Certification of Illinois Law on Permitted Emissions and the CGL Pollution Exclusion

Introduction

In Sterigenics U.S., LLC v. National Union Fire Insurance Company of Pittsburgh, PA, the United States Court of Appeals for the Seventh Circuit was asked to resolve an important question under Illinois law: whether industrial emissions of a toxic chemical, ethylene oxide (EtO), discharged pursuant to a regulatory permit, fall within the “pollution exclusion” of standard-form Commercial General Liability (CGL) insurance policies. The underlying dispute arose in the wake of mass tort litigation brought by more than 800 community members in Willowbrook, Illinois, alleging serious illnesses—including cancer—attributable to decades of EtO emissions from a sterilization plant first operated by Griffith Foods International, Inc. and later by Sterigenics U.S., LLC. When Griffith and Sterigenics sought defense coverage under two successive one-year CGL policies issued by National Union (covering 1983–1985), the insurer denied coverage, invoking the pollution exclusion. The district court held that National Union had a duty to defend, applying an intermediate Illinois appellate decision (Erie Insurance Exchange v. Imperial Marble Corp.) to carve out a permit-related exception to the exclusion. On appeal, the Seventh Circuit affirmed in part, found certain defense-scope arguments waived, and—given conflicting post-Koloms authorities—certified a controlling question of Illinois law to the Illinois Supreme Court.

Summary of the Judgment

The Seventh Circuit’s opinion, authored by Judge Scudder, addressed two principal issues:

1. Scope of the Duty to Defend: National Union argued that its duty to defend must be narrowed to injuries “occurring during the policy period” (1983–1985) and that the district court erred by granting a broad defense without parsing each of the 800 underlying complaints. The Seventh Circuit rejected this argument as waived, noting that National Union never presented it clearly below.
2. Pollution Exclusion and Permits: All parties agreed the Master Complaint alleged bodily injuries from chronic EtO emissions. Under Illinois law (American States Ins. Co. v. Koloms), a standard CGL pollution exclusion bars coverage for “traditional environmental pollution,” but is ambiguous if an emission is “authorized by law.” Post-Koloms, the Illinois appellate courts have split: Erie Marble held that a regulatory permit creates an ambiguity in the exclusion, while Scottsdale Indemnity Co. v. Village of Crestwood held that permitted discharges remain excluded. Concluding Illinois law is unsettled, the Seventh Circuit certified to the Illinois Supreme Court the question:

   “In light of the Illinois Supreme Court’s decision in American States Insurance Co. v. Koloms, 687 N.E.2d 72 (1997), and mindful of Erie Insurance Exchange v. Imperial Marble Corp., 957 N.E.2d 1214 (2011), what relevance, if any, does a permit or regulation authorizing emissions (generally or at particular levels) play in assessing the application of a pollution exclusion within a standard-form commercial general liability policy?”

Analysis

Precedents Cited

• American States Insurance Co. v. Koloms (Ill. 1997): The Illinois Supreme Court interpreted the standard CGL pollution exclusion and confined it to “traditional environmental pollution”—industrial releases of pollutants that risked large-scale environmental harm—while excluding trivial or commonplace leaks (e.g., pool chlorine, residential furnace carbon monoxide).
• Erie Insurance Exchange v. Imperial Marble Corp. (Ill. App. Ct. 2011): An Illinois intermediate appellate court held that emissions made pursuant to an Illinois EPA permit introduced an ambiguity in the pollution exclusion, creating a duty to defend alleged bodily injury claims stemming from permitted discharges.
• Scottsdale Indemnity Co. v. Village of Crestwood (7th Cir. applying Ill. law 2012): The Seventh Circuit, interpreting Illinois law, held that permitted emissions of environmental contaminants (perchloroethylene in drinking water) remain excluded under the standard pollution exclusion.
• Outboard Marine Corp. v. Liberty Mutual Ins. Co. (Ill. 1992): Established that the “sudden and accidental” exception to a pollution exclusion applies only to truly unexpected releases, not routine or continuous discharges.

