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05/02/97 MISSOURI PACIFIC RAILROAD COMPANY v.

May 2, 1997

MISSOURI PACIFIC RAILROAD COMPANY, ON ITS OWN BEHALF AND AS SUCCESSOR IN INTEREST TO CHICAGO AND EASTERN ILLINOIS RAILROAD COMPANY AND TO TEXAS AND PACIFIC RAILWAY COMPANY AND THEIR SUBSIDIARY AND AFFILIATED COMPANIES, PLAINTIFF-APPELLEE,
v.
INTERNATIONAL INSURANCE COMPANY, INDIV., AND AS SUCCESSOR TO INTERNATIONAL SURPLUS LINES INSURANCE COMPANY, NORTH RIVER INSURANCE COMPANY, AND UNITED STATES FIRE INSURANCE COMPANY, DEFENDANT-APPELLANT (ADMIRAL INSURANCE COMPANY, ET AL., DEFENDANTS). MISSOURI PACIFIC RAILROAD COMPANY, ON ITS OWN BEHALF AND AS SUCCESSOR IN INTEREST TO CHICAGO AND EASTERN ILLINOIS RAILROAD COMPANY AND TO TEXAS AND PACIFIC RAILWAY COMPANY AND THEIR SUBSIDIARY AND AFFILIATED COMPANIES, PLAINTIFF-APPELLEE, V. FEDERAL INSURANCE COMPANY; AND COMMERCIAL UNION INSURANCE COMPANY, ON BEHALF OF C.E. HEALTH COMPENSATION AND LIABILITY INSURANCE COMPANY, AS SUCCESSOR TO CERTAIN INTERESTS OF EMPLOYERS' SURPLUS LINES INSURANCE COMPANY, DEFENDANTS-APPELLANTS (ADMIRAL INSURANCE COMPANY, ET AL., DEFENDANTS). MISSOURI PACIFIC RAILROAD COMPANY, ON ITS OWN BEHALF AND AS SUCCESSOR IN INTEREST TO CHICAGO AND EASTERN ILLINOIS RAILROAD COMPANY AND TO TEXAS AND PACIFIC RAILWAY COMPANY AND THEIR SUBSIDIARY AND AFFILIATED COMPANIES, PLAINTIFF-APPELLEE, V. CENTURY INDEMNITY COMPANY, AS SUCCESSOR TO CIGNA SPECIALTY INSURANCE COMPANY, F/K/A CALIFORNIA UNION INSURANCE COMPANY, AND CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Du Page County. No. 94--MR--0198. Honorable Bonnie M. Wheaton, Judge, Presiding.

Released for Publication June 5, 1997.

The Honorable Justice Bowman delivered the opinion of the court. Inglis and Rathje, JJ., concur.

The opinion of the court was delivered by: Bowman

JUSTICE BOWMAN delivered the opinion of the court:

This appeal involves an insurance coverage dispute between plaintiff, Missouri Pacific Railroad Company (Missouri Pacific), and four of its excess general liability insurance carriers, Commercial Union Insurance Company (Commercial Union), Federal Insurance Company (Federal), International Insurance Company (International), and Century Indemnity Company (Century Indemnity) (collectively, the insurers).

The following facts are taken from the record. Additional relevant facts will be discussed as they relate to the issues on appeal.

Thousands of current and former Missouri Pacific employees have brought claims against Missouri Pacific seeking damages for hearing loss allegedly caused by continuous and repeated on-the-job exposure to unsafe levels of noise. In addition, hundreds of current and former Missouri Pacific employees have brought claims against Missouri Pacific seeking damages for asbestos-related injuries allegedly caused by continuous and repeated exposure to unsafe levels of asbestos over the course of their employment. The underlying claimants' work histories span over 73 years, starting in the 1920s.

Between 1934 and 1986, Missouri Pacific maintained self-insured retentions (SIRs). Missouri Pacific apparently carried no insurance prior to 1934. Between 1957 and 1986, Missouri Pacific purchased certain insurance policies from the insurers (the policies). The total SIRs underlying the policies at issue is over $67 million.

The policies at issue are identical in most respects and warrant the same interpretation. Under the policies, the insurers agreed to indemnify Missouri Pacific for "all sums" caused by an "occurrence":

"[The Insurer] will indemnify [Missouri Pacific] for all sums which [Missouri Pacific] shall become legally obligated to pay as damages and expenses (all as hereinafter defined as included within the term 'Ultimate Net Loss') because of personal injury or property damage, caused by an occurrence and arising out of operations necessary to the conduct of the business of the Insured."

"All sums" are further defined as "damages" in the "ultimate net loss" provision:

"'Ultimate net loss' means the total of all damages and expenses, as defined below, with respect to each occurrence; (a) 'damages' means all sums which [Missouri Pacific] becomes legally obligated to pay as damages, whether by reason of adjudication or settlement, because of personal injury or property damage *** (B) 'expenses' means all reasonable expenses incurred by [Missouri Pacific] in the investigation, settlement, and defense of any claim or suit seeking such damages, including hospital, medical, and funeral charges paid as a consequence of any occurrence hereunder *** and legal expense (including attorney's fees and court costs) ***."

