Well driller penetrates septic system; floods Township office with Bentonite, resulting in triangular suit between Township, driller and driller's insurer

Maple Forest Township in Crawford County hired Clearwater Drilling, LLC, to drill a new water well for the Township offices.  Clearwater drilled the first 50', sprayed Bentonite into the hole under pressure, and overwhelmed the septic system it had penetrated, flooding the Township Offices with Bentonite and fecal matter.  The Township sued Clearwater for damages, and the driller sued his commercial liability insurer, Auto Owners, to provide coverage.  Auto Owners was absolved of responsibility to provide a defense to the claim or to pay indemnity, after arguing that its "pollution" exclusion applied to the incident.

The trial judge ruled in Auto Owners' favor, holding that contaminating the septic system and Township Offices was an "excluded risk" because the Bentonite was a "pollutant" as defined by the policy, once it was contaminated with human waste. The judge did conclude, however, that the "overspray" endorsement which broadened coverage for "pollutants" normally used in the driller's business, might apply to this incident--but that the policy didn't require the insurer to defend or indemnify "overspray" claims. 

The driller appealed after a non-jury trial in which the judge held that since the Bentonite, alone, was not toxic, even the "overspray" endorsement would not require Auto Owners to pay for the damage that resulted during the well drilling process.

The Court of Appeals accepted, for the most part, the lower court's analysis .  It accepted the parties' acquiescence in the argument that the general exclusion for "pollutants" applied to the dispersal of Bentonite, once it was contaminated with human waste.  Thus, if there were any coverage, it would be under the "overspray" broadened coverage for a limited class of pollutants.  Even though the policy did not provide for indemnification of damages caused by "overspray" the higher court concluded that the policy language did require the insurer to defend the damage claim and cover the litigation expenses.  The court noted that the duty to defend is frequently broader than the duty to indemnify and "must be measured by the allegations in the pleadings."  Since the Township brought a claim that included damages in addition to pollution, Auto Owners was contractually bound to defend the claim until such point as the damages were clearly limited to those caused by excluded "pollutants."  The higher court also explicitly rejected the trial judge's conclusion that the "overspray" endorsement included no duty to defend or indemnify, finding that coverage defense to be inconsistent with the clear language of the policy.