(Article from Insurance Law Alert, July/August 2023)
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Holding
Reversing a trial court decision, an Illinois appellate court ruled that underlying bodily injury and property damage claims arising out of contaminated water were not excluded from coverage as a matter of law. LM Ins. Corp. v. City of Sycamore, 2023 IL App(2d) 220234 (Ill. App. Ct. June 8, 2023).
Background
Residents filed a putative class action against the City of Sycamore, alleging that its failure to properly maintain water mains resulted in unsafe drinking water and damage to equipment in homes. According to the complaint, water was contaminated with iron, lead and bacteria as a result of decaying pipes. Liberty, Sycamore’s general liability insurer, sought a declaration of no coverage. Liberty argued that Sycamore’s ongoing failure to maintain the pipes was not a covered “occurrence” and that in any event, coverage was barred by pollution and lead exclusions. A trial court agreed and ruled in favor of Liberty as a matter of law. The appellate court reversed and remanded the matter for further proceedings.
Decision
First, the court rejected Liberty’s assertion that the policies’ pollution exclusion precluded coverage. The court framed the dispositive question as whether the iron, lead and bacteria allegedly distributed to residents constituted “traditional environmental pollution” or “pollution harms as traditionally understood.” Under Illinois precedent, the determination of whether an event falls within “traditional environmental pollution” turns primarily on whether the hazardous material is confined to the insured’s premises (such as the release of carbon monoxide contained inside a building), or conversely, dispersed into the land, atmosphere or water (such as the contamination of ground water by toxic chemicals that escaped from a manufacturing plant). Applying this framework, the appellate court concluded that the underlying claims did not allege a “textbook” or “unquestionable” example of traditional environmental pollution. The court reasoned that there was no alleged release, discharge or escape of a pollutant into the ground that caused the water to become contaminated; rather the water did not become contaminated until it was already in Sycamore’s water pipes. Additionally, the court noted a lack of case law holding that degrading water mains that result in contaminated water constitute traditional environmental pollution.
Second, the court held that the policies’ lead exclusion, which applied to any claims “arising from” lead, did not relieve the insurer of its duty to defend or indemnify as a matter of law because the underlying allegations attributed injury and damage to iron and bacteria, in addition to lead.
Finally, the appellate court declined to affirm the trial court’s holding that there was no alleged “occurrence,” defined by the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The appellate court explained that the occurrence question focuses on whether the insured expected or intended the injury, not whether the initial injury-causing actions were performed intentionally. The court rejected Liberty’s contention that Sycamore’s conduct constituted a “nonoccurrence” because the natural and expected consequences of Sycamore’s decision to neglect maintenance on its water mains for decades were deterioration and resulting harm to residents.
Comments
This decision applies a narrow reading of pollution exclusions under Illinois law. The alleged contamination of Sycamore’s water supply with known pollutants appears to fall within the scope of the plain terms of the pollution exclusion (“discharge, dispersal, seepage, migration, release or escape of ‘pollutants’”) notwithstanding the origin of the harm from pipe deterioration as opposed to leakage into soil.