Thirty years ago, recognizing that comprehensive general liability (CGL) insurance policies were “tailor made” to provide coverage for most pollution-related injuries, insurers added an exclusion to CGL policies in an attempt to avoid coverage for such claims.1
Depending on how the pollution exclusion is read, its breadth may effectively render the insurance coverage under CGL policies illusory. In 1997, the Illinois Supreme Court first construed the standard pollution exclusion and found that its reach is limited to “traditional environmental contamination.” However, the Illinois Supreme Court left the question of what constitutes “traditional environmental contamination” to future courts for determination on a case-specific basis.
Most policyholders that have experience with insurance claims will likely confirm that the mere fact that you have given the insurer timely notice of a claim is no guarantee of a timely response. Consequently, the policyholder may be required to go it alone by funding its own defense while awaiting a response from its insurer. And, of course, there is no guarantee that the insurer will actually provide a defense.
Does your company’s business insurance cover the risks presented by the ordinary course of its operations? The unhappy lesson to the policyholder in Phusion Projects v. Selective Insurance, a December 2015 decision by an Illinois appellate court, is that the time to make that inquiry is before your company faces multiple lawsuits tied to the design of its product. And a sound way to manage the risk associated with your business is to undertake a risk audit against your risk management strategies.
A recent Illinois appellate court decision illustrates that a policyholder can compel its insurance carrier to provide it with a defense even when it is clear from extrinsic facts that the insurer will not ultimately have an obligation to indemnify the policyholder against a judgment.
Given the high cost of defending against even baseless claims, compelling the insurer to pay the defense costs even though it will not have to fund a judgment is not an empty victory. As illustrated by the recent appellate decision in Illinois Tool Works, Inc. v. Travelers Casualty and Surety, the policyholder may need to push the insurer to focus on the facts as pled and not the facts as “known” to force its insurance carrier to defend the claim. Policyholders themselves should not focus on the facts as known but on potential liability, assuming the claimant could actually prove the claims — regardless of how factually baseless they may be — in assessing whether it has coverage for defense costs.