RIVERSIDE OIL, INC., et al.

v.

FEDERATED MUTUAL INSURANCE CO.

U.S. DISTRICT COURT FOR THE CENTRAL DISTRICT OF ILLINOIS

August 19, 1994

This matter is before the court on the plaintiffs’ motion for summary judgment. This case was originally filed in the Circuit Court of the Sixth Judicial Circuit, Champaign County, Illinois, but was removed to this court under 28 U.S.C. 1446 on February 16, 1994. The defendant stated in his notice of removal that the plaintiffs are all citizens of Indiana while the defendant is a Minnesota corporation and also claimed that the amount in issue is greater than $50,000.00. Thus, the court appears to have proper diversity jurisdiction under 28 U.S.C. 1332.

The plaintiffs’ suit against the defendant arises out of the uncontrolled discharge of gasoline at four gas stations (one in Illinois and three in Indiana) owned or leased by the plaintiffs. Plaintiffs A.D. and Joyce K. Searls leased the stations and subleased them to other parties. A.D. Searls is the president of Riverside Oil, Inc. ("Riverside") which leases the three Indiana stations from the Searls and subleases them to other parties. The plaintiffs claim that their insurance policies with the defendant, issued every year from January 1, 1978 through January 1, 1988, were comprehensive general liability policies requiring the defendant to indemnify the plaintiffs and pay the cost of their defense to the claims. The plaintiffs seek a declaratory judgment as well as an order requiring the defendant to pay their defense costs and indemnify them against all losses incurred as a result of state or federal agency actions or private lawsuits.

Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S.Ct. 2548 (1986); Herman v. National Broadcasting Co., Inc. 744 F.2d 604, 607 (7^th Cir. 1984), cert. denied, 470 U.S. 1028, 84 L. Ed. 2d 782, 105 S. Ct. 1393 (1985). "In determining whether factual issues exist, a reviewing court must view all the evidence in the light most favorable to the non-moving party." Black v. Henry Pratt co., 778 F.2d 1278, 1281 (7th Cir. 1985). However, Rule 56(c) "mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and o which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party there is no ‘genuine’ issue for trial." Mechnig v. Sears, Roebuck & Co., 864 F.2d 1359, 1363 (7^th Cir. 1988) (quoting Matushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986)).

Choice of Law

The plaintiffs contend that the court should apply Illinois law to the parties’ dispute because there is no conflict between Illinois and Indiana Insurance law. The defendant concedes that this may be true in terms of basic black letter law concepts that such as "terms in insurance contracts are given their ordinary meanings unless defined in the contract"; if there is any ambiguity in a policy term, it is to be construed in favor of the insured and coverage; the insurance company has the burden of proving the applicability of exclusions; and both states have adopted these rules because insurance contracts typically involve little bargaining over the contract language. See Outboard Marine v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 119, 180 Ill. Dec. 691, 607 N.E.2d 1204 (1992); South Bend Escan Corp. v. Federal Ins. Co., 647 F. Supp. 962, 966 (N.D. Ind. 1986); Eli Lilly & Co. v. Home Ins. Co., 482 N.E.2d 467, 470-71 (Ind. 1985). But, the defendant argues that there are specific Indiana cases that contradict Illinois law as some of the issues discussed below, and also asserts that even where the Indiana courts are silent this court should not assume that Indiana would follow Illinois’ lead, especially where Illinois has adopted a minority view.

Because of their position that there is no conflict between Illinois and Indian law, the plaintiffs do not discuss how Illinois’ rules on choice of law would apply here. See Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). The defendant claims that Illinois follows the rule that the law of the place of execution will apply, in this case Indiana. See Hamilton Die Cast, Inc. v. United States Fidelity and Guar. Co., 508 F.2d 417, 419 (7^th Cir. 1975); Home Ins. Co. v. Service Am. Corp., 654 F. Supp. 157, 159 (N.D. Ill. 1987). Furthermore, the defendant alleges that even if the various Second Restatement of Conflicts Factors, mentioned by the Illinois courts in dicta are considered here, Indiana law should still apply because three of the stations are there, Riverside is domiciled there, the defendant has an office there, the contracts were negotiated and executed there by the defendant’s Indiana employees and the plaintiffs paid Indiana resident premiums. See Palmer v. Beverly Enters., 823 F.2d 1105, 1007 (7^th Cir. 1987); York v. Globe Life and Accident Ins. Co., 734 F. Supp. 340, 341 (C.D. Ill. 1990) (Nihm, J.); Hofled v. Nationwide Life Ins. Co., 59 Ill. 2d 522, 322 N.E.2d 454, 454 (Ill. 1975).

