UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF INDIANA

HAMMOND DIVISION

ATLANTIC CASUALTY INSURANCE )

COMPANY, )

Plaintiff/Counter-Claim Defendant, )

)

v. ) CAUSE NO.: 2:15-CV-66-JEM

)

JUAN AND MARIA GARCIA, )

Defendants/Counter-Claimants. )

OPINION AND ORDER

This matter is before the Court on cross-motions for summary judgment: (1) Plaintiff

Atlantic Casualty Insurance Company’s Motion for Summary Judgment [DE 23], filed on April 22,

2016; and (2) Defendants Juan and Maria Garcia’s Motion for Partial Summary Judgment and

Response to Atlantic Casualty’s Motion for Summary Judgment [DE 25], filed on May 26, 2016.

The parties have consented to the exercise of jurisdiction by a United States Magistrate

Judge, see DE 14, giving this Court jurisdiction to decide this case under 28 U.S.C. § 636(c).

I. Background

In 2004, Juan and Maria Garcia purchased property in Lake Station, Indiana. The site was

the home of an old dry cleaning facility that had operated from around 1945 to 2000. DE 23-6 at 10-

15. In connection with the dry cleaning operation, the site housed underground storage tanks

containing “Stoddard solvent,” a petroleum-based solvent used in dry cleaning; “PCE” solvent; and

heating oil. DE 23-6 at 10-18.

Around 1999 or 2000, a site assessment had revealed that some of the tanks containing

Stoddard solvent were leaking. An environmental consulting company reported the leak to the

Indiana Department of Environmental Management, which requested further testing. Testing

continued into 2004, the year the Garcias bought the site. See generally DE 23-6 at 10-19. The
Garcias say they had no knowledge of the preexisting contamination when they bought the property,

nor did they for many years after. 

After buying the property, the Garcias leased the site to tenants who operated an auto repair

shop and a day spa. The Garcias bought commercial general liability insurance every year, but the

relevant insurer in this case is Atlantic, from whom the Garcias bought commercial general liability

insurance in 2009 and 2010. The first policy ran for a year beginning on June 25, 2009, and the

Garcias renewed for a second year, ending on June 25, 2011. For simplicity, the Court will refer to

the pair of year-long policies as “the policy.”

In September 2014, the Garcias learned of the Indiana Department of Environmental

Management’s claim seeking to have the Garcias conduct and pay for further investigation and

remediation of environmental contamination originating on the property. In November 2014, the

Garcias notified Atlantic of the IDEM’s claim.

The Garcias also hired a company called Environmental Inc. to investigate the site.

Environmental reported that the pollution consisted of chemicals from the site’s old dry cleaning

operation’s underground storage tanks: Stoddard solvents, “PCE” solvents, and heating oil. DE 23-6

at 10-18; DE 23-6 at 14 (“Q: . . . The contamination sources that we just talked about, [Stoddard

solvents, PCE solvents, and heating oil], those contamination sources would have all predated the

Garcias’ purchase of the property, correct? A: Yes.”); DE 23-12 (“The cause of the contamination

is clearly the dry cleaning operations in which [the dry cleaners’ owners] engaged for many years

. . .”).

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Atlantic denied the Garcias’ claim and filed this lawsuit, seeking declaratory judgment that

its policy does not provide coverage to the Garcias. Both sides now seek summary judgment.

II. Legal standard

The Court must grant a motion for summary judgment “if the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”

Fed. R. Civ. P. 56(a). In other words, for summary judgment to be appropriate, “the record must

reveal that no reasonable jury could find for the non-moving party.” Dempsey v. Atchison, Topeka,

& Santa Fe Ry., 16 F.3d 832, 836 (7th Cir. 1994) (internal quotation omitted).

In considering summary judgment, the Court must construe all facts in a light most favorable

to the non-moving party and draw all reasonable inferences in favor of that party. Srail v.Vill. of

Lisle, 588 F.3d 940, 948 (7th Cir. 2009). The Court at summary judgment does not evaluate the

weight of the evidence, judge witnesses’ credibility, or determine the truth of the matter, but rather

determines whethere there is a genuine issue of triable fact. See Cimino v. Fleetwood Enters., 542

F. Supp. 2d 869, 873 (N.D. Ind. 2008).

Indiana state law governs the substance of the parties’ coverage dispute. See, e.g., Am. Std.

