ATTORNEYS FOR APPELLANTS: ATTORNEYS FOR APPELLEE:
FRED R. HAINS DANIEL W. GLAVIN
Fred R. Hains & Associates Beckman, Kelly & Smith
South Bend, Indiana Hammond, Indiana
ATTORNEYS FOR AMICUS CURIAE ATTORNEYS FOR AMICUS CURIAE
INDIANA MANUFACTURING INSURANCE ENVIRONMENTAL
ASSOCIATION: LITIGATION ASSOCIATION:
GEORGE M. PLEWS STEVEN M. BADGER
DONNA C. MARRON ANNE L. COWGUR
Plews Shadley Racher & Braun McTurnan & Turner
Indianapolis, Indiana Indianapolis, Indiana
LAURA A. FOGGAN
Wiley, Rein & Fielding
SUPREME COURT OF INDIANA
JOHN FREIDLINE and DONNA FREIDLINE )
Appellants (Plaintiffs), ) Supreme Court Cause Number
) Court of Appeals Cause Number
SHELBY INSURANCE COMPANY, ) 71A03-0004-CV-132
Appellee (Defendant). )
APPEAL FROM THE ST. JOSEPH SUPERIOR COURT
The Honorable William C. Whitman, Judge
Cause No. 71D05-9908-CP-01027
ON PETITION TO TRANSFER
August 28, 2002
Complaining that toxic fumes from substances used to install carpet in an office
building injured them, occupants of the building sued the carpet installer, the building
owners, and others. When the building owners insurance carrier refused to defend
and indemnify them, the owners filed a third party complaint to enforce their
rights under the insurance policy. The building owners also alleged the insurance
carrier denied coverage in bad faith. The trial court entered summary judgment
in the insurance carriers favor on both claims. On review, the Court
of Appeals reversed. Having previously granted transfer, we now affirm in part
and reverse in part the judgment of the trial court.
Facts and Procedural History
John and Donna Freidline own a commercial building in South Bend. In
August 1997, they hired a subcontractor to replace the carpet in some of
the offices. During the carpet installation, several employees who worked in the
building complained that toxic fumes from the carpet glue sickened them. The
employees sued the Freidlines, Steve Beachey d/b/a Joers Floor Center of Indiana, Inc.,
Valley Development Company, Inc., Armstrong Inc., and the W.W. Henry Co., claiming both
compensatory and punitive damages.
The Shelby Insurance Company insured the Building. The Freidlines notified the insurance
carrier and requested Shelby to defend them in the legal action and to
indemnify them in case of judgment. Citing a pollution exclusion in the
insurance policy, Shelby declined to either defend or indemnify. The Freidlines then
filed a third party complaint against Shelby to enforce their rights under the
insurance policy. They also alleged the companys denial of coverage was done
in bad faith. Thereafter, the Freidlines filed a motion for summary judgment
against Shelby. After conducting a hearing, the trial court denied the Freidlines
motion and entered summary judgment in favor of the insurance company. The
Freidlines appealed. The Court of Appeals reversed finding that Shelby was obligated
under the policy to defend and indemnify the Freidlines. Freidline v. Shelby
Ins. Co., 739 N.E.2d 178, 184 (Ind. Ct. App. 2000). The Court
also determined that Shelby acted in bad faith in failing to do so.
Id. at 185. We affirm in part and reverse in part
the judgment of the trial court.
I. Standard of Review
When reviewing a grant or denial of summary judgment, our well-settled standard of
review is the same as it is for the trial court: whether
there is a genuine issue of material fact and whether the moving party
is entitled to judgment as a matter of law. Ind. Univ. Med.
Ctr., Riley Hosp. for Children v. Logan, 728 N.E.2d 855, 858 (Ind. 2000).
Summary judgment should be granted only if the evidence authorized by Indiana
Trial Rule 56(C) shows that there is no genuine issue of material fact
and the moving party deserves judgment as a matter of law. Id.
