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INTERNATIONAL ENVTL. CORP. v. NATIONAL UNION FIRE

December 1, 1993

INTERNATIONAL ENVIRONMENTAL CORPORATION, Plaintiff,
v.
NATIONAL UNION FIRE INSURANCE COMPANY of Pittsburgh, Pa., HARTFORD INSURANCE COMPANY, and INSURANCE COMPANY OF NORTH AMERICA, Defendants.



The opinion of the court was delivered by: MARVIN E. ASPEN

 MARVIN E. ASPEN, District Judge:

 This declaratory judgment action arises in the wake of a failed HVAC system in a local Chicago highrise. Plaintiff International Environmental Corporation ("IEC") has sought declaratory relief against three insurance companies in connection with claims filed against IEC charging that it supplied faulty fan coil units for use in the HVAC system. Each of the four parties have filed motions for summary judgment. For the following reasons we grant in part and deny in part National Union Fire Insurance Company's ("National Union") motion, grant IEC's motion, deny Hartford Insurance Company's ("Hartford") motion, and deny Insurance Company of North America's ("INA") motion.

 I. Summary Judgment Standard

 Under Federal Rule of Civil Procedure 56(c), summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). Moreover, we must view the record and all possible inferences in the light most favorable to the non-moving party. See United States v. Diebold, Inc., 369 U.S. 654, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962); Williams v. Williams Electronics, Inc., 856 F.2d 920, 922 (7th Cir. 1988). Summary judgment should be denied "where there is reason to believe that the better course would be to proceed to a full trial." Anderson v. Liberty Lobby, 477 U.S. 242, 255, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986).

 II. Factual Background

 In 1986 and 1987, the general contractor for the 3660 North Lake Shore Drive Building contracted with Economy Mechanical Industries of Illinois, Inc. ("EMI") to install a heating, ventilation and air conditioning ("HVAC") system in the building. EMI, in turn, purchased vertical fan coil units from IEC. After installation, EMI conducted routine performance tests of the fan coil system, during which several of the risers *fn1" failed, resulting in cracked pipes and water leakage. Specifically, these failures occurred on May 22, 1987, June 15, 1987, June 18, 1987, July 6, 1987, July 7, 1987, July 9, 1987 (two failures), and July 18, 1987 (two failures). None of the parties dispute that leaks continued to occur in 1988, 1989, 1990, and 1991.

 Next, Waveland enlisted mechanical engineers to examine he installation of the HVAC systems. After inspecting the building, these engineers determined that defects in the installation of the fan coil units within the HVAC system exposed the pipes to undue strain, leading to cracking and stress corrosion as well as damage to the fan coil units.

 Based upon these results, Waveland, who had been sued by EMI for payments assertedly due on its contracts, filed a counterclaim against the mechanical subcontractor for recovery, citing damages of approximately $ 20,000,000. In its original counterclaim, Waveland sought damages for (1) the cost of investigating the problem, (2) the cost of repairing water damage stemming from the leaks, and (3) the cost of repairing faulty pipes. Subsequently, Waveland amended its claim to include replacement of the entire fan coil system.

 In April, 1989, EMI filed a third party action against IEC, claiming that IEC was responsible for the malfunctions and damage and seeking indemnity and/or contribution. This litigation, proceeding as McHugh Construction v. Midwest Bank & Trust Co., Economy Mechanical Industries v. International Environmental Corp., No. 88-CH-2449 ("McHugh litigation"), is currently pending in the Circuit Court of Cook County, with Sidley & Austin representing IEC. To date, IEC has not been held liable for any of the damage sustained at the building site.

 Throughout its travails at 3660 North Lake Shore Drive, IEC carried the following insurance policies:

 A. National Union Policies

 National Union Fire Insurance Company ("National Union") issued IEC two Commercial General Liability insurance policies ("CGL's") effective from April 22, 1985 to January 11, 1988. Upon learning of EMI's third party complaint against IEC, National Union, in 1989, offered to defend the embattled company. At the same time, the insurance company denied that the policy covered EMI's claims against IEC and enumerated those provisions of the policy that National Union believed excluded coverage.

 Under each of the policies, IEC was required (in the form of premium payments) to reimburse National Union approximately 119% for any sums expended by the insurance company in IEC's defense. IEC has not taken advantage of National Union's offer to defend, nor has IEC submitted any bills to this insurer.

