INSURANCE POLLUTION EXCLUSION APPLIED TO WATER SUPPLY CONTAMINATION

Certain residents sued their village and village officials seeking damages for alleged contamination of water furnished by the municipal water system. The village continued to use for many years a well contaminated by perc, a dry cleaning solvent, which had migrated into the soil and ground water. The state also sued the village to compel remediation.

The insurer for the village sued in federal court for a declaration that the insurer had no duty to defend the suits against the village or to indemnify the village if the residents and the state should prevail in their suits.

The insurance policies at issue were public entity general liability policies issued to municipalities. They contained a pollution exclusion of the same kind found in commercial general liability policies. The pollution exclusion excluded from coverage bodily injuries, property damage and personal injuries arising from the discharge and dispersal of pollutants and also excluded expenses arising from orders to clean up or respond to the effects of pollution.

THe federal Seventh Court of Appeals affirmed the District Court holding that the pollution exclusion applied to relieve the insurers from any responsibility for the suits by the residents and the state against the village. The Court stated: "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 Court explained that a prime rationale for the pollution exclusion relates to the impossibility of adjusting insurance premiums for the greater risk of loss potential from high risk insurance customers. Thus, the exclusion forces high risk potential polluters to self identify by buying pollution coverage. (Scottsdale Indemnity Co. and National Casualty Co. v. Village of Crestwood, US Ct App, 7th Cir., Nos. 11-2385, 11-2556,11-2583, March 12, 2012)

The lesson of this decision for a water utility, of course, is twofold: first, read and understand the utility's general liability policy, including the pollution exclusion; and second, purchase a pollution coverage rider sufficient to cover potential contamination issues.