Ins. Co. v. Drew, No. 08-48, 2009 U.S. Dist. LEXIS 99135, *11 (N.D. Ind. Oct. 15, 2009) (citing

Harper v. Vigilant Ins. Co., 433 F.3d 521, 525 (7th Cir. 2005)). In Indiana, the construction of a

written contract is a generally question of law for which summary judgment is “particularly

appropriate.” Plumlee v. Monroe Guar. Ins. Co., 655 N.E.2d 350, 354 (Ind. Ct. App. 1995), trans.

denied. But before granting summary judgment based on the construction of a written contract, the

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Court must determine either that as a matter of law the contract is not ambiguous or uncertain, or

that any ambiguity can be resolved without the need for fact-finding. Id. 

Generally, insurance contracts “are subject to the same rules of interpretation and

construction as are other contracts.” Eli Lilly & Co. v. Home Ins. Co., 482 N.E.2d 467, 470 (Ind.

1985). An exclusion in an insurance policy “must clearly and unmistakably bring within its scope

the particular act or omission that will give rise to the exclusion,” and coverage “will not be

excluded or destroyed by an exclusion unless such clarity exists.” Keckler v. Meridian Sec. Ins. Co.,

967 N.E.2d 18, 23 (Ind. Ct. App. 2012), trans. denied.

An insurer’s duty to defend its policyholder is broader than its contractual obligation to

provide coverage. Trisler v. Indiana Ins. Co., 575 N.E.2d 1021, 1023 (Ind. Ct. App. 1991). But

while the duty is broader, it “is not boundless.” West Bend Mut. Ins. Co. v. United States Fid. &

Guar. Co., 598 F.3d 918, 922 (7th Cir. 2010) (citing Indiana law). An insurer may properly choose

not to defend if its independent investigation of the facts underlying a complaint against its insured

“reveals a claim patently outside of the risks covered by the policy.” Liberty Mut. Ins. Co. v.

Metzler, 586 N.E.2d 897, 901 (Ind. Ct. App. 1992), trans. denied. The nature of the claim, not the

merit, establishes the insurer’s duty to defend. Trisler, 575 N.E.2d at 1023.

III. Policy language

The policy obligated Atlantic to defend the Garcias against a lawsuit seeking either of two

types of damages: damages for bodily injury and property damage (Coverage A), and damages for

personal and advertising injury (Coverage B). But the policy also contained two relevant exclusions:

a pollution exclusion and a claims-in-process exclusion. 

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A. Pollution exclusion

The pollution exclusion appears in both Coverage A and Coverage B. 

In Coverage A, the pollution exclusion says that the insurance does not apply to: (1) bodily

injury or property damage caused by “pollutants”; or (2) any loss, cost, or expense arising out of any

(a) request, demand, or requirement to respond to or assess the effects of “pollutants”; or (b) any

claim or suit by a governmental authority for damages because of responding to or assessing the

effects of “pollutants.” 

In Coverage B, the pollution exclusion says that the insurance does not apply to “personal

and advertising injury” arising out of the actual, alleged, or threatened release of “pollutants,” nor

to any loss, cost, or expense arising out of: (1) any request, demand, or requirement to respond to

or assess the effects of “pollutants,” or (2) any claim or suit by a governmental authority for

damages because of responding to or assessing the effects of “pollutants.”

The policy defines a “pollutant” as:

[A] solid, liquid, gaseous, or thermal irritant or contaminant or all material for which a

Material Safety Data Sheet is required pursuant to federal, state, or local laws, where ever

discharged, dispersed, seeping, migrating or released, including but not limited to petroleum,

oil, heating oil, gasoline, fuel oil, carbon monoxide, industrial waste, acid, alkalis, chemicals,

waste, treated sewage; and associated smoke, vapor, soot and fumes from said substance.

Waste includes material to be recycled, reconditioned, or reclaimed.

