The Seventh Circuit held that Scottsdale Indemnity Co. and National Casualty Co. have no duty to defend or indemnify the Village of Crestwood, Illinois, regarding claims that it supplied its residents with polluted water for more than twenty years, even though the Village was not the original polluter of the water. The decision is important in delineating the scope of the pollution exclusion, a contentious issue with significant implications for insurers and insureds. Some jurisdictions apply the broad, plain language of the pollution exclusion; others narrow the exclusion so that it has effect only in those situations involving “traditional environmental pollution.” The Seventh Circuit held that even in a jurisdiction such as Illinois, which requires the narrower “traditional environmental pollution” interpretation, the exclusion is not so narrow as to bar coverage only for the original polluter or to claims where environmental clean-up costs could have been or were incurred.

The insurance-coverage dispute arose out of allegations that the Village delivered tap water contaminated with perchloroethylene, vinyl chloride, and dicloroethylene to Village water consumers. Hundreds of the Village’s current and former residents sued the Village in over two dozen lawsuits, alleging they were exposed to contaminated drinking water from 1986-2007. The claimants allege that the contaminated water caused cancer, other serious illnesses, and death.

Scottsdale Indemnity Co. and National Casualty Co. insured the Village under twenty-two liability policies with more than $50 million in coverage limits. They declined to defend and denied coverage based on the pollution exclusion in the policies.
At issue was the scope of the absolute pollution exclusion. Under American States Insurance Co. v. Koloms, 687 N.E.2d 72 (Ill. 1997), courts applying Illinois law do not look solely to the exclusion’s plain language. Rather, Koloms instructs that the exclusion applies only to injuries arising out of “traditional environmental pollution.”

Judge Posner, writing for the Seventh Circuit, rejected the Village’s argument that the pollution exclusion should not apply because it was not the original polluter: “The defendants point out that they didn’t originate the contamination. That is irrelevant. The exclusion is of liability for harms resulting from the ‘dispersal,’ ‘migration,’ or ‘release’ of contaminants, not their creations or just their first distribution.” Though not the original polluter, the Village distributed the chemicals from the water well and “caused” the contamination of its water supply. Further, the court concluded that the exclusion’s wording makes clear that the pollution exclusion is not limited merely to situations where environmental clean-up costs were or could be incurred.

The Seventh Circuit also rejected the Village’s argument that the exclusion should not apply when the insured’s “core business activity” involves distributing the contaminated product. Separating high-risk from low-risk insureds would not be feasible. Moreover, the court rejected the Village’s argument that the lawsuit was not about pollution at all because the Village’s water supply was allegedly below the maximum contaminant level allowed by environmental regulations. The court concluded that contaminant levels are unimportant: “All that counts is that the suits are premised on a claim that the perc caused injuries for which the plaintiffs are seeking damages, and that claim triggers the pollution exclusion.”

The rationale for the decision is based on extensive consideration of the intersection of the economics underlying the exclusion, the nature and pricing of insurance, and the exclusion’s history and wording. Judges Richard A. Posner, Diane P. Wood and David F. Hamilton sat on the panel for the Seventh Circuit.

In this action, Bradley M. Jones and Anthony J. Alt represented Scottsdale Indemnity Company.

To read the opinion, click here.