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04/29/94 LAPHAM-HICKEY STEEL CORPORATION v.

April 29, 1994

LAPHAM-HICKEY STEEL CORPORATION, PLAINTIFF-APPELLANT,
v.
NATIONAL SURETY CORPORATION, DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County. The Honorable Albert Green, Judge Presiding.

Rakowski, Mcnamara, Egan

The opinion of the court was delivered by: Rakowski

JUSTICE RAKOWSKI delivered the opinion of the court:

Lapham-Hickey Steel Corporation (Lapham-Hickey) filed a declaratory judgment action against its insurer National Surety Corporation (National Surety). The suit alleged that under the comprehensive general liability policies (policies) issued to Lapham-Hickey, National Surety owed a duty to defend with respect to potential liability for environmental pollution. The court entered summary judgment in favor of National Surety finding that Lapham-Hickey was neither sued nor subjected to a substantial threat of litigation sufficient to trigger the duty to defend under the policies.

The issue on appeal is whether Lapham-Hickey was subjected to action sufficiently adversarial and coercive in nature to trigger the duty to defend. The parties agree that neither the material facts nor the inferences to be drawn are in dispute and that resolution of the issue involves a question of law.

From about 1912 to 1962 the Valentine-Clark Company operated a plant in St. Paul, Minnesota (the site) using creosote, fuel oil and PCP as wood preservatives, primarily for treating telephone poles. Over the years these substances contaminated the soil and ground water. In 1985 Lapham-Hickey acquired the site without knowledge of the contamination. Later, St. Paul Steel Company became interested in purchasing the site from Lapham-Hickey, conducted an investigation and in 1987 discovered the contamination. Shortly thereafter, Lapham-Hickey was notified that the Environmental Protection Agency (EPA) and the Minnesota Pollution Control Agency (MPCA) had opened files regarding the site.

In the summer of 1987, the MPCA sent Lapham-Hickey a proposed consent order. The order stated that Lapham-Hickey was a "responsible person" (RP) *fn1 and requested an investigation and feasibility study. Lapham-Hickey disputed the proposed RP finding but agreed to initiate the remedial investigation/feasibility study. Negotiations continued between Lapham-Hickey and the MPCA and in March 1988 the parties agreed that a "no action" letter would serve their respective interests. The letter, issued on June 8, 1988, stated in pertinent part:

"The MPCA has made no determination as to whether or not Lapham-Hickey Steel is a responsible person (Responsible Person) within the meaning of Section 115B.03 of the Minnesota Environmental Response and Liability Act (MERLA). However, as discussed in a meeting between representatives of Lapham-Hickey Steel and the MPCA staff on March 14, 1988, based on the information currently available regarding site usage and ownership history, *fn2 the MPCA staff does not believe that Lapham-Hickey Steel is a Responsible Person with respect to any hazardous substance, pollutant or contaminant at the site. Accordingly, based upon the facts presented, the staff does not intend to recommend any enforcement action to the Agency, regarding any claim for liability against Lapham-Hickey as a Responsible Person within the meaning of MERLA."

In exchange for the "no action" letter, Lapham-Hickey agreed to conduct a thorough investigation into the nature and extent of the pollution at the site. Lapham-Hickey's environmental consultant began that investigation in the summer of 1988 and submitted a final report to Lapham-Hickey and the MPCA in January 1989. The report confirmed the existence of environmental pollution at the site.

The MPCA did not make any further demands or initiate any enforcement action. The EPA requested access to the property and in October 1987, it issued a site inspection report concluding that the site was contaminated. That report was the last communication Lapham-Hickey received from the EPA.

The language of the policies at issue provides that National Surety "shall have the right and duty defend any suit against the insured * * *." (Emphasis added.) The common and ordinary meaning of suit is "the prosecution of a * * * claim or action before a tribunal authorized to hear such claims or actions." ( Community Unit School District v. Country Mutual Insurance (1981), 95 Ill. App. 3d 272, 279, 419 N.E.2d 1257, 50 Ill. Dec. 808.) Although it is clear that the facts sub judice do not amount to a suit, many courts have held that the duty to defend may be triggered by action that is somewhat less than a suit in the traditional sense. See Ryan v. Royal Insurance Co. of America, 916 F.2d 731, 735 (1st Cir. 1990) wherein the court stated that to accord "talesmanic significance" to the word "suit * * * brings to the language of the policy a precision that the drafter omitted and that the parties were not bound to anticipate".

There are several cases where certain actions were held to be the functional equivalent of a suit: Aire Frio, SA v. United States Fidelity and Guaranty Co. 309 F. Supp. 1388 (D. Canal Zone 1970) (proceedings before industry board of contract appeal); Madawick Contracting Co. v. Travelers Ins. Co. (1954), 307 N.Y.Ct.App. 111, 120 N.E.2d 520 (arbitration proceedings); Community Unit School District, 95 Ill. App. 3d 272, 50 Ill. Dec. 808, 419 N.E.2d 1257 (actions before administrative agencies), and Avondale Industries v. Travelers Indemnity Co. 887 F.2d 1200 (2d Cir. 1989) and United States Fidelity and Guaranty v. Specialty Coatings Co. (1989), 180 Ill. App. 3d 378, 535 N.E.2d 1071, 129 Ill. Dec. 306 ("potentially responsible person" letters).

The rationale of these cases is to focus upon substance rather than form. Although the conduct or action held to be the functional equivalent of a suit varies from case to case, the Ryan court stated:

"notwithstanding idiosyncratic differences in nomenclature, case after case insists that, shy of an actual suit, a substantial entry-level burden must be carried before the duty to defend under a CGL policy arises. Most of the cases describe the entry-level burden in terms of coerciveness or adversariness. [Citation.] Almost all of them require, at a bare minimum, some showing of ...


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