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
OF COUNSEL:
LAURA A. FOGGAN
MEREDITH FUCHS
Wiley, Rein & Fielding
Washington, D.C.
IN THE
SUPREME COURT OF INDIANA
JOHN FREIDLINE and DONNA FREIDLINE )
)
Appellants (Plaintiffs), ) Supreme Court Cause
Number
) 71S03-0107-CV-335
v. )
) 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
RUCKER, Justice
Case Summary
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
carrier’s 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 company’s 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.
Discussion
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 208.
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.
R. at 232-33 (emphasis omitted).
The Freidlines contend that fumes emanating from carpet glue are not
included in the policy’s definition of pollutants, and thus bodily injury
arising from those fumes is covered. Relying on precedent from this
Court,[1] 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 glue fumes.
Freidline, 739 N.E.2d at 184. Accordingly, the Court of Appeals reversed
the trial court’s 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 the
Freidlines.
III. Bad Faith
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 policy’s 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 owner’s
garage liability policy,[2] this Court was particularly troubled by an
interpretation that would exclude coverage for a large segment of Kiger’s
gas station’s 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,[3] 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.” Id.
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.[4] 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 Court’s lead and construed the pollution
exclusion against the insurer so as not to exclude coverage for
environmental claims made against Summit. Id. at 935. Summit’s 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.
Id.
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.[5] 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 court’s grant of summary judgment in favor of Shelby. After
considering Kiger, Seymour, and Summit, the trial court found that the
pollution exclusion in Shelby’s general liability policy “does not appear
ambiguous.” R. at 311. Inasmuch as we find there is a rational basis for
Shelby’s 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.[6] Thus, the
trial court correctly entered summary judgment in favor of Shelby on this
issue.
Conclusion
We reverse the trial court’s 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.
-----------------------
[1] 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).
[2] The definition of pollutants in American States’ garage policy is
identical to the definition in the Freidlines’ general liability policy.
[3] 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, J.,
dissenting).
[4] As in 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, J.,
dissenting).
[5] 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 fumes).
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 Shelby’s 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.
[6] 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 insurer’s 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 902.
Freidline v. Shelby Insurance Co.
Combined Opinion