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December 23, 1974


The opinion of the court was delivered by: Marshall, District Judge.


Before me are cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56(c), filed by the plaintiff Hartford Accident & Indemnity Company (hereinafter "Hartford"), the defendant, Wayne Crider, d/b/a Crider & Sons Boring & Jacking (hereinafter "Crider"), and the intervenor, Santucci Construction Company (hereinafter "Santucci"). The underlying action is Hartford's suit for declaratory judgment to determine its duties and liabilities under a general liability insurance policy issued to Crider. Santucci was granted leave to intervene. Jurisdiction is based on diversity of citizenship.

The facts surrounding this litigation are not in substantial dispute. Crider was in the business of boring and jacking, excavation work and the construction of underground tunnels. On September 3, 1969, Hartford issued a manufacturers' and contractors' liability insurance policy (No. 83MC242208) to Crider for a premium of $1,887.

Thirteen months later, on November 10, 1970, Santucci filed a civil action against Crider in the Circuit Court of Cook County, Illinois,*fn1 alleging that it had a contract with the Sewer Commission of Freeport, Illinois, for the construction and installation of sanitary and storm sewers. A portion of the contract was subcontracted to Crider on February 11, 1970. By the terms of the subcontract*fn2 Crider was to install sewer lines under U.S. Route 20 for a distance of 100 linear feet. The method of installation is described by the parties as pipe jacking. More specifically,

  Out of a shaft excavated at or near the point of
  commencement of defendant's [Crider] construction, a
  length of 60-inch diameter steel pipe was to be
  forced hydraulically part way into the face of the
  subsurface to be excavated. Laborers (miners and
  muckers) would then excavate the earth from inside
  the casing; as the excavation progressed, the steel
  casing was continuously jacked forward into the
  earth. This operation would continue until the entire
  length of the construction was excavated and lined
  with the 60-inch steel pipe. Thereupon, with the
  steel pipe as a carrier the sewer was to be
  constructed using joined lengths of 42-inch
  reinforced concrete pipe placed within the steel

Santucci further alleged in the state action that Crider breached his contractual duty of ordinary care and failed to use good workmanship. The specific breaches are enumerated in paragraph seven of the amended state court complaint.*fn4 As a consequence of these breaches, Route 20 allegedly "subsided," resulting in severe damage not only to Route 20 and the underlying soil supports, but also to the underground construction already performed.*fn5 Because of this damage Crider was dismissed and Santucci had to complete the work by "open cutting," a more expensive operation. This work and restoring the grade to Route 20 constitute Santucci's $112,000 claim of damages.

George Woselowsky is presently employed by Santucci. Between February 12, 1970, and March 13, 1970, he was the job superintendent on the Freeport contract. During this period he observed Crider's work and the damage to Route 20. Problems with the construction began on February 20, 1970, but the damage to Route 20 was not noticed until March 6, 1970, when Illinois State Highway Department officials observed a one or two inch dip in the road. By March 9, however, the dip had reached four and one-half inches in its deepest depression, and by March 10, the depth was estimated at seven inches. Woselowsky's last personal observance of Route 20 was on March 13; on that date the dip was 10 to 12 inches. On May 2, 1970, the Highway Department ordered the damaged portion of Route 20 closed or rerouted and the road open cut so that the remainder of the sewer work could be completed and the road repaired.

Between February 12, 1970, and March 13, 1970, Woselowsky also stated that the surface of the roadway at the top edge never moved away from adjacent surface and collapsed suddenly into the excavation. "The movement of the road and ground beneath it resulted in a slow, gradual, steady lowering of the elevation of the road surface which, . . . took place over a period of many days."*fn7

Rufus Weaver is also employed by Santucci. He became the Freeport job superintendent on March 16, 1970. He was, however, present at the construction site between February 27, 1970 and May 4, 1970. During this period he observed Crider's work and the accompanying problems with Route 20. To the extent Weaver and Woselowsky were on the job at the same period, Weaver supports Woselowsky's affidavit.

Subsequent to March 13, 1970, the last day Woselowsky observed the problems with Route 20, Weaver stated the road continued to subside. By May 2, 1970, the surface of the road gradually dropped 10 feet below its original elevation. Between March 9 and April 27, the subsidence was corrected by asphalt paving. During this period, the road dip widened from approximately 50 feet to 80 feet.