Here, there is no dispute of the facts. Accordingly, this
is a proper case for summary judgment, and our standard of review is
de novo. See LCEOC, Inc. v. Greer, 735 N.E.2d 206, 208 (Ind.
2000); Bosecker v. Westfield Ins. Co., 724 N.E.2d 241, 243 (Ind. 2000).
We view the pleadings and designated materials in the light most favorable to
the non-movant, in this case, Shelby. See LCEOC, Inc., 735 N.E.2d at
II. Pollution Exclusion
At issue first is whether bodily injury resulting from the toxic fumes in
carpet glue is excluded from insurance coverage. The Freidlines general liability insurance
policy with Shelby provides that the company 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.
R. at 231 (emphasis omitted). This insuring agreement is subject to several
exclusions, including a pollution exclusion:
This insurance does not apply to: . . .
Bodily injury and property damage arising out of the actual, alleged or threatened
discharge, dispersal, seepage, migration, release or escape of pollutants . . .
Pollutants means 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.III. Bad Faith
R. at 232-33 (emphasis omitted).
The Freidlines contend that fumes emanating from carpet glue are not included in
the policys definition of pollutants, and thus bodily injury arising from those fumes
is covered. Relying on precedent from this Court,
See footnote the Court of Appeals
agreed, finding the pollution exclusion ambiguous and construing it against the insurance company
so as not to exclude coverage for injuries resulting from release of carpet
Freidline, 739 N.E.2d at 184. Accordingly, the Court of
Appeals reversed the trial courts grant of summary judgment in favor of Shelby
on the defense and indemnification issue. We agree and summarily affirm the
Court of Appeals on this point. However, we disagree with our colleagues
that Shelby acted in bad faith when it failed to defend and indemnify
Indiana law has long recognized a legal duty, implied in all insurance contracts,
for the insurer to deal in good faith with its insured. Erie
Ins. Co. v. Hickman, 622 N.E.2d 515, 518 (Ind. 1993); Vernon Fire &
Cas. Ins. Co. v. Sharp, 264 Ind. 599, 349 N.E.2d 173, 181 (1976).
In recognizing a cause of action in tort for a breach of
that duty, we have also noted that a cause of action will not
arise every time an insurance claim is denied. Hickman, 622 N.E.2d at
520. For example, a good faith dispute about whether the insured has
a valid claim will not supply the grounds for recovery in tort for
the breach of the obligation to exercise good faith. Id. On
the other hand, an insurer that denies liability knowing there is no rational,
principled basis for doing so has breached its duty. Id. To
prove bad faith, the plaintiff must establish, with clear and convincing evidence, that
the insurer had knowledge that there was no legitimate basis for denying liability.
Ind. Ins. Co. v. Plummer Power Mower & Tool Rental, Inc., 590
N.E.2d 1085, 1093 (Ind. Ct. App. 1992).
Here, the Freidlines contend that Shelby had no legitimate basis for denying coverage
because the company knew of precedent from this Court finding the definition of
pollutants ambiguous and thus strictly construing the pollution exclusion against insurance companies.
The Freidlines specifically point to a letter their counsel sent to Shelby, dated
October 25, 1999, detailing recent cases involving the pollution exclusion decided by this
Court and the Court of Appeals. R. at 272-73. In response,
Shelby points to the plain language of the insurance policys pollution exclusion arguing
that the definition of pollutants includes any fumes and therefore bodily injury arising
out of the release of glue fumes is not covered. Moreover, although
Shelby concedes it knew of the cases at the heart of this dispute,
the company argues that the holdings in these cases only determined that the
pollution exclusion was ambiguous as applied to the facts of each case.
In American States Insurance Company v. Kiger, 662 N.E.2d 945 (Ind. 1996), the
Indiana Department of Environmental Management sought reimbursement from Kiger, the owner of a
Sunoco gas station, for clean-up costs due to contamination from a leaking underground
gasoline tank. Kiger, in turn, looked to his insurer, American States, for
defense and indemnification. The insurance company denied coverage based on the pollution
exclusions in the policies issued to Kiger. In addressing the question of
whether gasoline is a pollutant as defined by the owners garage liability policy,
this Court was particularly troubled by an interpretation that would exclude coverage for
a large segment of Kigers gas stations business operations.
