598 F.3d 918 (7th Cir. 2010), 09-2519, West Bend Mutual Ins. Co. v. United States Fidelity and Guar. Co.

Docket Nº:09-2519.
Citation:598 F.3d 918
Opinion Judge:FLAUM, Circuit Judge.
Attorney:Jeffrey Leavell (argued), Racine, WI, for Plaintiff-Appellant. Charles E. Spevacek (argued), Meagher & Geer, Minneapolis, MN, for Defendants-Appellees.
Judge Panel:Before FLAUM, WILLIAMS, and SYKES, Circuit Judges. SYKES, Circuit Judge, dissenting.
Case Date:March 25, 2010
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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598 F.3d 918 (7th Cir. 2010)




No. 09-2519.

United States Court of Appeals, Seventh Circuit.

March 25, 2010

Argued Dec. 9, 2009.

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Jeffrey Leavell (argued), Racine, WI, for Plaintiff-Appellant.

Charles E. Spevacek (argued), Meagher & Geer, Minneapolis, MN, for Defendants-Appellees.

Before FLAUM, WILLIAMS, and SYKES, Circuit Judges.

FLAUM, Circuit Judge.

Plaintiff-appellant West Bend Mutual Insurance Company (" West Bend") appeals from the grant of summary judgment in favor of appellees, who consist of a group of insurance companies that includes the United States Fidelity and Guaranty Company (" Fidelity") and Federated Mutual Insurance Company (" Federated"). West Bend initially sued the defendants for breach of contract because Federated declined to defend a mutual insured in a class action alleging that insured's gas station contaminated groundwater in a residential neighborhood. The case revolves around whether the pollution exclusion contained in Federated's policy effectively limited coverage for gasoline spills under Indiana law. The district court found that a clause in Federated's policy excluded coverage for this type of claim and granted summary judgment in favor of Federated, Fidelity, and other insurers. West Bend now appeals this judgment as it applies to Federated.

For the following reasons, we affirm.

I. Background

MDK is a corporation that owned a gas station in Goshen, Indiana, which stored its retail gasoline in underground tanks. In September 1996, MDK notified the Indiana Department of Environmental Management (" IDEM") of a leak from these tanks. Over the following years, MDK procured a variety of monitoring and engineering services designed to control and repair the leak. In 1998, MDK sold the gas station to Southland Corporation.

During the period when it owned the gas station, MDK held insurance coverage from a series of companies: Fidelity from 1980 to 1990, Indiana Insurance from 1990

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to 1995, West Bend from December 1995 to 2001, and Federated from 2001 to 2003. In September 2002, the Bowens family and other individuals who lived near the gas station commenced a class action lawsuit (" the Bowens action") against a group of defendants that included MDK. Plaintiffs alleged that gasoline had leaked into groundwater and migrated beneath the nearby Jackson Street neighborhood, causing personal injury and property damage to people whose homes were inundated with toxic fumes.

In September 2002, MDK requested that West Bend provide it with a defense; West Bend complied, subject to a reservation of rights to dispute coverage. MDK made a similar request to Federated, which declined coverage on the grounds that its policy featured a pollution exclusion as well as other coverage limitations. Eventually, West Bend paid $4 million to settle the class action.

The case before us centers on whether the Federated insurance policy covered claims put forth in the Bowens action. Federated provided a commercial general liability policy (" CGL") to MDK from October 1, 2001 to October 1, 2003, which insured the company from liability to others for property damage and bodily injury occurring within the policy period. The policy stated:

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of " bodily injury" or " property damage" to which this insurance applies. We will have the right and duty to defend the insured against any " suit" seeking those damages.


b. This insurance applies to " bodily injury" and " property damage" only if:

(1) The " bodily injury" or " property damage" is caused by an " occurrence" that takes place in the " coverage territory" ;

(2) The " bodily injury" or " property damage" occurs during the policy period; and

(3) [The Known Loss Exclusion] Prior to the policy period, no insured ... knew that the " bodily injury" or " property damage" had occurred, in whole or in part....

c. [Continuous Injury Endorsement] " Bodily injury" or " property damage" which occurs [sic] during the policy period and was not, prior to the policy period, known to have occurred by any insured ... includes any continuation, change or resumption of that " bodily injury" or " property damage" after the end of the policy period.