The court will address this issue as it applies to each argument made by the parties. If Indiana law doers in fact differ from the law of Illinois in any significant manner the court will apply Indiana law. Otherwise, the court will look to both Illinois and Indiana law for instruction. If Illinois law represents a minority view on a question which Indiana has yet to address, the court will look at the common principles shared by the states to see if it appears likely that Indiana would apply the same principles as Illinois has to reach the same result.

Standard Pollution Exclusion

There was a clause in the parties’ contact between 1978 and 1983 commonly known as the standard pollution exclusion. The exclusion provided that the insured is not covered for bodily injury or property damage resulting from pollution except that where the pollution is "sudden and accidental" the insured is covered. The Plaintiffs note that the Illinois Supreme Court has held that the word "sudden" as used in this context is ambiguous and therefore, in construing insurance policies in general and exclusions in particular against the insurer, found that "sudden" means unexpected. or unintended. See Outboard Marine, 154 Ill. 2d 90, 121, 180 Ill. Dec. 691, 607 N.E.2d 1204 (1992). Stated differently, insureds are not covered for expected or intended discharge of pollutants. See id.

The basic principles of law enunciated in Outboard Marine are not unique or different from the law of Indiana, although the application of that same law may be. The defendant admits that the interpretation of the word "sudden" is irrelevant because the clarification clause in the 1983-1986 policies provides for coverage for unintentional discharges, but does argue that "sudden" is an unambiguous temporal limitation on the exclusion. n1 In the interest of completeness, the court finds that the analysis in Outboard Marine is fully consistent with the policies enunciated in the Indiana insurance cases especially since the word "sudden" has tow distinct and reasonable definitions, one temporal and the other conditional. See id. The plaintiffs state that no Indiana appellate court has passed on the issue, but note that an Indiana trial court has followed Outboard Marine. See Indiana Dep’t Envtl. Mgt. v. Kiger, No. 32C01-9206-CP-184 (Ind. Hendricks Circ. Ct. March 1, 1994); see also Barmet of Ind., Inc. v. Security Ins. Group, 425 N.E.2d 201 (Ind. App. 1981) (standard policy exclusion applies but pollution was intentional). The cases cited by the defendant from other jurisdictions are not persuasive to this court. See Board of Regents of the Univ. of Minn. et al. v. Royal Ins. Co. of Am., et al., 517 N.W.2d 888, (Minn. S. Ct. June 17, 1994) (to interpret "sudden" to mean unexpected would create a redundancy that could not have been intended); Dimmitt Chevrolet, Inc. v. Southwestern Fidelity Ins. Corp., 636 So. 2d 700, 702-04 (Fla. 1993) (Grimes, J., concurring) (temporal definition of "sudden" is its only plain and ordinary meaning). Therefore, the court finds that the word "sudden" as used in the exception to the exclusion means unexpected or unintended.

n1 The defendant also argues that the interpretation of the 1978-1983 policies does not affect two of the sites in Indiana because they were purchased after January 1, 1983. Further, as discussed below, the defendant contends that the plaintiffs’ motion for summary judgment fails for the years 1978-1986 because they have not sufficiently shown that unintended discharges occurred during the relevant policy periods, and because of the "owned property" exclusion.