Id. at 949.
After expressing concern, we strictly construed the language against the insurer by
finding the policy ambiguous because the term pollutant does not obviously include gasoline.
Id. In a three-to-two decision,
See footnote we specifically held, If a garage
policy is intended to exclude coverage for damage caused by the leakage of
gasoline, the language of the contract must be explicit.
Similarly, in Seymour Manufacturing Company, Inc. v. Commercial Union Insurance Company, 665 N.E.2d
891 (Ind. 1996), the United States Environmental Protection Agency (EPA) sought to recover
clean-up costs from Seymour Manufacturing Company (SMC), which stored, treated, and disposed of
waste generated by manufacturers. The EPA alleged that SMC allowed hazardous materials
to spill, leak, or ooze from the containers causing soil contamination, fumes, fires,
and odor problems. SMC sued its insurance carrier, Commercial Union, for a
declaratory judgment when the insurer refused to defend SMC. This Court, relying
on Kiger, found that Commercial Union had a duty to defend SMC.
Id. at 892.
Relying on Kiger and Seymour, the Court of Appeals, in Travelers Indemnity Company
v. Summit Corporation of America, 715 N.E.2d 926 (Ind. Ct. App. 1999), followed
this Courts lead and construed the pollution exclusion against the insurer so as
not to exclude coverage for environmental claims made against Summit. Id. at
935. Summits principal business was manufacturing and finishing metal parts. Several
of its sites in Indiana were the target of a soil and groundwater
clean-up. Summit sought a declaration that its insurer had a duty to
defend and indemnify the company for certain liability claims made against it by
the EPA, other regulatory agencies, and third parties. In its decision, the
Court of Appeals observed:
Were we writing on a clean slate, we might well conclude that the
language of the exclusion is clear and excludes coverage for the environmental claims
against Summit. However, our supreme court has twice recently considered the exclusionary
language that is, for practical purposes, the same as in the exclusions here.
Both with regard to the duty to indemnify in American States Ins.
Co. v. Kiger and the duty to defend in Seymour Mfg. Co. v.
Commercial Union Ins. our supreme court has determined the exclusion to be ambiguous
and has construed it against the insurer.
Shelby, in its response to the Freidlines summary judgment motion, distinguished these cases
from the instant case in terms of business operations and exposures. Shelby
argued that in Kiger, Seymour, and Summit, the business operations all involved the
handling and use of toxic or potentially polluting substances, so that the pollution
exclusion would virtually negate coverage. Br. of Appellee at 9. On
the other hand, the Freidlines, Shelby argued, own an office building an
operation that does not regularly use toxic or caustic substances. Additionally, Shelby
argued previous cases involved environmental clean-up, whereas the suit against the Freidlines involves
bodily injury to workers in the office building.
Although we refute these contentions by summarily affirming the Court of Appeals on
the pollution exclusion coverage issue, they do form a rational, principled basis for
denying liability. The scope of the pollution exclusion is an evolving area
of law, subject to differing interpretations.
See footnote The pollution exclusion is one of
the most frequently litigated exceptions found in a staple insurance industry product
the comprehensive general liability policy.
Tri-Town Corp., 863 F. Supp. at 38;
see also Madison Constr. Co., 735 A.2d at 106. This is also
evident in the trial courts grant of summary judgment in favor of Shelby.
After considering Kiger, Seymour, and Summit, the trial court found that the
pollution exclusion in Shelbys general liability policy does not appear ambiguous. R.
at 311. Inasmuch as we find there is a rational basis for
Shelbys actions, and Shelby supports its position with good faith legal argument, the
Freidlines have failed to establish by clear and convincing evidence that Shelby breached
its duty to act in good faith.
