7th Circuit upholds denial of environmental insurance claim

A northern Indiana couple cannot seek insurance coverage for pre-existing environmental pollution they discovered on their businesses’ property because the language of their insurance policy unambiguously exempts coverage for known or unknown property damage occurring before their policy began, the 7th Circuit Court of Appeals has ruled.

After purchasing property in Lake Station in 2004, Juan and Maria Garcia used the property as an auto repair shop and day spa. Before the Garcias opened their businesses, the property was used a dry cleaning facility, with six underground storage tanks containing a solvent, gasoline and heating oil.

A site investigation was conducted in 2000 after the previous owners reported a leak in the solvent tank in 1999, and additional testing was conducted in 2001 and 2004. The Garcias, however, claim they were unaware of the pre-existing environmental contamination until 2014, when they received a letter from Environmental, Inc.

A subsequent investigation in 2015 revealed the chemicals from the solvent and heating oil tanks still affected the property. The Garcias then tendered an Indiana Department of Environmental Management claim with Atlantic Casualty Insurance Company, which insured the property from 2009 to 2011.

Atlantic responded with a motion for declaratory judgment, so the couple filed a counterclaim for breach of commercial general liability coverage policies and for bad faith denial of the IDEM claim. Both parties then moved for summary judgment, and the U.S. District Court for the Northern District of Indiana ruled in favor of Atlantic based on a “Claims in Process” exclusion that precluded coverage for property damage, known or unknown, that occurred before the policy’s inception.

In affirming that decision Friday in Atlantic Casualty Insurance Company v. Juan Garcia and Maria Garcia, 17-1224, 7th Circuit Court of Appeals Judge William Bauer wrote the language of the exclusion was unambiguous.

“Looking at the form of the exclusion, which states, ‘any loss or claim for damages arising out of or related to ‘bodily injury’ or ‘property damage,’ whether known or unknown,’ a comma would follow ‘claim for damages’ if the exclusion sought to modify the timing of the claim rather than the damage,” Bauer wrote, referencing the Garcias’ appellate argument. “… With the omission of this comma, the ‘whether known or unknown’ language clearly modifies what precedes it – ‘’bodily injury’ or ‘property damage.’’”

“Thus, if the property damage happened before the policy period, but the damage had not been discovered, the exclusion bars coverage,” Bauer continued. “With no dispute that the damage to the Property began before the inception of the policies, we find that the ‘Claims in Process’ exclusion bars recovery on behalf of the Garcias.”