Weaver further stated that at no time did the "surface of the roadway at the top edge ever break away from the adjacent surface and collapse suddenly into the underground excavation. The movement of the road and the ground beneath it resulted in a slow, gradual, steady lowering of the elevation of the road surface which . . . took place over a period commencing, at the latest, March, 6, 1970, and ending on or about April 27, 1970."*fn8

As a result of Crider's alleged breach of contract and the resulting damages to Route 20, Santucci filed the aforementioned state action against Crider, who tendered defense of the suit to the Hartford, believing the alleged damages were covered under the policy of casualty insurance. Hartford denied liability under the terms of the policy, but obtained counsel for Crider to defend the state action under a reservation of rights. Thereafter Hartford filed this suit for a declaratory judgment asking this court to hold that the damages alleged in Santucci's amended state complaint are not covered by the policy. Hartford then filed the instant motion for summary judgment. Concomitantly, Santucci and Crider filed cross-motions for summary judgment asking this court to hold that the damages alleged in Santucci's complaint are covered by the policy issued to Crider. The parties' briefs have raised numerous arguments, all of which will be considered after a brief discussion of the applicable principles of law.

Rule 56(c) provides that a motion for summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits show that there are no genuine issues as to any material fact and the moving party is entitled to a judgment as a matter of law. As a procedural matter, the granting of a motion is a drastic remedy which is available only upon a clear showing that no material issues of fact remain for trial. Mintz v. Mathers Fund, 463 F.2d 495 (7th Cir. 1972). Accord, Kirk v. Home Indemnity Co., 431 F.2d 554 (7th Cir. 1970).

In the present case there is no factual dispute disclosed by the pleadings and affidavits. At most, the parties disagree on what label should be attached to the facts. Hartford's liability under the policy turns on the construction of several policy exclusions; this presents a question of law for the court. Hartford Accident & Indem. Co. v. Case Foundation Co., 10 Ill. App.3d 115, 294 N.E.2d 7, 11 (1st Dist. 1973); 6 J. Moore, Federal Practice, ¶ 56.17[31], at 2561 (1974). And each movant has the burden of establishing the facts that entitle him to judgment are not in dispute. Id. at 2563. See generally, Thoresen v. Roth, 351 F.2d 573 (7th Cir. 1965).

The final preliminary matter is the applicable choice of law rule. The parties' briefs refer to decisions of many different states and various federal circuits. Since this is a diversity action, the substantive law of Illinois as well as its applicable conflicts of laws decisions are controlling. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Erie R.R. Co. v. Thompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Under Illinois conflicts of law decisions, the validity, construction, and obligation of a contract must be determined by the law of the place where it is made or to be performed. Harris v. American Surety Co., 372 Ill. 361, 24 N.E.2d 42 (1939); Ryan v. Napier, 252 F. Supp. 730 (N.D.Ill. 1966). Therefore, Illinois law is controlling, since the contract was made in Illinois and covered work being performed in Illinois.

The first issue presented by the motions is whether an action for declaratory judgment lies when the insurer denies liability in full and defends under a reservation of rights. This issue is raised by Crider in his cross-motion for summary judgment.*fn9 And although his papers are not altogether clear, he appears to assert that an action for declaratory judgment is improper because of the difficulties in determining which damages are excluded under the policy's terms. Crider suggests that any claim of exclusion should be raised by Hartford in a garnishment proceeding if Santucci prevails in the state action.

This argument is without merit. The rule in Illinois is that an insurer has the duty to defend the insured when a complaint is filed and it arguably states facts that bring the case within the policy's coverage. If there is potential coverage but the insurer believes it has valid defenses based upon exclusionary provisions of the policy, it has two options. One, it may secure a declaratory judgment of its rights while defending the potential insured under a reservation of rights. Or two, it may defend the potential insured under a reservation of rights and seek to adjudicate its rights by a supplemental suit. If the insurer refuses to follow either of these procedures and does not defend when there is potential coverage, it is estopped to raise the exclusionary defenses in a subsequent action against it by the insured. John Mohr & Sons v. Hanover Ins. Co., 322 F. Supp. 184 (N.D.Ill. 1971); Gulf Ins. Co. v. Dooley, 286 F. Supp. 16 (N.D.Ill. 1968); Fragman Const. Co. v. Preston Const. Co., 1 Ill. App.3d 1002, 274 N.E.2d 614, 616 (2d Dist. 1971); see Sims v. Illinois Nat. Cas. Co., 43 Ill. App.2d 184, 193 N.E.2d 123 (3d Dist. 1963).

Hartford is presently defending Crider under a reservation of rights. Therefore, Hartford may bring this declaratory judgment action to protect its rights under the exclusionary provisions ...

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