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Indiana Court Of Appeals Finds There Is No Coverage Under General Liability Policies For Costs To Defend Order By IDEM To Apply For And Obtain PSD Permit

08.01.2007

In a decision dated August 8, 2007, Newman Manufacturing, Inc. v. Dalton Corporation v. Transcontinental Insurance Company, the Indiana Court of Appeals found that commercial general liability insurance policies do not cover the costs incurred to defend against an Order by the Indiana Department of Environmental Management (“IDEM”) that a foundry apply for and obtain a Prevention of Significant Deterioration (“PSD”) permit.

Amcast Corporation modified equipment at its gray iron foundry in Kendallville, Indiana in 1984 and 1985 without obtaining any preconstruction permits from the IDEM before implementing the changes. A citizen’s group presented a notice to the IDEM and USEPA of intent to file a lawsuit against Amcast for modifying its foundry without applying for or obtaining preconstruction permits or operating permits under the Clean Air Act or Indiana law. Neither IDEM nor USEPA initiated any action against Amcast based upon the citizen’s group’s notice. The citizen’s group sued Amcast in 1987, and during the suit, Amcast sold the foundry to its employees. The suit was settled in 1990, after which the employees sold the foundry to Dalton Corporation in 1992.

In February 2003, IDEM sent Dalton a Notice of Order for Submission of a PSD Permit Application, ordering Dalton to apply for and obtain a PSD permit for all of the emission units that were part of the 1984 modifications to the foundry. Dalton appealed the order in administrative proceedings and filed a complaint in Marion Superior Court seeking a declaration that IDEM’s 2003 Order was illegal and could not be enforced. The Marion Superior Court agreed with Dalton and barred IDEM from bringing an enforcement action based on res judicata, estoppel and laches.

Dalton then sued its comprehensive general liability insurance insurers alleging that they were liable for the attorneys’ fees that Dalton incurred in its suit against IDEM. Dalton contended that the insurers had a duty to defend it for the IDEM February 2003 Order because there was an “occurrence”, i.e. an unexpected happening without an intention or design, under the general liability coverage. Dalton contended that it was unaware that it was emitting excess pollution into the air after Amcast had made the 1984 modifications to the foundry. The insurer contended that the general liability insurance policies were meant to indemnify the insured for accidental property damage, not accidental violations of law.

The Indiana Court of Appeals found that IDEM’s Order requiring the submittal of an application for a permit covering the modification of emission units and requiring the installation of emission control equipment was intended to reduce future emissions of pollutants. Therefore, the mandated installation of emission control equipment did not constitute an “occurrence” that caused property damage. The Court held that the insurers did not have a duty to defend Dalton under the commercial general liability policies in connection with the IDEM’s February 2003 Order.

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