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INDIANAPOLIS-Insurers in Indiana soon may have legislative backing to exclude all environmental exposures from commercial general liability policies issued in the state.

Over the past two weeks, legislation was passed in response to an Indiana Supreme Court ruling last May that said the 1985 absolute pollution exclusion was ambiguous.

Indiana is the only state in the country that has found the 1985 absolute pollution exclusion to be ambiguous, said Laura Foggan, a partner at Wiley Rein & Fielding in Washington, who provided technical advice for the Indiana Institute.

But policyholder lawyers say the legislation, which would amend the Indiana Insurance Code, is a backhanded way of rewriting the exclusion and excludes far more than was originally intended.

Both chambers of the Indiana Legislature have passed similar bills proposing changes to the Indiana insurance law. The bills are now being amended, and a single version will go forward that insurers expect will become law.

The legislation would eradicate environmental coverage from CGL policies issued in Indiana after June 30, 1997, and would list in detail what could be deemed pollutants.

For example, the House bill names petroleum as a pollutant and says an environmental loss could arise from, among other things,"inhalation, ingestion or absorption of an irritant."

The amendments are a reaction to a state high court ruling last year that was unfavorable to insurers, said Fred McGarvey, vp in the Skokie, Ill., office of the American Insurance Assn.

He helped formulate the bills with the Insurance Institute of Indiana, an association of insurers.

In American States Insurance Co. vs. Kiger, the court ruled that the 1985 Insurance Services Offices absolute pollution exclusion was ambiguous when it was applied to a gasoline leak from an underground storage tank at a gas station.

The court ruled that the term "pollutant" did not obviously include gasoline and that as gasoline leakage was the major liability of the policyholder, denying coverage under the pollution exclusion would negate coverage for most of the policyholder's liabilities.

The insurance industry and the Indiana legislature reacted by formulating the bills that would provide statutory support to insurers seeking to refrain from covering environmental risks in general liability policies, said Mr. McGarvey of the AIA.

"The policymakers have spoken to say that, at least from the (effective) date of the act forward, CGL policies can absolutely exclude pollutants and it gives us the ability to say that we don't want to cover pollutants," he said.

The legislative action brings Indiana back into line with other states, said Ms. Foggan.

"The Kiger decision pushed Indiana away from the national trend, so this will rectify what could be seen as a division in the general understanding of the absolute pollution exclusion," she said.

But policyholder lawyers charge that the law was formulated as a way to amend the absolute pollution exclusion without actually rewriting the policy language.

"Rather than the industry amending the exclusion because of Kiger, they are having the legislature tell you that there's more than there really is in the exclusion," said Edward M. Joyce, a partner at Anderson, Kill & Olick P.C. in New York.

Insurers are likely wary of altering the exclusion itself, as that could be construed as an admission that it does not exclude all pollution claims, he said.

"They are using the Legislature in a backhanded way to protect themselves," Mr. Joyce said.

The bills are "gross overkill," said William Greany, a partner at Covington & Burling in Washington who represents policyholders.

The Kiger decision determined only that the 1985 exclusion was ambiguous in regard to some cases, and an amendment of the state insurance law is an overreaction, he said.

Also, the language in the bills is so far-reaching that it seems legislative action also may be an attempt to extend pollution exclusions to other liabilities, such as lead paint and asbestos, said Mr. Joyce.

In particular, the reference to the exclusion of "pollution inhaled, ingested or absorbed" may be an attempt to exclude those liabilities, he said.

However, coverage for those liabilities usually is sought under older policies, which will not be affected by the proposed bills, said Stephen Williams, president of the Insurance Institute of Indiana.

The legislation simply will confirm the intent of insurers not to cover pollution under general liability policies, he said.

"What we are seeking to do is codify the absolute pollution exclusion so that (insurers) can have some comfort going forward," Mr. Williams said.

The 1985 absolute pollution exclusion was added to policies after courts held insurers liable for environmental claims that insurers say they never intended to cover.