Liberty Mutual Insurance Co. units must defend and indemnify an Illinois city charged with letting its water main system deteriorate and harming residents because its coverage’s pollution exclusions do not apply, an Illinois state appeals court ruled Thursday, in overturning a lower court ruling.

Jennifer Campbell and Jeremy Pennington, residents of the City of Sycamore, Illinois, filed a putative class-action complaint against the city alleging its failure to maintain its century-old water mains had harmed its residents by providing them with unsafe drinking water and damaging the equipment that used water in their homes, according to the ruling by the Illinois state appeals court in Elgin in LM Insurance Corp. and Liberty Insurance Corp. v. The City of Sycamore and Jennifer Campbell and Jeremy Pennington.

Liberty Mutual units issued two commercial general liability insurance policies and two umbrella policies to Sycamore for the Dec. 1, 2018, to Dec. 1, 2020, period that provided coverage for bodily injury for property coverage and defense, but excluded pollution.

Ms. Campbell and Mr. Pennington filed a putative class action lawsuit in October 2020 alleging damage caused by the city’s “reckless” deferred maintenance in avoiding replacing its century-old water mains.

Liberty Mutual denied coverage on the basis that its policies’ pollution exclusion applied, and filed suit in state court seeking a declaration it had no duty to defend or indemnify the city. 

The trial court ruled in the insurers’ favor and was overturned by a three-judge appeals court panel.

Based on legal authorities, “we believe that the dispositive question is whether the iron, lead, and bacteria that Sycamore allegedly distributed to its residents constituted ‘traditional environmental pollution’ or ‘pollution harms as traditionally understood,’” the ruling said.

The panel concluded it did not. Unlike “traditional”’ environmental pollution cases, “there was no release, discharge or escape of a pollutant into the ground that caused the groundwater to become contaminated. 

“Rather, the complaint alleged that the water did not become contaminated until it was already in Sycamore’s water pipes,” the ruling said. 

“Although the complaint clearly alleged that the plaintiffs were harmed by pollutants, this is not equivalent to asserting that they were harmed by ‘traditional environmental pollution,’” it said, in reversing the lower court and remanding the case for further proceedings.

Sycamore attorney Angela L. Elbert, a partner with Neal Gerber Eisenberg LLP in Chicago, issued a statement that said in part, “We think this was an important ruling because the Court confirmed that the scope of pollution exclusions is limited to ‘traditional environmental pollution.’ They are not ‘total’ or ‘absolute’ exclusions, despite their name. The opinion also provides clarification on what does and does not constitute ‘traditional environmental pollution.’ Specifically, that contaminants inside pipes, containers and homes are not excluded."

Liberty Mutual’s attorneys did not respond to a request for comment.