Clarification of the Standard Pollution exclusion

In the parties’ 1986-1986 policies, a clause was added clearly stating that the "unintentional discharge, dispersal, release or escape of any liquid from a liquid storage tank or from any underground piping or connections leading to or from a liquid storage tank or from any underground piping or connections leading to or from a liquid storage tank shall be deemed to be sudden and accidental with respect to [the pollution] exclusion (f)." Thus, the defendant concedes that, as far as this argument is concerned, the plaintiffs are covered for unexpected discharges that occurred at the sites between 1983-1986. The defendant still contends of course, that the plaintiffs’ motion for summary judgment fails for the year 1978-1986 because they have not sufficiently shown that unintended discharges occurred during the relevant policy periods, and because of the "owned property" exclusion.

Absolute Pollution Exclusion

In 1987, the parties added an exclusion to the policy that barred coverage for bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or

escape of "pollutants". The exclusion states that

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.

The plaintiffs first characterize gasoline as a useful product rather than a waste. The plaintiffs argue that the definition does not specifically include gasoline and therefore the court should construe the clause in their favor and find coverage. No appellate court in either Illinois or Indiana has considered the question, but the Kiger trial court in Indiana found the exclusion inapplicable based on the policy of favoring insureds where there is ambiguity. See Indiana Dep’t Envtl. Mgt. v. Kiger, No. 32C01-9206-CP-184 (Ind. Hendricks Cir. Ct. March 1, 1994).

The defendant argues that the clause is clear and that gasoline is a liquid and an irritant or contaminant when not properly stored. Further, the defendant states that gasoline is a chemical. The definition, according to the defendant, was couched in general terms so as not to limit to the exclusion to only those pollutants specifically mentioned. The defendant notes that many courts have found that oil or fuel is a pollutant within the meaning of the pollution exclusion. See Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 120 (2d Cir. 1990) (oil); Guilford Indus., Inc. v. Liberty Mutual Insurance Co., 688 F. Supp. 792, 794 (D. Me. 1988), aff’d 879 F.2d 853 (1^st Cir. 1989) (oil); Union Mutual Fire Insurance Co. v. Hatch, 835 F. Supp. 59, 65-6 (D.N.H. 1993) (gasoline); Scarcia v. Maryland Casualty Co., 1988 WL 124570 at 3 (E.D. Pa. November 18, 1988) (gasoline). Further, the defendant contends that even though gasoline is the plaintiffs’ "product" it is a well-regulated one because of its toxic nature and still constitute a pollutant when released to the environment. See W.H. Breshears, Inc v. Federated Mutual Insurance Co., 832 F. Supp. 288, 291, (E.D. Cal 1993); Crescent Oil Co. v. Federated Mutual Insurance Co., No. 92-C-145-C (Kan. Dist. Ct., Montgomery County January 14, 1994 (attached as exhibit 6 to defendant’s appendix of authority).

It is certainly clear that gasoline is a liquid that can be an irritant or contaminant when released and, at least, it contains chemicals if it is not one itself. The ambiguity referred to by the plaintiffs comes only from the notion that since the plaintiffs owned gas stations, the exclusion should have ben more clear in stating whether or not gasoline fit the new exclusion. n2 although both Indiana and Illinois resolve ambiguities in favor of the insured especially where exclusions are involved, this does not authorize courts to find ambiguities where they do not exist. While the exclusion could have been more precisely drafted for its purpose, it is not ambiguous as liquid irritants or contaminants, such as gasoline, are included. The absolute pollution exclusion added to the policy by the partners in 1987 did not contain the "sudden and accidental" exception. Furthermore even though the exclusion seems to be directed primarily at waste products, it is broader than that and does not foreclose gasoline merely because the plaintiffs sold it as their product. Therefore, the court finds that the absolute pollution exclusion applies here to bar coverage for damage done after January 1, 1987 unless the plaintiffs are entitled to coverage under another provision of the policy.

n2 An interesting fact not mentioned by the defendant is that the same language regarding dispersal of an irritant or contaminant was also contained in the prior "sudden and accidental" exclusion, and the plaintiffs did not make this argument there. This does not mean that the plaintiffs have in any way waived the argument.