B. Claims-in-process exclusion

The claims-in-process exclusion also appears in both Coverage A and Coverage B. 

In Coverage A, the claims-in-process exclusion says that the insurance does not apply to: (1)

any loss or claim for damages arising out of or related to bodily injury or property damage, whether

known or unknown, that (a) first occurred before the policy’s inception date, or (b) is or is alleged

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to be in the process of occurring as of the policy’s inception date; or (2) any loss or claim for

damages arising out of or related to bodily injury or property damage, whether known or unknown,

that is in the process of settlement or suit as of the policy’s inception date.

In Coverage B, the claims-in-process exclusion says that the insurance does not apply to: (1)

any loss or claim for damages arising out of or related to personal and advertising injury liability,

whether known or unknown, that (a) first occurred before the policy’s inception date, or (b) is or is

alleged to be in the process of occurring as of the policy’s inception date; or (2) any loss or claim

for damages arising out of or related to personal and advertising injury liability, whether known or

unknown, that is in the process of settlement or suit as of the policy’s inception date.

IV. Analysis

Atlantic says its policy does not provide coverage for two reasons: (1) the chemicals at issue

are required to have Material Safety Data Sheets under federal law, and the policy specifically

excludes coverage for chemical contaminants that must have Material Safety Data Sheets under

federal law; and (2) the pollution at the site predates both the Garcias’ purchase of the site and the

Garcias’ purchase of insurance from Atlantic, and the policy excludes coverage for losses or claims

for damage that first occurred before the policy’s inception. Atlantic says it is entitled to summary

judgment on either or both of these grounds.

Atlantic also asks for summary judgment on the Garcias’ bad faith counterclaim. Atlantic

says the Garcias’ bad faith counterclaim fails as a matter of law because Atlantic’s policy does not

provide coverage to the Garcias. Alternatively, Atlantic says, the bad faith counterclaim fails as a

matter of law because Atlantic denied coverage in good faith.

The Garcias disagree; they say that their policy with Atlantic obligates Atlantic to defend

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and indemnify them, and they ask for partial summary judgment in their favor.

A. Pollution exclusion

Atlantic’s policy excludes coverage for “pollutants,” which the policy defines as including

“heating oil” as well as “all material for which a Material Safety Data Sheet is required” under

federal, state, or local law. Material Safety Data Sheets are required for all chemicals deemed

“hazardous” by the Occupational Safety and Health Administration. United Steelworkers of Am. v.

Auchter, 763 F.2d 728, 732-33 (3d Cir. 1985). 

Here, the chemicals at issue are Stoddard solvents, PCE solvents, and heating oil. Heating

oil is specifically listed in the policy’s pollution exclusion, and OSHA has identified Stoddard

solvents and PCE as hazardous. See 29 CFR 1910.1000, Table Z-1 at 16 (listing Stoddard solvents

and Perchloroethylene (a.k.a. PCE) as “Hazardous Substances”); see also DE 23-6 at 17 (“Q: Would

you expect there to be an MSDS sheet for all of the chemicals that you identify as being present on

the Garcia property? A: Yes.”). So because the policy specifically lists heating oil and because

Stoddard and PCE solvents are required to have MSDSs under federal law, Atlantic says that the

policy excludes coverage for the pollutants found on the Garcias’ site.

As the Garcias point out, Indiana courts have repeatedly found pollution exclusions

ambiguous and construed them not to exclude coverage. See, e.g., American States Ins. Co. v. Kiger,

662 N.E.2d 945 (Ind. 1996) (standard pollution exclusion—“any solid, liquid, gaseous or thermal

irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and

waste”—is ambiguous); Travelers Indem. Co. v. Summit Corp. of Am., 715 N.E.2d 926 (Ind. Ct.

