Indiana Supreme Court Again Finds The Pollution Exclusion Ambiguous, But Indicates A Possible Way Forward

Enforcing the pollution exclusion clause in a commercial general liability policy continues to be problematic for insurers in the state of Indiana. On March 22, 2012, the Indiana Supreme Court once again held that the absolute pollution exclusion is unenforceable because the term "pollutant" is ambiguous. State Auto. Mut. Ins. Co. v. Flexdar, Inc., No. 49S02‐1104‐PL‐199, Slip Op. (Ind. March 22, 2012).

Flexdar, Inc. (Flexdar) manufactured rubber stamps and printing plates at its facility in Indiana from 1994 through 2003. Flexdar's manufacturing process used a chemical solvent called trichloroethylene (TCE). In late 2003 and early 2004, TCE was discovered in the soil and ground water on and off the Flexdar site. The Indiana Department of Environmental Management (IDEM) informed Flexdar that it would be liable for the cleanup costs. Flexdar maintained commercial general liability and umbrella insurance policies with State Automobile Mutual Insurance Company (State Auto) during the relevant period and requested indemnification from State Auto. State Auto agreed to defend Flexdar against IDEM's claims under a reservation of rights. State Auto then filed a declaratory judgment action against Flexdar seeking a ruling that coverage was precluded by the absolute pollution exclusion.

State Auto relied on its absolute pollution exclusion, which defined the term "pollutants" to mean: "any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." State Auto also cited the Indiana "Business Operations" endorsement, which provided in pertinent part: "This Pollution Exclusion applies whether or not such irritant or contaminant has any function in your business, operations, premises, site or location." Flexdar argued that State Auto's pollution exclusion was ambiguous and therefore should be construed in favor of coverage. The trial and appellate courts agreed.

The Indiana Supreme Court reviewed its previous decisions that had found the term pollutant, as used in the absolute pollution exclusion, to be ambiguous. See, e.g., American 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); Friedline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002); Monroe Guar. Ins. Co. v. Magwerks Corp., 829 N.E.2d 968 (Ind. 2005). The court maintained that the clause, read literally, would negate virtually all coverage, thereby...