The policy then stipulated that bodily injuries or property damage occur at the earliest time the insured learns about them. A coverage limitation endorsement further provided that the policy " does not apply to, and the Company shall have no duty to defend, any claim seeking ‘ bodily injury’ or ‘ property damage’ that occurred before the policy period, regardless of whether that ‘ bodily injury’ or ‘ property damage’ is also deemed to have occurred during the policy-period of this policy."

The Federated policy featured a Pollution Exclusion Endorsement, which excluded coverage for the following:

f. Pollution [The Pollution Exclusion]

(1) " Bodily injury" or " property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of " pollutants" :


(f) At or from any tank, piping, pumps or dispensers at premises, sites or locations in addition to those described in subparagraphs (a), (b), (d)

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or (e), which are or were at any time owned, leased, installed, removed, tested, repaired or filled by or on behalf of any insured, wherever located (except at residences primarily used for dwelling purposes) which contain, transport or dispense or are designed to contain, transport or dispense:

(I) motor fuels;

(ii) kerosene;

(iii) lubricants or other operating fluids which are needed to perform the normal electrical, hydraulic or mechanical functions necessary for the operation of any " auto," " mobile equipment," watercraft or aircraft; or

(iv) waste lubricants or other operating fluids which are or were needed to perform the normal, electrical, hydraulic or mechanical functions necessary for the operation of any " auto," " mobile equipment" , watercraft or aircraft;

including, but not limited to, their constituent parts and other irritants or contaminants found therein.


Motor fuels means petroleum or a petroleum-based substance that is typically used in the operation of a motor or engine, including but not limited to gasoline, aviation fuel, number one or number two diesel fuel, or any grade of gasohol. [" Motor Fuels" Definition]

In a separate part of the policy that defines quoted terms, Federated stated that " pollutants" mean " 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." Notably, this definition did not specifically include gasoline.

The Federated policy also included an Indiana Changes Endorsement, which stated that the Federated Pollution Exclusion " applies whether or not such irritant or contaminant has any function in your business, operations, premises, site or location." In addition to the CGL policy, MDK held " Umbrella" excess liability and " products-completed operations hazard" coverage from Federated. The former tracked the scope of the CGL, while the latter supplemented it.

The district court ruled from the bench in favor of defendants-appellees because " the pollution exclusion in the ... policy bars a defense in coverage." It did not reach the issue of whether the Known Loss Exclusion also preempted West Bend's claim, but it did conclude that the products-completed operations hazard coverage was not an alternative source of an obligation to defend the Bowens action.

II. Discussion

We review a district court's grant of summary judgment de novo. First Nat'l Bank v. Cincinnati Ins. Co., 485 F.3d 971, 976 (7th Cir.2007). A grant of summary judgment is appropriate if " there is no genuine issue as to any material fact and ... the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).

Indiana law governs this case and our task is to interpret the Federated policy accordingly. To do so, " [w]e construe the insurance policy as a whole and consider all of the provisions of the contract and not just the individual words, phrases, or paragraphs." Briles v. Wausau Ins. Cos., 858 N.E.2d 208, 213 (Ind.Ct.App.2006). Generally, we give words their ordinary meaning, Holtzclaw v. Bankers Mut. Ins. Co., 448 N.E.2d 55, 59 (Ind.Ct.App.1983), though where ambiguity exists, we read insurance policies strictly against the insurer. Fid. & Deposit Co. of Md. v. Pettis Dry Goods Co., 207 Ind. 38, 190 N.E. 63, 65 (1934).

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Under Indiana law, the insurer's duty to defend is broader than his contractual obligation to provide coverage, but this duty is not boundless. " [W]here an insurer's independent investigation of the facts underlying a complaint against its insured reveals a claim patently outside of the risks covered by a policy, the insurer may properly refuse to defend." Liberty Mut. Ins. Co. v. Metzler, 586 N.E.2d 897, 901 (Ind.Ct.App.1992). That is, when an exclusion precludes coverage, the insurer does not have a duty to defend. Trisler v. Ind. Ins. Co., 575 N.E.2d 1021, 1023 (Ind.Ct.App.1991).

Of foremost importance in this case is the holding of the Indiana Supreme Court in American States Insurance Co. v. Kiger, 662 N.E.2d 945 (Ind.1996): " [i]f a garage policy is intended...

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