Indiana Supreme Court Affirms Ambiguity, Unenforceability Of Pollution Exclusion In CGL Policies

In State Auto Mutual Ins. Co. v. Flexdar, Inc., No. 49S02-1104-PL-199, ___ N.E.2d ___ (Ind. Mar. 22, 2012), the Indiana Supreme Court last week affirmed longstanding Indiana precedent holding that the standard "pollution exclusion" typically appearing in commercial general liability ("CGL") policies issued from approximately 1985 to 2005 is ambiguous and unenforceable as to most, if not all, types of environmental liabilities. This longstanding principle of Indiana law has been under assault in Indiana courts in recent years by insurers seeking to overturn this precedent.

The Indiana Supreme Court's opinion in Flexdar provides added security to policyholders whose policies are governed by Indiana law that their historical CGL coverage may be available to cover costs associated with government-mandated cleanups, as well as private party lawsuits alleging bodily injury or property damage arising from environmental conditions. Policyholders who are either based in Indiana or who have substantial Indiana operations stand to potentially benefit from this Indiana Supreme Court ruling. It is important to note, however, that while the ruling means that coverage for environmental liabilities is not automatically excluded, coverage also is not automatically guaranteed as a result of this ruling. As always, all pertinent policy provisions and considerations must be evaluated to assess their impact on the availability of coverage in each particular matter.

In Flexdar, the Indiana Department of Environmental Management ("IDEM") demanded that Flexdar, an Indianapolis-based rubber stamp and printing plate manufacturer, clean up trichloroethylene (a chemical solvent commonly known as "TCE") that was found in soil and groundwater at Flexdar's manufacturing site. Flexdar sought insurance coverage from its liability insurer, State Auto, for the legal, investigative, and remediation costs of complying with IDEM's demand. State Auto then sued Flexdar, seeking a court determination that the "pollution exclusions" in its policies from 1997 to 2002 absolved it of any obligation to provide coverage to Flexdar for IDEM's demand. The State Auto policies contained not only the standard CGL "pollution exclusion," but also an Indiana-specific endorsement stating that the exclusion "applies whether or not such irritant or contaminant has any function in your business, operations, premises, site or location."

The Indiana Supreme Court succinctly summarized its holding...