Legal Reasoning

The Seventh Circuit applied Illinois’s well-established “nine-corners” or “eight-corners” rule: to determine the duty to defend, one compares the policy language against the underlying complaint’s allegations. If the allegations potentially fall within coverage, the insurer must defend, even if the claims are groundless. Here:

1. No Private Nuisance Coverage: Although the policies cover “personal injury” including “invasion of the right of private occupancy,” the Master Complaint contains no factual allegations of impaired use or enjoyment of land, only invisible, odorless inhaled emissions causing medical injuries. Therefore, no arguable private nuisance claim arises.
2. Pollution Exclusion for Bodily Injuries: The policies bar “bodily injury ... arising out of the discharge ... of ... pollutants into ... the atmosphere,” except if the discharge is “sudden and accidental.” The Master Complaint alleges deliberate, long-term EtO emissions—classic “traditional environmental pollution” as Koloms envisioned. The “sudden and accidental” exception does not apply to routine industrial emissions.
3. Ambiguity Over Permits: Koloms did not address regulated discharges. Imperial Marble suggested that a lawful permit may render the exclusion ambiguous; Scottsdale took the opposite view. Because Illinois’s highest court has not spoken on that specific point, and the split between Illinois intermediate and federal appellate courts is material, the Seventh Circuit concluded that the question is “determinative” and “unsettled” under Illinois Supreme Court Rule 20.
4. Waiver of Temporal-Scope Argument: National Union’s argument that its coverage should be limited to claims arising between 1983 and 1985 was never clearly presented to the district court and is therefore waived on appeal.

Impact

This certification has far-reaching implications:

• Insurance Industry: Clarification on whether permits insulate insurers from pollution-exclusion obligations will shape policy drafting, premium pricing, and risk allocation in heavily regulated industries.
• Regulated Emitters: Corporations operating under government permits will better understand their coverage scope—and potential defense-cost exposure—when faced with environmental personal injury claims.
• Illinois Jurisprudence: A definitive ruling from the Illinois Supreme Court will resolve a split—between Imperial Marble and the Seventh Circuit’s Scottsdale decision—that has persisted for over a decade, guiding lower courts and litigants.
• Future Mass Tort Litigation: Parties in environmental mass tort cases will know in advance whether CGL policies bar or require defense of permit-authorized discharges, affecting settlements, discovery, and trial strategy.

Complex Concepts Simplified

• “Traditional Environmental Pollution”: Industrial-scale leaks or discharges of contaminants (e.g., chemical plant emissions) that pose broad environmental and health risks, not minor household spills or routine maintenance leaks.
• “Pollution Exclusion”: A standard clause in a CGL policy that denies coverage for injuries or property damage resulting from the release of pollutants, unless the release is truly “sudden and accidental.”
• “Sudden and Accidental Exception”: An exception carving out coverage for unforeseen, unintended releases (e.g., a tank rupture) but not continuous or foreseeable emissions from normal operations.
• “Duty to Defend”: An insurer’s obligation to pay defense costs whenever a complaint potentially alleges covered claims—even if coverage is doubtful or ultimately denied.
• “Certification” to a State Supreme Court: A federal appellate court’s device for asking the highest court of a state to clarify unsettled state law that is central to a federal case’s correct resolution.

Conclusion

Sterigenics U.S., LLC v. National Union Fire Insurance Company underscores the continuing importance of the pollution exclusion in CGL policies and the nuanced interpretive challenge posed by regulatory permits. While Koloms established that only “traditional environmental pollution” is excluded, it left open whether compliance with environmental permits alters that result. In light of conflicting intermediate and federal authority, the Seventh Circuit— finding Illinois law unclear—certified to the Illinois Supreme Court the dispositive question of whether permitted emissions escape or remain within the scope of the standard pollution exclusion. The forthcoming decision of the Illinois Supreme Court will not only resolve the parties’ coverage dispute but will also set a binding precedent for insurers, policyholders, and courts grappling with the interplay between environmental regulation and liability insurance.