Personal Injury Provisions

The plaintiffs argue in the alternative that even if a pollution exclusion bars coverage for any of the relevant policy periods, all of the policies contained personal injury provisions that cover "all sums which the insured shall become legally obligated to pay as damages." Personal injury is defined in the policies in relevant part as "wrongful entry or eviction or other invasion of the right of private occupancy." The plaintiffs note that the personal injury provisions contain no pollution exclusions and, although the parties do not consider the issue, it seems clear that any coverage under the personal injury provisions would include both the duty to defend and the duty to indemnify.

The plaintiffs first note that the Seventh Circuit has considered a nearly identical personal injury provision under Illinois and Missouri law and found that it covered government ordered cleanup costs arising out of the "wrongful entry" and "other invasion of the right to private occupancy" occasioned by the release of PCBs. See Pipefitters Welfare Educ. Fund v. Westchester Fire Ins. Co., 976 F.2d 1037, 1042 (7^th Cir. 1992). The court found that the release of PCBs at issue was clearly not an "eviction", but held that it could be a "wrongful entry" because Illinois law treated "wrongful entry" as substantially similar to trespass. not requiring any intent by the wrongdoer to take possession. See id. at 1041-42. The plaintiffs assert that the underlying Illinois law of trespass relied on in Pipefitters is identical to the law of trespass in Indiana. See Hawke v. Maus, 141 Ind. App. 126, 226 N.E.2d 713, 715 (Ind. App. 1976) (trespasser need not intend to commit a trespass); City of Bloomington v. Westinghouse Elec. Co., 891 F.2d 611 (7^th Cir. 1989) (same).

The defendant argues initially that the plaintiffs’ claims under the personal injury provisions fail because the only claims made against the plaintiffs were by the states of Indiana and Illinois. The defendant contends that these state entities are not "persons" and thus cannot suffer "personal" injury. The defendant asserts that even assuming arguendo that a "wrongful entry" or "other invasion" did occur, neither of them could have affected the right of private occupancy as required under the policies. The defendant relies on Harrow Prods, Inc. v. Liberty Mutual Insurance Co., 833 F. Supp. 1239 (W.D. Mich. 1993), where the court compared the law of trespass to the torts of false arrest, malicious prosecution, defamation and invasion of privacy and concluded that they all can only be committed against persons. See id. at 1256. The defendant points out that both Pipefitters and Titan Holdings Syndicate, Inc. v. City of Keene, N.H., 898 F.2d 265, 267 (1^st Cir. 1990), at least included a suit by private owners of property under the personal injury provisions. See Pipefitters, 976 F.2d at 1038-40. n3

n3 The Pipefitters court decided only the duty to defend issue, but as stated above, there is no indication that the duties to defend and indemnify should be discussed separately in this case.

In the alternative, the defendant notes that Pipefitters has been rejected by some other jurisdictions and would also be rejected by the Indiana courts. See W.H. Breshears, Inc. v. Federated Mutual Insurance Co., 832 F. Supp. 288, 291 (E.D. col. 1993); Titan Corp. v. Aetna Casualty & Sur. Co., 22 Cal. App.4th 457, 27 Cal. Rptr. 2d 476, 486 (Cal. App. 1994) (Insured’s objectively reasonable expectation would be that the term "other invasion of the right of private occupancy" draws meaning from the preceding "wrongful entry of eviction" and would involve a disruption of the actual ability to occupy the property, not mere property damage).

The court does not accept the distinction suggested by the defendant based on the underlying absence of any private property owner complaining about the gasoline leaks. Whether the gasoline itself entered upon someone else’s property or whether the contaminated soil or groundwater would eventually do so does not change the fact that Illinois law (as interpreted by the Seventh Circuit in Pipefitters) regarding such as a "wrongful entry" for purposes of the personal injury provisions. Similarly, the plaintiffs’ claim that the law of trespass is the same in Illinois and Indiana does not carry the day because all states likely accept the fact that a trespass need not deprive a landowner of occupancy. The key question is whether Indiana would follow Pipefitters in segregating the clause to allow coverage based on the "wrongful entry" interfering with the right of private occupancy. The court finds that all other things being equal between these two reasonable positions, the Indiana courts would likely resort to its policy of constructing insurance policies in favor of the insured and coverage. Although the Titan Corp. court made a valid point that such a result "effectively negates the pollution exclusion," having two separate clauses potentially providing coverage for the same occurrence is not so unheard of as to change the result. Therefore, the court finds that the personal injury provisions provide an alternative ground for coverage for the years 1978-1987, assuming they can show that unintended discharges occurred during the policy periods and no other exclusion applies.

