November 23, 2010
Yesterday, the Indiana Court of Appeals issued a decision in
State Auto. Mut. Ins. Co. v. Flexdar, Inc., 937 N.E.2d 1203 (Ind. Ct. App. 2010), Case No. 49A02-1002-PL-00111, in which it followed 14 years of precedent and found an absolute pollution exclusion in an insurance policy ambiguous. Given the precedent, this substantive ruling does not break much new ground. However, the Court's conclusion that
Evid. R. 407 bars evidence of subsequent policy revisions to demonstrate an ambiguity in the policy does.
less..
Flexdar operates a factory and, in 2003, it was discovered that the industrial solvent trichloroethylene (TCE) had leaked from the premises and contaminated subsoil and groundwater. The contamination was reported to IDEM, which informed Flexdar that it could be liable for the costs of cleanup and remediation. Flexdar notified State Auto and requested defense and indemnification pursuant to its CGL policies. Those policies contained an absolute pollution exclusion. State Auto instituted a dec action seeking a declaration that it owed no coverage to Flexdar. The trial court concluded that the policy was ambiguous and State Auto appealed.
On appeal, Flexdar argued that State Auto's 2004 endorsement form, which specifically listed TCE as a pollutant, demonstrated that its prior absolute pollution exclusion was ambiguous. The Court addressed whether this evidence should be excluded under Rule 407 as a subsequent measure. The Court noted that this Rule is typically associated with personal injury and other negligence cases, but that it is worded broadly and has been applied in many other contexts including intentional tort and contract claims. The Court then followed the 7th Circuit's lead (in
Pastor v. State Farm Mut. Auto. Ins. Co., 487 F.3d 1042, 1045 (7th Cir. 2007)), and held that "Rule 407 may bar evidence of subsequent policy revisions offered to resolve ambiguity in an executed insurance contract." Quoting
Pastor, the Court explained that changing the policy language was not admission that the previous language was ambiguous.
The subsequent version of the clause, in which State Farm made explicit that "day" means 24 hours, and which State Farm describes as a clarification, Pastor deems a confession that her interpretation of the original clause is correct. Obviously it is not a confession. And to use at a trial a revision in a contract to argue the meaning of the original version would violate
Rule 407 of the Federal Rules of Evidence, the subsequent-repairs rule, by discouraging efforts to clarify contractual obligations, thus perpetuating any confusion caused by unclarified language in the contract. ... Pastor wants to use the evidence that State Farm, to avert future liability to persons in the position of the plaintiff, changed the policy, to establish State Farm's "culpable conduct." That is one of the grounds that evidence of subsequent corrective action may not be used to establish.
As stated above, the Court then refused to distinguish precedent and concluded that the absolute pollution exclusion in the State Auto policy was ambiguous. During this discussion, the Court did do one interesting thing -- it noted that the Governor vetoed legislation that purported to define "pollutant" when used in an insurance policy and cited this as additional authority for its decision.
This decision demonstrates the Court's willingness to apply Rule 407 broadly to contexts which only remotely touch on the opponent of that evidence's "negligence or culpable conduct." Indeed, this decision could be used to preclude any subsequent measure taken after a legal dispute arises. In other words, this case will be a useful one to have in your arsenal.
Lessons:
- Evid. R. 407 precludes evidence of subsequent changes to policy language to demonstrate an ambiguity in a prior version of the policy.
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