App. 1999) (standard pollution is ambiguous and is construed not to exclude coverage); Freidline

v. Shelby Ins. Co., 739 N.E.2d 178 (Ind. Ct. App. 2000) (standard pollution exclusion is ambiguous

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and is construed not to exclude coverage), rev’d on other grounds, 774 N.E.2d 37 (Ind. 2002); State

Auto Mut. Ins. Co. v. Flexdar, 964 N.E.2d 845, 851 (Ind. 2012) (standard pollution exclusion is

ambiguous and is construed not to exclude coverage) (“our decisions have consistently held that the

insurer can (and should) specify what falls within its pollution exclusion”); Visteon Corp. v. Nat’l

Union Fire Ins. Co. of Pittsburgh, 777 F.3d 415, 417 (7th Cir. 2015) (“Indiana requires that for [a

pollution-exclusion] clause to be enforceable the policy must ‘specify what falls within its pollution

exclusion.’”) (quoting Flexdar, 964 N.E.2d at 848). 

However, the pollution exclusion in Atlantic’s policy is more specific than the exclusions

in those cases. And prior cases are not controlling where the policy language differs. See West Bend

Mutual Ins. Co. v. United States Fid. & Guar. Co., 598 F.3d 918, 921-24 (7th Cir. 2010) (in finding

exclusion unambiguous, distinguishing language at issue from Kiger policy language, which was

similar but distinguishable enough not to control result); compare Flexdar, 964 N.E.2d at 850

(“practically every substance would qualify as a ‘pollutant’ under [the standard] definition,

rendering the exclusion meaningless”); Old Republic Ins. Co. v. Gary/Chi. Int’l Airport Auth., No.

15-281, 2016 U.S. Dist. LEXIS 96361, *13 (N.D. Ind. July 25, 2016) (“No Indiana case has held

that all pollution exclusions are unenforceable . . .”). So the cases the Garcias cite do not demand

the conclusion that the pollution exclusion here is ambiguous.

But the Garcias counter that even Atlantic’s more specific pollution exclusion language is

ambiguous, because it refers to pollutants by citing to federal law rather than identifying specific

pollutants within the policy itself. 

Atlantic responds that the Indiana Supreme Court has approved of the practice of referencing

federal law to exclude pollutants. See Flexdar, 964 N.E.2d at 852. In Flexdar, the Indiana Supreme

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Court held that the pollution exclusion at issue was ambiguous. 964 N.E.2d at 851 (“Indiana

precedent has consistently refused to apply a pollution exclusion like the one at issue in this case on

grounds of ambiguity.”). The court noted that an insurer “has the ability to resolve any question of

ambiguity” by “more careful drafting,” noting that, indeed, after the Flexdar litigation arose the

Flexdar insurer had done just that by revising its pollution exclusion language to be more specific.

Id. at 852. The court then quoted that revised language, which defined “pollutants” as including

“substances specifically listed, identified, or described by one or more of the following references:

Comprehensive Environmental Response, Compensation and Liability Act (CERLCA) Priority List

Hazardous Substances (1997 and all subsequent editions), Agency for Toxic Substances And

Disease Registry ToxFAQs . . . and/or U.S. Environmental Protection Agency EMCI Chemical

References Complete Index,” which resolved “any question of ambiguity.” Id. So, Atlantic says, the

Indiana Supreme Court has explicitly blessed the practice of referring to federal law to define

“pollutants” in an insurance policy exclusion.

But U.S. District Court for the Southern District of Indiana has disagreed with Atlantic’s

interpretation of Flexdar. See St. Paul Fire & Marine Ins. Co. v. City of Kokomo, No. 13-1573, 2015

U.S. Dist. LEXIS 82465 (S.D. Ind. June 25, 2015), reconsideration denied, 2015 U.S. Dist. LEXIS

159176 (S.D. Ind. Nov. 25, 2015). There, an insurance policy defined pollutants by referring to

federal and Indiana law, providing a list of laws as examples. The insurer argued that Flexdar’s

language supported this practice—just as Atlantic argues here—but the Kokomo court disagreed.

