“Claims in Process” exclusion applies because contamination first occurred prior to policy inception

The Seventh Circuit, applying Indiana law, affirmed the district court’s ruling and held that there was no coverage for property damage arising out of pollutants leaking from underground storage tanks due to a “Claims in Process” exclusion in the relevant policies.  The Seventh Circuit confirmed the trial court’s interpretation of the “Claims in Process” exclusion and found that the exclusion precluded coverage for claims arising out of property damage – known or unknown – that occurred, or was in the process of occurring, before the policy’s inception.  Thus, while the insureds were unaware of the damage, because the damage occurred prior to the inception of the relevant insurance policies, the insurer had no coverage obligations.

The insureds purchased commercial property in Lake Station, Indiana in August of 2004.  The property contained six underground storage tanks used by the prior owner, a dry cleaning company.  In 1999, the dry cleaning company reported a newly discovered leak from four of the tanks to the Indiana Department of Environmental Management (“IDEM”).  According to the insureds, they did not have any knowledge of the preexisting environmental contamination until 2014, well after they procured Commercial General Liability coverage from Atlantic Casualty Insurance Company (“Atlantic”) for the property starting in 2009.  After the insureds tendered the IDEM claim to Atlantic, Atlantic filed a complaint seeking declaratory relief.  The district court interpreted the “Claims in Process” exclusion to preclude coverage for losses or claims for damages arising out of property damage that occurred before the policies’ inception and held that Atlantic had no coverage obligations for the IDEM claim.

On appeal, the insureds argued that the “Claims in Process” exclusion is ambiguous.   The relevant language from the “Claims in Process” exclusion includes:

1. any loss or claim for damages arising out of or related to ‘bodily injury’ or ‘property damage’, whether known or unknown: a. which first occurred prior to the inception date of this policy; or b. which is, or is alleged to be, in the process of occurring as of the inception date of this policy.
2. Any loss or claim for damages arising out of or related to ‘bodily injury’ or ‘property damage’, whether known or unknown, which is in the process of settlement, adjustment or ‘suit’ as of the inception date of this policy.

The insureds argued that the three parallel conditions following the phrase, “whether known or unknown,” could modify “any loss or claim for damages,” rather than “’bodily injury or property damage.’”  The Seventh Circuit disagreed stating, “a comma would follow ‘claim for damages’ if the exclusion sought to modify the timing of the claim rather than the damage.”  Thus, the exclusion was found to be unambiguous and the district court’s interpretation was affirmed.  Therefore, because there was no dispute that the damage to the property occurred before the inception of the policies, the Seventh Circuit held that the “Claims in Process” exclusion barred coverage for the IDEM claim. Atlantic Casualty Ins. Co. v. Garcia, No. 17-1224 (7th Cir. Dec. 22, 2017).