John and Donna Freidline and other parties were sued by employees of tenants of their commercial building. Their building was insured under a CGL issued by Shelby Insurance Co. In August 1997, a flooring company installed new carpeting in the Freidline’s building. A number of persons working there claimed that fumes from the glue used to cement the carpeting made them sick. Upon receiving notice of lawsuits related to the injuries, the Freidlines sent a claim to its carrier. Shelby rejected their request for coverage and they also refuse to defend the claims.

Shelby advised the Freidlines that the loss involved a pollutant and coverage was excluded. The insureds sued Shelby for coverage and they also alleged that the carrier acted in bad faith. Shelby’s subsequent request for a summary judgment was granted and the insureds appealed. The district court reviewing the appeal saw the issue the same as the Freidlines, recognizing an obligation for Shelby to provided coverage and also agreeing that the company’s denial was evidence of dealing in bad faith. Shelby appealed its reversal of legal fortune.

The higher court immediately agreed with the district court’s decision to find the pollution exclusion inapplicable to the loss caused by glue fumes. The court then took on the bad faith allegation, first establishing that a mere denial of a claim is not, by itself, proof of bad faith. The court then reviewed several other Indiana cases involving pollution –related losses. The court decided that, as loss circumstances differ, it is reasonable for insurers and insured to have different views on whether coverage applies, resulting in a dispute. The district court’s decisions were affirmed with regard to Shelby owing an obligation to respond to the claim and reversed with regard to a finding of bad faith.

John and Donna Freidline, Plaintiffs-Appellants v. Shelby Insurance Company, Defendants-Appellees, InSCt. No. 71S03-0102-CV-335. Filed August 28, 2002. 2002 LEXIS 671. Affirmed in Part, Reversed in Part and Remanded CCH Fire and Casualty Cases Paragraph 7643.