Although the revised policy language quoted approvingly in Flexdar “did contain a general

reference to CERCLA [a federal law],” the Kokomo court found that the Flexdar court’s approval

of the revised language related to the revision’s specific reference to “trichloroethylene (TCE),”

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which was the very substance at issue in Flexdar. Id. at *31. In the Kokomo court’s view, the

Flexdar opinion did not demonstrate that the Indiana Supreme Court approves of defining

“pollutant” in insurance policy exclusions by referring to federal and state law. To the contrary, the

definition was “not sufficiently specific.” Id. at 32-33 (“This general incorporation of state and

federal laws is insufficient to comply with Indiana’s stringent standard that an insurance policy

specify what falls within its pollution exclusion.”) (internal quotation omitted); accord Kokomo,

2015 U.S. Dist. LEXIS 159176, *18 (same result on reconsideration) (“defini[ng] . . . ‘pollutant’

[by] generally incorporating a plethora of federal and state environmental laws [i]s not sufficient”);

Old Republic Ins. Co. v. Gary/Chi. Int’l Airport Auth., 2016 U.S. Dist. LEXIS 96361, *8-10 (N.D.

Ind. July 25, 2016) (“As recently noted in [Kokomo], Indiana utilizes a unique approach to determine

the applicability of a pollution exclusion . . . .”).

 Here, although Atlantic’s policy specifically lists “heating oil” as a pollutant—just as the

revised language quoted approvingly in Flexdar listed TCE, the substance at issue there—the

policy’s definition of “pollutant” does not list Stoddard solvents or PCE solvents. Rather, the

pollution exclusion purports to encompass Stoddard solvents and PCE solvents by reference to

federal law. So the ultimate question is whether referring to federal law is enough to satisfy the

Indiana Supreme Court’s stringent standards with respect to pollution exclusions. Atlantic argues

that Flexdar indicates that the Indiana Supreme Court approves of defining “pollutant” in an

insurance policy exclusion by referring to federal law, but the U.S. District Court for the Southern

District of Indiana has disagreed. See Kokomo, 2015 U.S. Dist. LEXIS 82465 at 31 (“The Court

concludes that th[is] definition of ‘pollutant’ . . . is not sufficiently specific such that the Court can

grant summary judgment to [the insurer] . . .”). 

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The Court is inclined to agree with its colleague in the Southern District of Indiana, but the

question is a close one, and the Court is also mindful of Indiana Supreme Court Justice Sullivan’s

warning that finding nearly all pollution exclusions unenforceable will cause “premium increases

as insurers seek to charge for the increased risks [of extremely unpredictable pollution liability]” and

will present Indiana businesses with “a Hobson’s choice: paying higher premiums for coverage they

don’t need, thereby dissipating their financial resources, or going without coverage, thereby

exposing themselves to risk of loss from ordinary tort liability.” Flexdar, 964 N.E.2d at 854

(Sullivan, J., dissenting).

Under the principle of judicial restraint, federal courts “should not reach out to resolve

complex and controversial questions when a decision may be based on a narrower ground.” Allen

v. Ferguson, 791 F.2d 611, 615 (7th Cir. 1986). And as explained in Section IV.B, below, the Court

finds that Atlantic’s policy does not provide coverage to the Garcias because of the policy’s claimsin-process exclusion. So the Court need not rule on whether the policy’s pollution exclusion bars

coverage in order to resolve this case, and the Court declines to do so.

B. Claims-in-process exclusion

Atlantic argues that its policy does not provide coverage to the Garcias because of the

policy’s claims-in-process exclusion. That exclusion precludes coverage for losses or claims for

damages arising out of property damage—known or unknown—that occurred or was in the process

of occurring before the policy’s inception. So if the property damage happened before the policy

period but the damage had not been discovered, the exclusion bars coverage. And here, Atlantic

says, no one disputes that the pollution at issue predated the Garcias’ ownership of the site.

The Garcias counter that the relevant “loss” or “claim for damages” for which the policy

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provides coverage is the Indiana Department of Environmental Management’s claim, which did not

begin, they say, until 2014 when the IDEM advised the Garcias of their obligation to clean up the

contamination emanating from the site. Likewise, the Garcias did not begin incurring expenses

related to the claim until they entered the IDEM’s voluntary remediation program in 2015. So, the

Garcias say, the claims-in-process exclusion does not apply because there was no loss or claim for

damages in process before the policy’s inception in 2009. Before 2009, the Garcias say, the IDEM

had asserted no claim against the Garcias before 2009, and the Garcias had suffered no loss.

