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Employers Insurance of Wausau v. Ehlco Liquidating Trust

January 22, 1999

EMPLOYERS INSURANCE OF WAUSAU, APPELLEE,
v.
EHLCO LIQUIDATING TRUST ET AL., APPELLANTS (C.E. HEATHCOMPENSATION AND LIABILITY INSURANCE COMPANY, APPELLEE).



The opinion of the court was delivered by: Justice Bilandic

Agenda

25-September 1998.

This appeal involves a dispute over insurance coverage for environmental property damage at industrial sites in Mena, Arkansas, and Albany County, Wyoming. Employers Insurance of Wausau (Wausau) filed this declaratory judgment action in the circuit court of Cook County against Ehlco Liquidating Trust; its trustee, Noel H. Goodman; and C.E. Heath Compensation and Liability Insurance Company (Heath).

Wausau is an insurance company that issued insurance policies to Edward Hines Lumber Company (Hines) and a subsidiary owned by Hines. Hines and its subsidiary operated lumber treatment facilities at the sites in Arkansas and Wyoming. Hines subsequently dissolved. Ehlco Liquidating Trust (Ehlco) is a trust created to resolve Hines' contingent liabilities. Heath was an excess insurer of Hines.

The circuit court ultimately granted Ehlco's motions for judgment on the pleadings with respect to insurance coverage for both sites. The appellate court reversed both judgments on the pleadings and remanded for further proceedings in accordance with its decision. 292 Ill. App. 3d 1036. We allowed the petition for leave to appeal filed by Ehlco and its trustee. 166 Ill. 2d R. 315.

BACKGROUND

The pleadings disclose the following undisputed facts pertinent to the issues in this appeal. Two underlying lawsuits are involved, one in Arkansas and one in Wyoming. Each underlying suit resulted from the operation of industrial wood-treatment facilities that dispersed hazardous wastes into the environment, thereby causing environmental contamination and property damage.

From January 1, 1968, to October 1, 1971, Wausau insured Hines and its subsidiary pursuant to certain comprehensive general liability insurance policies. These policies provided that Wausau "will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of *** property damage *** to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such *** property damage." Wausau discontinued insuring Hines in 1971.

Mena Site

The Mena site consists of 57 acres of land on which the Nebraska Bridge Supply and Lumber Company (Nebraska Bridge) constructed a post and pole production plant and, later, a wood-treatment facility. In 1967, Hines acquired all the stock of Nebraska Bridge, making Nebraska Bridge a wholly owned subsidiary of Hines. From 1967 to 1978, Nebraska Bridge, as a Hines subsidiary, continued to operate the wood-treatment facility on the Mena site. Hines sold the Mena site in 1978.

In 1980, the United States Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) (42 U.S.C. §9601 et seq.). On March 18, 1982, the United States Environmental Protection Agency (EPA) wrote a letter to Hines pursuant to CERCLA. The letter advised Hines that it may be a potentially responsible party (PRP), liable for the costs of investigating and responding to environmental contamination at the Mena site. Earlier, the EPA had verbally informed Hines that it intended to initiate an administrative action against Hines relating to the Mena site. As a result, also on March 18, 1982, but apparently before Hines received the PRP letter, Hines notified Wausau of the EPA's intentions. Hines' letter to Wausau stated:

"[A]lthough we have received no formal notice, we have been informed by the [EPA] and the Arkansas Department of Pollution Control and Ecology of their intentions to assert liability against us and others for costs related to the cessation and clean-up of alleged hazardous waste discharges from the Mena, Arkansas treating plant. We therefore hereby give you notice of such claims."

On March 29, 1982, Wausau responded to Hines' letter. Wausau indicated that its policies did not appear to provide coverage for the potential claim, stating:

"Regarding the allegation of property damage, there is no coverage for property damage occurring after our coverage expired, or after October 1, 1971. Also applicable to the last policy we had which expired October 1, 1971 we had endorsement number nineteen which was the exclusion for contamination or pollution unless it was sudden and accidental." On August 2, 1982, and again on March 8, 1983, Hines wrote to Wausau requesting that it reconsider its refusal to defend Hines against the EPA's investigation and proceeding concerning the Mena site. Wausau provided no defense.

