Court Finds Pollution Exclusion Is Ambiguous
October 17, 2011
The 3rd District Appellate Court recently held that a pollution exclusion in a commercial general liability (CGL) policy was ambiguous with respect to its application to a claim based on manufacturing plant emissions allowed under a permit issued by the Illinois Environmental Protection Agency (IEPA) in compliance with the federal Clean Air Act, 42 U.S.C. Section 7401 et seq. Erie Insurance Exchange v. Imperial Marble Corp. No. 3-10-0380. 2011 WL 4375335 (3d Dist. Sept. 15, 2011).
The insurer, Erie, was represented by Hinkhouse, Williams, Walsh LLP. Bryan, Cave LLP represented the insured manufacturer, Imperial.
Imperial manufactured cultured marble vanities, countertops and other synthetic products. It used various chemicals in its manufacturing processes which created odorous emissions that were dispersed into the atmosphere. The emissions were authorized under a permit issued by the IEPA in accordance with Clean Air Act requirements.
In August 2007, a class action on behalf of all persons residing within one mile of the Imperial plant, was brought against Imperial, asserting negligence, trespass and nuisance claims.
The complaint alleged personal injuries and property damage resulting from the invasion of the plaintiffs' person and property by noxious odors and hazardous air pollutants.
The complaint further alleged that some of the emissions exceeded those allowed by the IEPA permit and that Imperial knew and expected the emissions to occur.
Erie issued a CGL policy to Imperial for the relevant time period. The policy was issued through a broker that had an agency agreement with Erie and both the broker and an Erie manager toured the Imperial facility for gaps in coverage but reported none.
Upon being tendered the class-action claim, Erie denied coverage and brought this declaratory judgment action. It based its denial on the lack of an occurrence, the expected or intended exclusion and the policy's pollution exclusion.
The latter excluded coverage for any bodily injury or property damage arising out of the discharge of "pollutants," which were defined as including any gaseous irritant or contaminant, including smoke, fumes, chemical, waste and so forth.
Imperial filed a counterclaim for coverage. On cross motions for summary judgment, the trial court agreed with Erie and found that the policy provided no coverage. Imperial took this appeal.
Occurrence Issue
In an opinion by Justice Mary K. O'Brien, the 3rd District reversed. She examined first whether the complaint alleged an "occurrence," defined by the policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
Erie contended that because the emissions were intentionally discharged, they did not constitute an accident.
O'Brien disagreed, finding that as long as the bodily injury or property damage were unexpected, the complaint should be found to allege an occurrence, regardless whether the emissions were intentional.
This was so particularly given Imperial's position that it had no intent to pollute as evidenced by its operation under an emissions permit.
Expected Or Intended Exclusion
O'Brien applied a similar analysis to the expected or intended exclusion. She said that the complaint did not allege solely that Imperial expected or intended to harm the underlying plaintiffs. Rather, the allegations asserted, in part, that Imperial emitted noxious odors as part of its normal business operations. Because Imperial operated pursuant to an emissions permit, it could not be considered to have expected or intended any injury and, therefore, the exclusion would not apply.
Pollution Exclusion
With respect to the pollution exclusion, Imperial contended that its emissions were not pollution as established by its IEPA permit or at least were not traditional environmental pollution as recognized by the Illinois Supreme Court in American States Insurance Co. v. Koloms. 177 Ill. 2d 473 (1997). O'Brien, however, said that it was not necessary to determine whether Imperial's emissions constituted traditional environmental pollution.
Rather, she said, "(t)he policy's pollution exclusion is 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."
In accordance with Koloms, she found that the policy's pollution exclusion had a "potentially limitless application."
And when the complaint was compared to the relevant provisions in the policy, it was unclear to O'Brien whether permitted emissions were excluded.
Because the ambiguity had to be resolved in favor of Imperial, the court reversed, finding that Erie had a duty to defend Imperial on the claims asserted in the underlying action.
Key Points
1) Intent for purposes of an "occurrence" and the expected or intended exclusion focuses on whether the injury is expected or intended, not whether the act was intentionally performed.
2) An absolute pollution exclusion may be found to be ambiguous when the underlying claim is based in part on emissions that an insured is permitted to make by an environmental regulatory agency.