But to accept the Garcias’ position would be to ignore the claims-in-process exclusion’s

plain language. That language excludes losses or claims for damages arising out of property damage,

whether known or unknown, that first occurred or began occurring before the policy’s inception. The

Garcias interpret the exclusion as barring coverage for claims or expenses that occurred or began

occurring before the policy’s inception, but the relevant question is when the damage occurred or

began occurring. See, e.g., Boss Mgmt. Servs. v. Acceptance Ins. Co., No. 06-2397, 2007 U.S. Dist.

LEXIS 69666, *31 (S.D. Tex. Sept. 19, 2007) (insurer’s denial on basis of claims-in-process

exclusion, which “excludes coverage for loss arising out of property damage that ‘first occurred

prior to the inception date’ of the policies,” presents “the same” question as insurer’s denial on basis

that “[t]he policy language clearly requires that, to be covered, the property damage must occur

during the policy period”); Atl. Cas. Ins. Co. v. Brent Jessee Recording & Supply, Inc., No. 11-939,

2012 U.S. Dist. LEXIS 24072, *7-8 (W.D. Pa. Feb. 24, 2012) (similar analysis).

Here, there is no question that the pollution at issue—and hence the damage to the Garcias’

property—began long before the Garcias even bought the property. So the exclusion applies, and

the policy does not provide coverage to the Garcias.

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The Garcias argue in the alternative that the claims-in-process exclusion merely limits

Atlantic’s damages obligations to damages occurring during the policy period. So although

Atlantic’s liability may not extend beyond its pro rata share for its own policy period, the Garcias

say, that does not “defeat coverage” or limit Atlantic’s duty to defend.

But while it is true that the policy generally limits Atlantic’s liability to damage that “occurs

during the policy period,” DE 23-3 at 13, as explained above the claims-in-process exclusion

excludes coverage for property damage that occurred or was in the process of occurring before the

policy period commenced. So the policy does not provide coverage, and Atlantic is entitled to

summary judgment.

C. Bad faith

Atlantic also asks the Court to enter summary judgment in Atlantic’s favor on the Garcias’

bad faith counterclaim. Because the policy does not provide coverage here, Atlantic says, Atlantic

rightfully denied coverage. Freidline v. Shelby Ins. Co., 774 N.E.2d 37, 40 (Ind. 2002) (“To prove

bad faith, the [insured] must establish . . . that the insurer had knowledge that there was no legitimate

basis for denying liability.”); Thomas v. Victoria Fire & Cas. Ins. Co., 706 N.E.2d 212, 216 (Ind.

Ct. App. 1999) (affirming summary judgment to insurer on bad faith claim where insureds were not

entitled to coverage). Alternatively, Atlantic says, at worst this declaratory judgment action

represents a good-faith coverage dispute, not a bad faith denial of coverage. Freidline, 774 N.E.2d

at 40 (“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”).

As explained above, the policy does not provide coverage to the Garcias because of the

claims-in-process exclusion. So Atlantic did not act in bad faith in denying coverage, and summary

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judgment in Atlantic’s favor is appropriate.

D. The Garcias’ other summary judgment arguments

Because the claims-in-process exclusion frees Atlantic from the obligation to defend the

Garcias, the Court need not address the Garcias’ other summary judgment arguments, which attack

Atlantic’s other justifications for not defending the Garcias.

V. Conclusion

Plaintiff Atlantic Casualty Insurance Company is entitled to declaratory judgment that its

policy does not provide coverage to the Garcias for the claims alleged by the IDEM and that Atlantic

has no obligation to defend or indemnify the Garcias for the claims alleged by the IDEM. The Court

accordingly GRANTS Atlantic’s Motion for Summary Judgment [DE 23] and DENIES Defendants

Juan and Maria Garcias’ Motion for Partial Summary Judgment [DE 25]. The Court DIRECTS the

Clerk of the Court to enter judgment in Atlantic’s favor.

So ORDERED this 5th day of January, 2017.

s/ John E. Martin 

MAGISTRATE JUDGE JOHN E. MARTIN 

UNITED STATES DISTRICT COURT

cc: All counsel of record

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