ILLINOIS COURT NARROWS POLLUTION EXCLUSION

SPRINGFIELD, Ill.-In a significant victory for general liability insurance policyholders, the Illinois Supreme Court has ruled that the absolute pollution exclusion does not bar coverage for losses involving all types of contaminants.

The court looked beyond the exclusion's language to avoid applying it in "absurd" fashion and heavily weighed insurers' decades-long effort to shield themselves from pollution cleanup claims. The court concluded the pollution exclusion does not bar coverage for carbon monoxide poisoning claims, because such claims "do not remotely resemble traditional environmental contamination."

The Oct. 17 ruling is the first decision by a state high court on whether carbon monoxide is a pollutant as defined by the pollution exclusion. Carbon monoxide last year killed about 240 people and injured nearly 11,000 in home and workplace accidents, according to government statistics.

The ruling is a double whammy against insurers.

First, the court, whose decisions often are cited in insurance coverage disputes nationwide, narrowed the applicability of the exclusion. Policyholders long have complained that the exclusion, first widely used in 1986, is so broad that insurers can classify virtually any substance involved in a liability claim as a contaminant and deny coverage.

"The Illinois ruling is a major policyholder victory in establishing that insurance companies' attempts to apply the exclusion provision to routine events just isn't working," said policyholder attorney Irene C. Warshauer, a partner with Anderson, Kill & Olick P.C. in New York. Ms. Warshauer filed an amicus brief in the case on behalf of the Federal Home Loan Mortgage Corp.

The second setback for insurers is that the court refused to rely on the exclusion's wording and instead considered the exclusion's historical context.

"It says that words in an insurance policy can't be construed in the abstract," said policyholder attorney William Greaney, a partner with Covington & Burling in Washington.

Other courts also have outlined the exclusion's history, but the Illinois court did so in greater detail, Mr. Warshauer said.

Insurer attorneys, though, complained that the court relied on only policyholders' version of the exclusion's drafting history.

Still, insurers came away with a significant victory in the case, according to insurer attorney Laura Foggan, who filed an amicus brief in the case for the Insurance Environmental Litigation Assn.

The decision signals that in cases involving environmental contamination, policyholders likely would not find the court sympathetic to their exclusion-weakening arguments, including that the provision applies to only active industrial polluters, said Ms. Foggan, a partner with Wiley, Rein & Fielding in Washington.

Insurers still could face a problem in that area, though, because the court did not define "traditional environmental pollution," said Dennis Cantrell, one of the defense attorneys in the case.

While Illinois' high court is the first to rule on whether the pollution exclusion bars carbon monoxide claims, a few other state supreme courts have ruled in favor of policyholders in cases involving bodily injuries caused by contaminants when there was no associated environmental damage.

Supreme courts in Massachusetts, Maryland, New Hampshire, New York and Arkansas have barred insurers from invoking the exclusion to deny coverage for lead, asbestos and sewage backup liability claims, according to policyholder attorneys.

The Texas Supreme Court in 1995, though, ruled for an insurer in a dispute over coverage for bodily injury claims filed after a policyholder accidentally released noxious fumes that drifted over a Texas town.

In the Illinois case, the defendant, American States Insurance Co. of Indianapolis, will not seek a rehearing, said Mr. Cantrell, a partner with Bingham Summers Welsh & Spilman of Indianapolis.

The litigation was triggered by a furnace malfunction in a commercial building in Lincolnshire, Ill., in September 1990. The furnace emitted carbon monoxide and other noxious fumes in the building. Six of a tenant company's employees became ill and sued the building's owners for allegedly failing to properly maintain the furnace.

The owners, Harvey and Nina Koloms, filed claims with their CGL insurer, American States, which agreed to defend the Koloms under a reservation of rights. American States then asked a trial court to rule that the insurer had no duty to defend or indemnify the Koloms.

In a summary judgment, the trial court ruled for the Koloms. An appellate court last year affirmed the trial court's ruling on American States' duty to defend the Koloms. However, the appeals court said the duty-to-indemnify issue cannot be addressed until the underlying litigation against the Koloms has been resolved.

The state Supreme Court affirmed the trial court's decision.

But, insurer and policyholder attorneys agree the court made clear that insurance companies must indemnify policyholders in such cases.

The Supreme Court, in an opinion written by Justice Mary Ann G. McMorrow, agreed with American States that the exclusion's language is specific and that courts reasonably could conclude the exclusion is unambiguous.

But, Justice McMorrow then wrote: "Like many courts, we are troubled by what we perceive to be an over-breadth in the language of the exclusion as well as the manifestation of an ambiguity which results when the exclusion is applied to cases which have nothing to do with 'pollution' in the conventional, or ordinary, sense of the word."

The justice outlined the history of the absolute pollution exclusion from the industry's attempts in 1966 to eliminate coverage for gradual pollution damages.

Amendments to federal pollution liability laws prompted the insurance industry in 1970 to develop the predecessor to the 1986 pollution exclusion, the court said. The 1970 exclusion barred coverage for pollution damages except when pollution incidents were sudden and accidental.

Many courts later interpreted the word "sudden" to mean "unexpected" rather than "abrupt." Those rulings meant insurers had to cover enormous damages resulting from gradual pollution.

Insurers adopted the 1986 exclusion solely to remove the "sudden and accidental" exception in the 1970 exclusion, the Illinois Supreme Court found. "We would be remiss, therefore, if we were to simply look to the bare words of the exclusion, ignore its raison d'etre, and apply it to situations which do not remotely resemble traditional environmental contamination," Justice McMorrow wrote.

The case should not have involved the exclusion's history, said insurer attorney Edward Zampino, a partner with Cozen & O'Connor P.C. in Newark, N.J.

The court agreed the exclusion states the policy will not cover bodily injuries caused by noxious fumes. "The analysis should begin and end there," said Mr. Zampino, who was not involved in the case.

Mr. Cantrell, American States' attorney, agreed. Noting that he does not practice in Illinois, Mr. Cantrell said, "I was startled by the result, because it appeared to me the court went against well-established law in Illinois to reach that result."

Under the rules of insurance policy interpretation, courts should consider only the plain meaning of the contract, he said.

Even more problematic than considering the exclusion's history, the court did not get it right, insurer attorneys complained.

Insurers did not adopt the exclusion just to avoid pollution cleanup claims, Mr. Zampino said. The court ignored the exclusion's first section, which bars coverage for virtually all pollution discharges, except in product liability and completed operations cases, he said.

Claims resulting from carbon monoxide poisoning were "the very kinds of things the industry was trying to avoid," Mr. Zampino said.

Ms. Foggan agreed. "It was a broad clause that came after the industry saw it couldn't count on the courts and couldn't leave in any exceptions."

Today, the industry is more amenable to covering some of those claims, including carbon monoxide poisoning liability claims, she said, citing the three pollution endorsements the Insurance Services Office Inc. unveiled last spring (BI, May 19).

Mr. Zampino stressed that regulators and policyholder attorneys, particularly Eugene Anderson, knew before the exclusion was approved that it would significantly reduce CGL coverage. Mr. Zampino said Mr. Anderson warned regulators, and insurers conceded coverage would be narrowed.

Mr. Anderson, a partner with Anderson Kill & Olick P.C. of New York, recalled that insurers admitted the exclusion's language was overly broad. But, the industry promised it would apply the exclusion to only willful polluters.

"I bit," he said. Mr. Anderson said he did not imagine and did not warn regulators that insurers could use the exclusion to deny coverage for a claim resulting from a defective heater, for example.

American States Insurance Co. vs. Harvey Koloms et al., Illinois Supreme Court; No. 81289.