Pollution exclusion applies to groundwater contamination claim

Source: Lexology, April 19, 2012
By: Michael E. Rigney, Kelley Drye & Warren LLP

SCOTTSDALE INDEMNITY CO. V. VILLAGE OF CRESTWOOD (March 12, 2012)
Crestwood, Illinois, a suburb outside of Chicago, uses both Lake Michigan and its own wells as sources for the water it supplies to its residents. A number of residents brought suit in state court against Crestwood and various past and current officials, alleging that it continued to provide well water to village residents after learning that it was contaminated with perchlorethylene, a common dry cleaning solvent. The residents seek damages for their health injuries. The State of Illinois also brought suit against Crestwood seeking a site inspection and remediation. Two of the Village’s insurers brought suit for a declaratory judgment that they had no duty to defend or indemnify because of their policies’ pollution exclusions. Judge Kendall (N.D. Ill.) granted summary judgment to the insurers. The plaintiffs appeal.
In their opinion, Seventh Circuit Judges Posner, Wood, and Hamilton affirmed. The pollution exclusions exclude from coverage certain injuries arising out of the release of pollutants. The Court easily concluded that a literal reading of the policies would exclude coverage for the alleged harms. But it also concluded that a literal reading would exclude other harms that should not be excluded – harms that would not be characterized as pollution incidents. The Illinois Supreme Court has limited the pollution exclusion to “traditional environmental pollution.” Instead of a literal reading, the Court looked to the reasons for the exclusion, insurance’s affect on behavior, and the exclusion’s history to determine where to draw the line between coverage and non-coverage. Typical tort cases that might incidentally involve contaminants (e.g., a traffic accident resulting from spilled contaminants that would have similarly occurred had the spill involved non-contaminants) fall outside the exclusion. The Crestwood case, on the other hand, is a case about groundwater contamination. Groundwater contamination litigation is one of the concerns that gave rise to the pollution exclusion. The facts that the Village defendants did not originate the contaminant and that the perchlorethylene level was below environmental regulatory standards are irrelevant.

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