"Suits" Seeking Damages

Under the terms of all the relevant policies, the defendant is obligated to defend and indemnify the plaintiffs only in suits that seek recovery for property damage. In Outboard Martine, the Illinois Supreme Court specifically found that EPA and IEPA orders to remove and dispose of contamination are "suits seeking damages" under similar policies. See Outboard Marine, 154 Ill. 2d at 109-16. The court noted that various courts had found the term damages ambiguous and found in favor of coverage, while other courts had regarded it as unambiguous but in opposite ways (no coverage for injunctive response costs/coverage for injunctive response costs). See id. at 114-15 (citations omitted). In resolving the issue itself, the Illinois court stated that the policy would be of little utility if its coverage depended on whether the underlying complainant sought legal or equitable relief. More importantly, the court finds that Indiana’s policy of construing insurance policies in favor of the insured and coverage would settle the dispute as one Indiana trial court has already done. See Sam Winer & co., Inc. v. Commercial Union Ins. Co., Inc., No. 20D01-9207-CP-347 (Ind. Elkhart Super. Ct. February 18, 1994 (attached as exhibit 19 to the plaintiffs’ authorities in support).

The defendant’s arguments here are not persuasive. The defendant contends that because Indiana dn Illinois have not brought administrative or judicial enforcement proceedings against the plaintiffs no "suit seeking damages" exists. This logic, however, would encourage insureds like the plaintiff to resist legitimate government demands that sites be cleaned up pending official actions. The parties could not have intended such a result. The defendant does cite an Indiana proceeding where the insured was requested to perform certain clean up measures was not a "suit seeking damages". See Ulrich Chem., Inc. v. American states Ins. Co., 1990 WL 484974 at 3 (Ind. Shelby County Cir. Ct. 1990). The court finds that an Indiana appellate court would be more likely to follow Sam Winer than Ulrich as it is more consistent with Indiana’s treatment of insurance cases. Similarly, the court rejects the cases from other jurisdictions that give the term "suits seeking damages" a narrow reading thereby encouraging uncooperative behavior by insureds seeking coverage. Therefore, the court finds that the IEPA and IDEM demands at issue in this case are "suits seeking damages".

"Known Loss" Doctrine

Although the defendant makes no mention of it in its brief, apparently the "known loss" doctrine was alluded to at some point in the discussions between the parties concerning the policies at issue. The court in Outboard Marine found that the "known loss" doctrine precludes coverage only when the insured knew of contamination before the policy was signed and also knew that the contamination would cause loss or liability. See Outboard Marine, 154 Ill. 2d at 106. The defendant does not question the plaintiffs’ claims that they knew nothing of the contamination under the IEPA and IDEM demanded clean up of the sites, and therefore the "known loss" doctrine does not apply in this case. n4

n4 Similarly, the defendant has not made any mention of the plaintiffs’ alleged failure to timely notify it that coverage would be sought.

"Owned Property" Exclusion

The relevant policies contained an "owned property" exclusion that provided that "this insurance does not apply . . . to property owned or occupied or rented by the insured . . . property used by the insured, or . . . property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control." The Seventh Circuit in applying Wisconsin law has held that insureds who contaminated their own property were entitled to coverage despite the "owned property" exclusion because they were not attempting to collect for loss in value or damage to their land but instead for the cost of complying with a government-ordered clean up. See Patz v. St. Paul Fire & Marine Ins. Co., 15 F.3d 699, 704 (7^th Cir. 1994). The court found that it was irrelevant whether the contamination was on the plaintiffs’ property or not because they were not seeking to recover for damage to their property, but for the cost of the liability imposed on them by the government. See id. Obviously, this analysis transcends Wisconsin law as it interprets the policy language with simple logic. The distinction drawn by a California court finding that the exclusion applies except where groundwater is contaminated because landowners do not own groundwater. See Intel Corp. v. Hartford Accident & Indem. Co., 692 F. Supp. 1171, 1188-89 (N.D. Cal. 1988), aff’d in part and rev’d in part, 952 F.2d 1551 (9^th Cir. 1991). Therefore the "owned property" exclusion does not apply in this case.