See footnote Thus, the trial court correctly
entered summary judgment in favor of Shelby on this issue.
We reverse the trial courts grant of summary judgment in favor of Shelby
on the Freidlines defense and indemnity claim. In all other respects the
judgment of the trial court is affirmed. This cause is remanded.
SHEPARD, C.J., and DICKSON, SULLIVAN and BOEHM, JJ., concur.
See Seymour Mfg. Co. v. Commercial Union Ins. Co., 665 N.E.2d
891 (Ind. 1996); Am. States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind.
1996); see also Travelers Indem. Co. v. Summit Corp. of Am., 715 N.E.2d
926 (Ind. Ct. App. 1999).
The definition of pollutants in American States garage policy is identical
to the definition in the Freidlines general liability policy.
Footnote: Justice DeBruler penned the majority opinion, with concurrences from Justices Dickson
and Selby. Justice Sullivan dissented, with Chief Justice Shepard concurring, concluding that
the insurance policy excluded coverage because the policy did not cover the accidental
discharge of the contaminating pollutant gasoline.
Kiger, 662 N.E.2d at 950 (Sullivan,
Kiger, Justice DeBruler wrote for the majority, with Justices
Dickson and Selby concurring. Chief Justice Shepard concurred, accepting Kiger as stare
decisis for the purposes of this case. Seymour Mfg. Co., 665 N.E.2d
at 893 (Shepard, C.J., concurring). Justice Sullivan dissented, contending genuine issues of
fact existed as to whether the hazardous waste spills were expected or intended
under the sudden and accidental language of the pollution exclusion. Id. (Sullivan,
For example, Shelby points to recent out-of-state decisions holding injuries resulting from
similar types of emissions are excluded from insurance coverage by the pollution exclusion.
See, e.g., Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d 997 (4th Cir.
1998) (carbon monoxide); West Am. Ins. Co. v. Band & Desenberg, 138 F.3d
1428 (11th Cir. 1998) (indoor air pollution); Haman, Inc. v. St. Paul Fire
& Marine Ins. Co., 18 F. Supp.2d 1306 (N.D. Ala. 1998) (methyl parathion
- substance used by an exterminator). See also cases cited by Amicus
Insurance Environmental Litigation Association including: Am. States Ins. Co. v. Nethery, 79
F.3d 473 (5th Cir. 1996) (paint and glue fumes); Essex Ins. Co. v.
Tri-Town Corp., 863 F. Supp. 38 (D. Mass. 1994) (carbon monoxide); Madison Constr.
Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100 (Pa. 1999) (concrete sealant
The Massachusetts district court also observed that the majority of courts that have
reviewed the pollution exclusion language, which is very similar to the language contained
in Shelbys insurance policy and is nearly identical throughout the fifty states, have
ruled the pollution exclusion unambiguous and thus enforce the exclusion in accordance with
its plain language. Tri-Town Corp., 863 F. Supp. at 40.
We observe this is true both for the duty to indemnify
and the duty to defend. Although the duty to defend is broader
than the duty to indemnify,
see Seymour Mfg. Co., 665 N.E.2d at 892,
this principle applies when the risk is insured against. Where an insurers
independent investigation of the facts underlying a complaint against its insured reveals a
claim is patently outside of the risk covered by the policy, the insurer
may properly refuse to defend. Liberty Mut. Ins. Co. v. Metzler, 586
N.E.2d 897, 901 (Ind. Ct. App. 1992); see also Transamerica Ins. Serv. v.
Kopko, 570 N.E.2d 1283, 1285 (Ind. 1991). Here, Shelby determined the Freidlines
general liability policy provided no coverage for the workers negligence claim. We
do observe, however, that an insurer who, after making an independent determination that
it has no duty to defend, fails to protect its interest by either
filing a declaratory judgment action for a judicial determination of its obligations under
the policy or hiring independent counsel and defending its insured under a reservation
of rights, does so at its own peril. Metzler, 586 N.E.2d at