Scottsdale Indem. Co. v. Vill. of Crestwood

• Citation: 673 F.3d 715
• Decision Date: 12 March 2012
• Docket Number: Nos. 11–2385,11–2583.,11–2556,s. 11–2385
• Parties: SCOTTSDALE INDEMNITY CO. and National Casualty Co., Plaintiffs–Appellees, v. VILLAGE OF CRESTWOOD, et al., Defendants–Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

673 F.3d 715

SCOTTSDALE INDEMNITY CO. and National Casualty Co., Plaintiffs–Appellees,

v.VILLAGE OF CRESTWOOD, et al., Defendants–Appellants.

Nos. 11–2385

11–2556

11–2583.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 13, 2012.Decided March 12, 2012.

Bradley Mitchell Jones (argued), Meagher & Geer PLLP, Minneapolis, MN, for Plaintiffs–Appellees.

Robert M. Chemers (argued), Attorney, Pretzel & Stouffer, Chicago, IL, for Defendants–Appellants in No. 11–2385.

Chris C. Gair, Attorney, Jenner & Block LLP, Chicago, IL, for Defendant–Appellant in No. 11–2556.Jay P. Deratany (argued), Attorney, the Deratany Firm, Chicago, IL, for Defendants–Appellants in No. 11–2583.

Before POSNER, WOOD, and HAMILTON, Circuit Judges.

POSNER, Circuit Judge.

This appeal in a diversity suit governed by Illinois law requires us to interpret the pollution exclusion from coverage found in most general liability insurance policies. The most common policy is the “commercial general liability policy” drafted by the Insurance Services Office and purchased by businesses to insure against losses arising out of general business operations. 9A Steven Plitt et al., Couch on Insurance § 129:1, pp. 129–5 to 129–7 (3d ed.2005). The policies at issue in this case are “public entity general liability policies,” which are issued to municipalities to cover analogous risks and contain the same pollution exclusion as the commercial general liability policy.

Two insurers sue for a declaration that they have no duty either to defend a series of tort suits brought against their insureds (the Village of Crestwood, Illinois, and past and present Village officials) or to indemnify the insureds should the plaintiffs in those suits prevail. The district court, holding that the allegations in the tort complaints triggered the pollution exclusion, granted summary judgment for the insurers, precipitating these appeals, which are multiple because there are a number of different declaratory-judgment suits.

Crestwood is a small Chicago suburb (population 11,000) that supplies its residents with water obtained from both Lake Michigan and wells that it owns, and bills the residents for the water. According to the tort complaints, in 1985 or 1986 Crestwood's mayor and other Village officials learned from state environmental authorities that one of the wells was contaminated by perc (PCE—perchloroethylene, also known as tetrachloroethylene). A solvent widely used in dry cleaning, perc is a common contaminant of soil and groundwater and is more difficult to clean up than oil spills are; it is a carcinogen to boot. Agency for Toxic Substances & Disease Registry, U.S. Department of Health & Human Services, “Toxicological Profile for Tetrachloroethylene” 55–59 (Sept.1997), www. atsdr. cdc. gov/ toxprofiles/ tp. 18. pdf (visited Jan. 31, 2012). Perc used by a nearby dry-cleaning establishment had leaked into the groundwater tapped by the well. Village officials promised the state authorities that the well would be used only in emergencies. But instead, for reasons of economy, the well continued to be used as a source of the daily Village water supply—without disclosure to the Village's residents. The well remained in use until 2007, and not until 2009 was it sealed. Illinois Department of Public Health, Division of Environmental Health, “Water Well Sealing Form,” www. villageof crestwood. com/ documents/ CRESTWOOD_–_ WATER_ WELL_ SEALING_ FORM_ 04– 22– 2009_ 15– 50– 37– 1. pdf (visited Jan. 31, 2012).

Hundreds of Crestwood residents, having learned of the contamination of their water supply from a series of articles in the Chicago Tribune, sued the Village and past and present Village officials in an Illinois state court seeking damages for injury to health. In a parallel suit the State of Illinois seeks an injunction requiring the Village to finance “a site inspection to determine the nature and extent of contamination” and take “all necessary steps to remediate the contamination.” All these suits are pending.

The defendants' insurance policies (primary policies issued by Scottsdale and excess policies issued by National) exclude from coverage “ ‘bodily injury,’ ‘property damage,’ or ‘personal injury’ arising out of, or ‘wrongful act(s)’ which result in the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants' at any time,” and also exclude from coverage expenses arising from orders for “cleaning up ... or in any way responding to, or assessing the effects of pollutants.” “Pollutants” are defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” There are slight differences in the wording of the various policies but they are immaterial and we ignore them.