 B. Hartford Policy

 Hartford insured IEC from January 11, 1988 through April 10, 1990. The policy at issue provides as follows:

 
(a) We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under supplementary payments - coverage a and b. This insurance applies only to 'bodily injury' and 'property damage' which occurs during the policy period. The 'bodily injury' or 'property damage' must be caused by an 'occurrence.'

 As with most insurance policies, however, the Hartford policy contains various exclusions. For example, by its terms, the policy does not apply to the following:

 
(n) damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of (1) your product . . .
 
If such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

 On April 3, 1989, Waveland filed a counterclaim against EMI, alleging that, due to improper installation of and defect in the HVAC system, leaks had developed on about August 4, 1987, January 5, 1988, January 6, 1988, and January 9, 1988. The counterclaim further alleged that "during the winter of 1987-88, the commercial boiler malfunctioned and therefore failed to provide heat, causing the sprinkler pipes on the first floor to freeze." Counterclaim at P 17. Finally, Waveland claimed that "notwithstanding repeated attempts to repair the HVAC system, corrodents remain on the pipes and the conditions for further ruptures still exist." Id. at P 19.

 On September 29, 1988, EMI filed a third party complaint against IEC incorporating the allegations contained in Waveland's counterclaim and requesting that IEC be required to indemnify EMI for any resulting liability. Upon its receipt (June, 1989), IEC tendered the third party claim to Hartford for defense. Hartford promptly responded, notifying IEC that it was researching the policy and recommending that IEC maintain Sidley & Austin as counsel.

 Several months later, on October 18, 1989, having received no further information from IEC, Hartford declined to defend the action, stating that its "current understanding is that the subject occurrence preceded our policy inception date of 01-11-88." IEC's Motion for Summary Judgment, Exh. I. Asking IEC to advise it if any further information emerged that might change its assessment, Hartford indicated that it would keep its files open for another 90 days. Id.

 On December 13, 1989, IEC wrote back to Hartford, informing its insurer that it believed Hartford's understanding was "based upon incomplete or erroneous facts." IEC's Motion for Summary Judgment, Exh. J. IEC apprised Hartford that the building owners were alleging that the pipes incorporated into IEC's fan coil units had been exposed to some corrosive agent, and that this exposure, which they alleged had been continuous since installation, caused the piping to fail. Additionally, the letter mentioned that the most recent pipe failure had occurred in March, 1989, well within the policy period. Id.

 On January 18, 1990, Hartford responded, stating that "in the event that there is any extant suit or any amended complaint filed that alleges an occurrence date that falls within our policy period, please forward same for our review." Hartford's 12(n) Statement, Exh. E. In fact, prior to this last exchange between IEC and Hartford, on June 10, 1989, Waveland amended its counterclaim to include the March, 1989 rupture, further alleging that the entire fan coil system required replacement. Moreover, after Hartford spurned IEC's tender, EMI amended its third party complaint to incorporate Waveland's new allegations. IEC failed to forward or tender either of these amended complaints to Hartford. Hartford's 12(m) Statement PP 21 & 24; IEC's 12(n) Response PP 21 & 24. Instead, Hartford first learned of the amended third party complaint on July 8, 1992, when it received a status report on the litigation from LSB Industries (IEC's parent company). One month later, Hartford personnel met with attorneys from Sidley & Austin to discuss the case. On September 8, 1992, Hartford informed Sidley & Austin that it was sending information on the matter to Hartford's home office for review. On November 20, 1992, IEC filed the instant declaratory judgment action. Shortly thereafter, on December 8, 1992, Hartford offered to reimburse IEC for reasonable defense costs subject to reservation of rights. Although IEC rejected the offer as untimely, it has nonetheless submitted statements of its defense fees and costs to Hartford for reimbursement. To date, Hartford has made no payments.

 Insurance Company of North America ("INA") issued an Excess General Liability Policy to LSB Industries, Inc. effective April 10, 1991 through April 1, 1992. This policy has been renewed annually and presently provides coverage to IEC. Although it contains virtually identical provisions to those mentioned in connection with the Hartford policy, INA's policy differed from both National Union's and Hartford's in one key respect. INA provided IEC with an excess insurance policy, rather than a primary policy. *fn3" While covered by INA's excess policy, IEC established a retained limit -- i.e., that amount beyond which INA's coverage is triggered -- of $ 100,000.

 INA's policy included a provision relevant to this litigation. The supplementary payments provision ...


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