On March 12, 2012, the Seventh Circuit, applying Illinois law, held that the Village of Crestwood was not entitled to coverage for claims relating to a contaminated water supply.  See Scottsdale Indemnity Co. v. Village of Crestwood, ___ F.3d ___, 2012 WL 769730, Nos. 11-2385, 11-2556, 11-2583 (7th Cir. Mar. 12, 2012).  The policyholder, the Village of Crestwood, was sued in a number of bodily injury claims and a property damage remediation claim stemming from allegedly contaminated well water containing perc (PCE – percloroethylene, also known as tetrachloroethylene), a solvent used in dry cleaning.  Allegedly perc that was used by a nearby dry-cleaning store leaked into the groundwater that led into the well.  Without disclosure to the Village residents and with alleged knowledge of the contamination, the Village allowed the well to be used as a source of daily water supply from at least 1985 through 2007.

Crestwood’s standard form ISO General Liability insurance policies contained pollution exclusions that excluded from coverage bodily injury, property damage or personal injury “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time” and also excluded expenses arising from orders for “cleaning up … or in any way responding to, or assessing the effects of pollutants.”  “Pollutants” were defined to include any contaminant.  The court found there to be no doubt that perc is a contaminant and that the tort plaintiffs are alleging its dispersal. 

The more interesting part of this decision is the reason that the court chose not to stop there and simply affirm the lower court’s ruling without fanfare.  Instead, the court went to great lengths to go on and potentially narrow the future reach of the pollution exclusion.  “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.”  The Seventh Circuit emphasized that the Supreme Court of Illinois has specifically limited the pollution exclusion to harms arising from “traditional environmental pollution,” citing American States Ins. Co. v. Koloms, 687 N.E.2d 72, 82 (Ill. 1997), or more clearly stated as “pollution harms as ordinarily understood.”  The court offered a number of examples of instances where the pollution exclusion should not apply.

Notwithstanding this discussion, the court still found the pollution exclusion applicable to the residents’ claims, even though Crestwood allegedly did not originate the contamination and the contamination was below the maximum levels permitted by environmental regulations.  The court found that the Village caused the contamination of its water supply, thereby presumably making the pollution exclusion appropriate in its traditional sense to apply to the present facts before it.