The policies also define the term occurrence":

"'Occurrence' means (a) an accident, or (b) a continuous or repeated exposure to conditions which result in personal injury or property damage which is neither expected nor intended from the stand point of [Missouri Pacific], if such accident or such personal injury or property damage occurs while this policy is in force."

The other relevant provision in the policies is the "Retained Limit-Other Insurance" clause:

"Retained Limit--Other Insurance. Underwriters shall be liable only for that amount of ultimate net loss resulting from any one occurrence which is in excess of

(A) the amount stated in the Schedule as the 'Retained Limit', or

(B) the amount of the applicable limit or limits of liability of other insurance against liability as insured hereby carried by the Assured or on its behalf, if the amount of such limit or limits or the aggregate thereof is greater than the applicable retained limit."

Missouri Pacific filed a declaratory judgment and contract action against the insurers. Missouri Pacific sought a declaration that it was entitled to indemnification from the insurers for the noise-induced hearing loss (NIHL) and asbestos-exposure claims brought against it. Missouri Pacific alleged that the NIHL claims and asbestos-exposure claims each arose from one proximate, uninterrupted, and continuing cause. Missouri Pacific alleged that some amount of damage occurred in each policy between 1957 and 1986; thus, it was entitled to select the policy period that would provide full indemnification for "all sums" incurred as a result of the claims. Missouri Pacific also alleged that reimbursement of the claims was subject to the payment of only one SIR per claim type. Missouri Pacific alleged that it paid over $79 million in connection with the NIHL claims and $7.2 million in connection with the asbestos-exposure claims.

On April 29, 1996, Missouri Pacific moved for summary judgment asserting, inter alia, that the NIHL claims and asbestos-exposure claims each arose from a single occurrence for purposes of insurance coverage and thus that it need satisfy only one SIR prior to seeking reimbursement for each claim type. Missouri Pacific also moved for summary judgment on the basis that the insurers were fully liable (up to the policies' limits of liability) for "all sums" incurred as indemnity in defense costs arising from the underlying NIHL and asbestos-exposure claims. The insurers' response to Missouri Pacific's motion for summary judgment was twofold. First, they argued that the NIHL claims could be allocated with a reasonable degree of scientific certainty; as a result, the policies were only responsible for the amount of hearing loss which occurred during the particular policy period. Second, they argued that, even if Missouri Pacific could not demonstrate with scientific certainty the amount of damage in each policy period, a pro rata, time-on-the-risk allocation method was proper because it was the only approach consistent with the language in the policies and Illinois law.

The insurers also moved for summary judgment on the ground that Missouri Pacific could not implicate the policies unless Missouri Pacific exhausted all applicable SIRs. The insurers maintained that horizontal exhaustion was appropriate when the policyholder was in effect self-insured over several policy periods. In response, Missouri Pacific argued that self insurance did not constitute "other insurance" and therefore that the principles of horizontal exhaustion did not apply.

On July 18, 1996, the trial court granted Missouri Pacific's motion for summary judgment. The court found as a matter of law that all NIHL claims arose from a single occurrence, that all asbestos-exposure claims arose from a single occurrence, and that Missouri Pacific must only satisfy one SIR for each occurrence. The trial court also declared that the policies were fully liable for the entire loss subject only to the policies' limits of liability.

The trial court also denied the insurers' motions for summary judgment. The court found that SIRs were not the equivalent of primary insurance coverage or "other insurance" and, thus, that horizontal exhaustion principles did not apply.

On July 26, 1996, this court issued its decision in Outboard Marine Corp. v. Liberty Mutual Insurance Co., 283 Ill. App. 3d 630, 219 Ill. Dec. 62, 670 N.E.2d 740 (1996). On August 5, 1996, the insurers filed a motion for clarification and, in the alternative, for reconsideration of the trial court's July 18, 1996, rulings. The insurers sought clarification of the court's determination of the appropriate method of allocation. The insurers also asked the court to reconsider its ruling in light of our decision in Outboard Marine. Based on their reading of Outboard Marine, the insurers maintained that the trial court should apply a pro rata, time-on-the-risk allocation method.

On August 12, 1996, the trial court denied the motion for clarification and reconsideration and entered a written order which granted Missouri Pacific's motion for summary judgment on the "occurrence" and "all sums" issues and denied the insurers' motions for summary judgment based on horizontal exhaustion. However, the court certified two questions relating to the "all sums" and horizontal exhaustion issues pursuant to Supreme Court Rule 308(a) (155 Ill. 2d R. 308(a)). Defendants filed separate applications for leave to appeal ...


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