According to a now-legendary song of the Hoosier State—made famous in part by Jim Nabors’ mellifluous baritone at the annual running of the Indianapolis 500-Mile Race—the “new-mown hay” regularly “sends out its fragrance” through the fields we Hoosiers “used to roam.” For decades now in Indiana, that fragrance has been noticeably less pungent with the odor of chlorinated solvents, among other things, and the moonlight now dreamt about is glistening off the increasingly pristine waters of the Wabash, making Hoosiers long ever more for their Indiana home!
This improvement in air, water, and soil quality in the Hoosier State is due, in large part, to the hard line the Indiana Supreme Court has taken with respect to the total (or absolute) pollution exclusion in commercial general liability (CGL) policies. Under Indiana law, the pollution exclusion—excluding from coverage damages caused by “pollutants”—is generally unenforceable and insurers are generally required to defend and potentially indemnify their policyholders with respect to claims for environmental contamination. After all, what is a “pollutant”?
Indiana has had a “longstanding recognition of the freedom of parties to enter into contracts” and the Indiana Supreme Court has long “presum[ed] that contracts represent the freely bargained agreement of the parties.” Time Warner Ent. Co., L.P. v. Whiteman, 802 N.E.2d 886, 895 (Ind. 2004). Thus, any contract ambiguity is construed against the party that drafted it. Id. at 894. As a result, the Indiana Supreme Court recognized long ago that the term “pollutant” in an insurance policy “does not obviously include gasoline” or a host of other compounds found in the products we use (or have used in the past) in everyday life, including chemical degreasers and dry cleaning solvents, and such provisions in insurance policies are “accordingly . . . ambiguous.” Am. States Ins. Co. v. Kiger, 662 N.E.2d 945, 949 (Ind. 1996).
A standard absolute “pollution exclusion” form provides that
[t]his insurance does not apply to any of the following:
* * * * * *
“Bodily injury,” “property damage” or loss, cost or expense arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants.”
* * * * * *
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
Id. at 948.
Obviously, gasoline, or for example, the once-popular dry-cleaning solvent, tetrachloroethylene, is not one of the listed “pollutants” in such provision, damage from which would be excluded from coverage. The Indiana Supreme Court highlighted this fact when noting: “that an insurance company would sell a ‘garage policy’ to a gas station when that policy specifically excluded the major source of potential liability is, to say the least, strange.” “[I]f a garage policy is intended to exclude coverage for damage caused by the leakage of gasoline, the language of the contract must be explicit.” Id. at 949. This was expounded upon in Indiana to the point that if an insurer wants to enforce such a provision it “can (and should) specify what falls within its pollution exclusion.” State Auto Mut. Ins. Co. v. Flexdar, Inc., 964 N.E.2d 845, 851 (Ind. 2012). In other words, if the insurer intends damages from trichloroethylene, tetrachloroethylene, or even gasoline, to be excluded, the contract should explicitly say so.
A federal court has now predicted that the New Mexico Supreme Court would join Indiana in rigorously enforcing insurance contracts as written and construing ambiguities against the drafting party. Applying “basic contract principles” requiring that the insurer “specify what falls within its pollution exclusion,” the District Court of New Mexico dubbed Indiana and New Mexico as states “least tolerant of contractual ambiguity.” Chisholm’s Village Plaza, LLC v. Travelers Commercial Insurance Company, No. CIV 20-0920 JB/JHR, 2022 U.S. Dist. LEXIS 146156, at *35 (D.N.M. Aug. 16, 2022). In this major victory for policyholders, the court found that the term “pollutants,” as used in the standard commercial general liability policy’s absolute pollution exclusion, is inherently ambiguous, creating the potential for coverage and triggering the duty to defend. Id. at *39. Like the Indiana Supreme Court, the court noted that “both policies include definitions of ‘pollutants’ that can be read to exclude coverage for almost anything.”.
The court conducted an extensive analysis of the nation’s laws with respect to these questions, analyzing the law in states that apply a “situational” approach versus states applying a “literal” approach to the absolute pollution exclusions. Under the “situational” approach, courts look at the pollution exclusion as applied to the facts on a case-by-case basis and try to narrow the exclusions to “traditional environmental pollution,” while under the “literal” approach, courts look at the exclusions as written and enforce the provisions because they find them to be “clear and unmistakable.” Id. at 28. Thus, under both the “situational” and “literal” approaches, the outcome is usually clear that there will be no coverage for what is deemed to be “traditional environmental pollution.”
The District Court of New Mexico, however, jettisoned both the situational and literal approaches, and predicted the New Mexico Supreme Court would follow the Indiana Supreme Court’s unique approach on the issue and join Indiana as one of the states “least tolerant of contractual ambiguity” and “most protective of the insured.” Id., at *35.
Thus, if an insurer in Indiana, and at least for now New Mexico, want to enforce an absolute pollution exclusion, it need follow “‘basic contract principles’ requiring that ‘the insurer . . . specify what falls within its pollution exclusion.” Id. (quoting Flexdar, Inc., 964 N.E.2d at 851). Without doing so, the pollution exclusion “does not describe any particular substance with enough specificity to put the insured on notice that loss arising from that substance is excluded.” Chisholm’s Village, 2022 U.S. Dist. LEXIS 146156, at *45.
This is a big win for policyholders and the environment in New Mexico, and, it would appear that going forward, as in Indiana, the fragrances emanating from the fruited New Mexican plains will also be less pungent with the odor of chlorinated solvents, and when New Mexicans dream about the moonlight on the [checks notes] Rio Grande, they will long ever more for their New Mexico home!
