the factual scenario before it was not controlled by whether the dispersion of fumes constituted ‘traditional environmental pollution;’ rather, the question was whether the dispersion of pollutant fumes that caused injury to others at or from the premises was the type of accident specifically excluded by the insurance policy purchased by Pharmasyn.”   The court determined that the policy language "at or from the premises" was not ambiguous. It further noted that the exclusion was broad, covering both pollution "at" the location of the business and pollution leaking "from" the location of the business. Since the Policy included "premises" in its pollution exclusion, the court found that the pollution exclusion precluded a defense and indemnity obligation.