effective or which is to be performed by one party to an existing contract before the other party is obligated to perform."). If an insured fails to meet certain pre-conditions, then the insurance policy does not take effect, and, by extension, no obligation to defend or indemnify ever attaches to the putative insurer. Exclusions, on the other hand, do not operate to void an insurance policy, but to carve out exceptions to coverage within the policy. Like a condition precedent, the known loss doctrine determines whether the insurance policy is ever triggered.
Additionally, like conditions precedent, known losses are rarely, if ever, evident from complaints. Instead, the best, and frequently the only, way for a court to determine whether a condition has been satisfied is to engage in a factual inquiry. On the other hand, policy exclusions (such as damage to an insured's own property, or the sistership exclusion), by their nature, are more readily discernible from the complaint itself.
As a result, we conclude that the applicability of the known loss doctrine need not be clear from the allegations of the complaint before an insurer may refuse a tendered defense. See Outboard Marine, 607 N.E.2d at 1211-12, 180 Ill. Dec. at 698-99 (although court did not address the issue, on appeal from summary judgment ruling on insurers' duty to defend and indemnify, court remanded to trial court for resolution of factual questions surrounding the known loss issue). Put another way, an insurer will not have abrogated its duty to defend simply because it is unclear from the complaint that it has a viable known loss defense. Instead, an insurer may offer extrinsic evidence on the issue for a court to consider before ruling on whether a duty to defend exists.
Consequently, the fact questions surrounding IEC's knowledge of the pipes' condition on January 11, 1988 preclude summary judgment for either party on this issue.
We therefore vacate that portion of our Order granting summary judgment for IEC on this basis and turn to Hartford's notice arguments.
In its motion for summary judgment, Hartford argued that it had no duty to defend EMI's original third party complaint because IEC failed to promptly notify Hartford of "an occurrence which may result in a claim," as required under the policy. Specifically, IEC waited until June, 1989 before sending Hartford a copy of EMI's third party complaint -- roughly two months after the suit had been filed, three months after the March, 1989 leak during the Hartford policy, over a year after the January, 1988 leaks, and almost two years after the initial riser failures.
Finding that the earliest event relevant to the notice issue was the March, 1989 leak, we ruled in our Order that IEC's conduct neither demonstrated lack of diligence, nor did it deprive Hartford of the opportunity to initiate a timely and thorough investigation of the injury claim. In fact, we pointed out that Hartford had failed even to raise timeliness as an issue in responding to IEC's initial tender.
It appears, however, that the January, 1988 leaks also constitute a relevant event which may have triggered IEC's notice obligations. Although the January, 1988 leaks constituted pre-policy occurrences, knowledge of the leaks may have put IEC on notice of two sorts of potential losses during the policy period: (1) future leaks attributable to stress corrosion cracking (which the January leaks evidenced might be ongoing, despite the remediation efforts), and (2) destructive repairs to finally fix the stress corrosion cracking. To the extent that IEC should have understood that claims from any of these losses might arise during Hartford's watch, IEC was obliged under the policy to promptly notify Hartford.
IEC explains that it did not notify Hartford about the stress corrosion cracking situation until June, 1989, because it believed that the stress corrosion cracking had been solved. Accordingly, it had no reason to expect any policy claims stemming from the condition -- be they claims stemming from future leaks or from destructive repairs initiated to fix the condition. On the other hand, once IEC learned of the March, 1989 leak and received EMI's original third party complaint in April, 1989, IEC promptly notified Hartford.
Ultimately, IEC's proffered explanation, juxtaposed with the timing of events, creates a question of fact best left to the trier of fact. See University of Illinois v. Continental Cas. Co., 234 Ill. App. 3d 340, 599 N.E.2d 1338, 175 Ill. Dec. 324 (4th Dist. 1992) (timeliness of notice by insured is question for trier of fact, unless all material facts are undisputed). That is, it is for a jury, not this Court, to determine whether IEC's stated belief that it understood the stress corrosion cracking to be gone was reasonable in light of the history of the pipes and in the face of the January, 1988 leaks.
Accordingly, we deny summary judgment for either party based on this issue.
Moreover, because the outstanding questions remaining in connection with Hartford's duty to defend touch upon the ultimate issue to be resolved in the underlying litigation -- namely, what caused the various leaks -- any further consideration of this issue would be premature and we dismiss this portion of IEC's suit with leave to reinstate within thirty days of the outcome of the underlying suit.
B. INA's Motion for Clarification and/or Reconsideration
In our Order we denied INA's motion for summary judgment on IEC's declaratory judgment action against it, ruling that the issues pertaining to various asserted policy exclusions were premature and that questions of fact surrounded INA's obligation to share in defense costs. INA now seeks clarification of our Order. Specifically, INA claims that (1) we failed to address its known loss argument, and (2) that we erroneously characterized its potential obligation under a Supplementary Payments provision to share in defense costs as a "duty to defend." We address these issues in turn.
1. Known Loss Doctrine
IEC correctly asserts that this Court intended to include the known loss doctrine on page 23 of its Order when we ruled that inquiry into INA's various liability defenses would be premature at this point. However, because we referred solely to "policy exclusions," (which would not include the known loss doctrine), INA's current confusion regarding our Order is understandable and we will take a moment to clarify our decision.
INA points out that its policy incepted on April 10, 1990, after the McHugh litigation was filed and after several more riser pipes had leaked. INA argues that, given these circumstances, IEC must have known that losses would probably occur during the INA policy period. The flaw in this argument mirrors that found in Hartford's invocation of the known loss doctrine: material questions of fact continue to envelop the issue of what IEC knew, or reasonably should have known, at various points in time, including April 10, 1990.
Accordingly, IEC's motion for declaratory judgment on INA's duty to indemnify was dismissed without prejudice.
2. Duty to Share Defense Costs
INA avers that the Court made "a poor choice of terminology" when it referred to INA's obligations under the Supplementary Payments provision as a "duty to defend." We agree. To clear up any confusion caused by this elocution, let us set the record straight. Should the Supplementary Payments provision apply, it requires INA to contribute a proportionate share of IEC's defense costs, but does not impose an independent "duty to defend."
C. IEC's Motion to Voluntarily Dismiss
In the wake of our original Order, the sole issue remaining for adjudication was whether the Supplementary Payment provision applied, obligating INA to share in IEC's defense costs. IEC has moved the Court to dismiss this issue without prejudice and with leave to reinstate within thirty days of the outcome of the underlying action. INA objected to such action, arguing that it was entitled to an immediate ruling on its motion for clarification and/or reconsideration. Having addressed INA's motion in its entirety, and in light of the fact that we must defer ruling on INA's duty to indemnify, we agree that it would save judicial resources to postpone proceeding on the issue of whether INA must share in IEC's defense costs until after the underlying litigation is resolved. Accordingly, we grant IEC's motion and dismiss this issue with leave to reinstate within thirty days of the closing of the underlying litigation.
For the foregoing reasons we grant in part and deny in part Hartford's motion to reconsider, deny Hartford's motion for leave to file a cross claim, deny IEC's motion for entry of judgment, grant in part and deny in part INA's motion for clarification and/or reconsideration, and grant IEC's motion for voluntary dismissal. It is so ordered.
MARVIN E. ASPEN
United States District Judge