Estoppel

The plaintiffs next argue that the defendant is estopped from denying coverage here because it paid claims to the plaintiffs under the same policies based upon a gasoline spill at their Madisonville, Kentucky gas station. The plaintiffs assert that they relied on this 1984 payment and other statements made by the defendant in continuing to renew the policies. The plaintiffs claim that estoppel is also appropriate based on the defendant’s statements to other policyholders and in other cases. The plaintiffs point out that the defendant has taken inconsistent positions on the definition of "sudden and accidental" and "property damage" in order to encourage policyholders to renew only to deny coverage later.

The defendant responds to the plaintiffs’ argument by stating that the actions and statements referred to by the plaintiffs are distinguishable and taken out of context. For example, the defendant notes that it covered the Madisonville claim because it occurred during a year when the policy had the clarification which the defendant has always admitted provides coverage. The defendant also correctly argues that these other statements and cases are simply not determinative of the issues before the court. The plaintiffs are certainly entitled to argue its interpretation of the policy, although it may well have to explain inconsistencies in treating its insureds to the trier of fact. The court finds that the defendant is not estopped from arguing its case to the court.

"Occurred" During the Policy Period

The defendant contends that even if the court finds that no exclusions apply, summary judgment is inappropriate because the plaintiffs have not sufficiently proved causation, i.e. that the property damage occurred during the relevant policy periods. Based on the findings above, the plaintiff are entitled to coverage for all policy years during which they can prove that Indiana and a "majority of American jurisdictions" follow the manifestation rule where the insurance injury is deemed to have occurred only when the actual damage manifests itself. See American Motorists Ins. Co. v. Trane Co., 544 F. Supp. 669 (W.D. Wis. 1982), aff’d, 718 F.2d 842 (7^th Cir. 1983); United States Fidelity & Guar. co. v. American Ins. Co., 169 Ind. App. 1, 345 N.E.2d 267 (Ind. App. 1976); U.S. Gypsum Co. v. Admiral Ins. Co., No. 83 L 53328, Cook Cty. (Ill. Cir. Ct. January 14, 1991). Thus, the defendant asserts that it is not liable for those losses which become apparent only after the policies expired.

This issue was not discussed by the plaintiffs in their memorandum as they likely assumed that if no exclusions applied, causation would be obvious. The court previously denied the plaintiffs’ motion to file a reply brief, but now it will allow the plaintiffs to file a memorandum solely on the issue of whether the manifestation rule should apply under Illinois and Indiana law. The court will then hold a hearing on that issue and also at that time the plaintiffs will be permitted to prove that their claim should be covered under the applicable standard. The plaintiffs should file this memorandum by September 12, 1994 and the evidentiary hearing will be held on September 19, 1994 at 2:00 p.m. before the court sitting in Urbana, Illinois.

IT IS THEREFORE ORDERED that the plaintiffs’ motion for summary judgment (docket #4) is allowed in part and denied in part as per this order. The plaintiffs are seeking recovery for losses stemming from "suits seeking damage" and although the absolute pollution exclusion would apply for 1987, the personal injury provisions in the policies provide an alternative ground for recovery. Therefore, as no other exclusions apply, the plaintiffs will be covered for all damages they can provide occurred during the policy years under the appropriate standard of law, an issue to be briefed by the plaintiffs as the defendant has already addressed it.

Enter this 19^th day of August, 1994.

HAROLD A. BAKER

UNITED STATES DISTRICT JUDGE