There is no doubt that perc is a “contaminant” within the meaning of the policies; and the tort plaintiffs are complaining about its “dispersal” by the Village from the contaminated well to their homes via the system of water mains that connects the well to the homes. The problem with stopping there and affirming the district court in one sentence is that a literal reading of the pollution exclusion would exclude coverage for acts remote from the ordinary understanding of pollution harms and unrelated to the concerns that gave rise to the exclusion. See Pipefitters Welfare Educational Fund v. Westchester Fire Ins. Co., 976 F.2d 1037, 1043–44 (7th Cir.1992) (Illinois law); Bernhardt v. Hartford Fire Ins. Co., 102 Md.App. 45, 648 A.2d 1047, 1052 (1994); cf. Porterfield v. Audubon Indemnity Co., 856 So.2d 789, 800–01 (Ala.2002).

Suppose a tanker truck filled with perc crashes into a bridge abutment, spilling its liquid cargo, and another vehicle skids on the wet surface of the highway into the abutment, injuring the driver. Perc is both a contaminant and a cause of the bodily injuries in this example. But it would be absurd to argue—and the insurers do not argue—that a claim arising from such an accident would be within the pollution exclusion, since in no reasonable sense of the word “pollution” was the driver a victim of pollution. Our Pipefitters opinion, citing cases that hold the exclusion inapplicable to “injuries arising from an individual's ingestion of malathion during a municipal pesticide-spraying operation,” “paint damage to vehicles which occurred during the spraypainting of a bridge,” an “apartment-dweller's ingestion of lead paint,” and a “release of asbestos particles during installation, handling and removal of insulation,” noted that all these cases “involve injuries resulting from everyday activities gone slightly, but not surprisingly, awry. There is nothing that unusual about paint peeling off of a wall, asbestos particles escaping during the installation or removal of insulation, or paint drifting off the mark during a spraypainting job. A reasonable policyholder, these courts apparently believed, would not characterize such routine incidents as pollution.” 976 F.2d at 1043–44.

Generalizing, the Supreme Court of Illinois has interpreted the pollution exclusion to be limited to harms arising from “traditional environmental pollution.” American States Ins. Co. v. Koloms, 177 Ill.2d 473, 227 Ill.Dec. 149, 687 N.E.2d 72, 82 (1997), involved a furnace that leaked carbon monoxide, injuring several workers in the building that contained the furnace. As in the cases discussed in Pipefitters, there was no environmental damage and the court held the pollution exclusion inapplicable.

A more perspicuous formula than “traditional environmental pollution” would be “pollution harms as ordinarily understood.” That formula would also exclude the case of the leaking furnace; for think of what a misuse of language it would be to say that the workers had been injured by pollution. If one commits suicide by breathing in exhaust fumes, is that death by pollution?

We can make further progress by thinking about reasons for exclusions from insurance coverage. The reasons do not include fear by insurance executives of losses by insureds. The business of insurance is covering losses. The more policies written, the better from the insurance company's standpoint—but this is provided the company can estimate within a reasonable range the size of the losses that it is likely to be required to reimburse the policyholders for. Otherwise it can't set premiums that will be high enough to compensate it for the risk of having to reimburse the losses it's insuring, without being so high that no one will buy its polices.

Insurance companies use statistical methodologies (actuarial science) to calculate “expected losses”—the sum of the insured losses, if they occur, discounted (multiplied) by the probability of loss. The higher that probability or the greater the loss if it occurs, the steeper the insurance premium must be in order to be compensatory. Insurers do not write policies when they can't calculate expected losses, since without such a calculation the determination of how high a premium to charge would be arbitrary. So for example they will not insure property against fire for more than the property is worth—overinsurance would induce property owners to be less careful about preventing fires, and how much less careful they would be and how that would affect fire losses would be very difficult to predict.

The effect of insurance on an insured's behavior and hence on the risk is called “moral hazard.” A related problem, also illustrated by fire insurance, goes by the name of “adverse selection.” (“Adverse self-selection” would be clearer.) Overinsurance would attract people who valued their property at less than its insured value, and the addition of such people to the insurance pool would increase the probability of losses and so drive up premiums. Legitimate insurance purchasers would respond to the increased premiums by shifting their business to companies that...