Meanwhile, the EPA commenced a lengthy environmental investigation of the Mena site, which concluded in late 1986. The EPA then issued its record of decision, which set forth its findings of fact and its final decision concerning remediation of environmental contamination at the Mena site. On March 17, 1988, pursuant to CERCLA, the EPA filed a suit against Hines and another company in the United States District Court for the Western District of Arkansas. United States v. Edward Hines Lumber Co. & Mid-South Wood Products of Mena, Inc., No. 88-2049 (W.D. Ark. Ft. Smith Div.). The complaint alleged that the Mena site was contaminated with several known and suspected carcinogens, including arsenic; that the pollutants were migrating from the site; and that the releases and threatened releases may present an "imminent and substantial" endangerment to human health or the environment. The complaint sought an injunction requiring the defendants to implement remedial action and reimburse the EPA for sums expended, and declaring the defendants liable for all future costs incurred for environmental investigations, clean-up, and response and enforcement actions. The pleadings are silent as to whether Wausau had notice of the filing of this complaint. Hines, the EPA, and the other company executed a consent decree concerning the Mena site. Therein, Hines agreed to finance and perform certain environmental response actions. Hines also agreed to reimburse the EPA for certain funds expended. The federal district court signed and entered this consent decree on May 16, 1988.

Wyoming Site

In the 1930s, Nebraska Bridge operated a wood-treatment facility in Albany County, Wyoming, on property owned by Union Pacific Railroad Company (Union Pacific). In 1934, Nebraska Bridge agreed to indemnify Union Pacific for property damage caused by its operations. As noted, Hines acquired Nebraska Bridge in 1967. From 1967 until 1972, Hines continued to operate the facility at the Wyoming site under the Nebraska Bridge name.

In 1981, the State of Wyoming filed suit against Union Pacific for damages caused by environmental contamination at the Wyoming site. In December of 1991, Union Pacific sued Ehlco, as the liquidating trust of Hines, under the 1934 indemnification agreement it had with Nebraska Bridge, in the federal district court of Wyoming. Union Pacific R.R. Co. v. J.H. Baxter & Co.; Ehlco Liquidating Trust, No. 91-CV-0247-B (D. Wyo.). Ehlco sent notice of this suit to Wausau in January 1992 and requested a prompt response regarding defense.

Wausau acknowledged receipt of Ehlco's letter on February 27, 1992, and stated that it was searching for its policies. Ehlco continued to supply information and update Wausau on the status of the underlying suit and continued to assert that Wausau owed Ehlco a defense and coverage. Wausau apparently did nothing other than request information from Ehlco. In June of 1992, Ehlco informed Wausau of a $1.3 million settlement offer by Union Pacific. In response, Wausau offered to pay 9% of the settlement and 9% of the defense costs incurred. Ehlco rejected Wausau's offer. Ehlco settled the lawsuit for $1.3 million and, as a result, the district court dismissed the suit with prejudice on November 5, 1992.

Circuit and Appellate Court Proceedings

On February 26, 1993, after both underlying suits were concluded, Wausau filed a complaint in the circuit court of Cook County seeking a declaratory judgment that it owed no duty to defend or indemnify Ehlco for environmental property damage at the Wyoming site. Ehlco answered and moved for judgment on the pleadings, seeking a declaration that Wausau owed defense and indemnity coverage for the Wyoming site. Ehlco also filed a counterclaim against Wausau seeking a declaration that Wausau owed defense and indemnity coverage for the environmental damage at the Mena site. Wausau then amended its complaint and sought a declaration of its obligations concerning the Mena site, in addition to the Wyoming site. Wausau also moved to dismiss Ehlco's counterclaim as barred, asserting that Ehlco breached a notice condition in the insurance policies. Ehlco later moved for judgment on the pleadings with regard to the Mena site.

On November 7, 1994, the circuit court entered an order denying Wausau's motion to dismiss Ehlco's counterclaim regarding the Mena site. The circuit court found that Wausau was estopped from asserting Hines' purported late notice as a defense to Ehlco's claim. For ease of Discussion, Hines is referred to as Ehlco from this point forward. Also on November 7, the circuit court granted both of Ehlco's motions for judgment on the pleadings. The circuit court held, as to each underlying matter, that Wausau owed a duty to defend Ehlco; that Wausau's duty to defend had been triggered; that Wausau wrongly breached its duty to defend, by (1) failing to defend Ehlco and by (2) failing to file a timely declaratory judgment action; and that, as a result, Wausau was estopped from asserting its defenses to coverage. Based on the foregoing holdings, the circuit court declared that, with regard to the Mena site, Wausau was liable for clean-up and defense costs, as well as prejudgment interest. As to the Wyoming site, Wausau was liable for defense costs, the cost of the Union Pacific settlement, and prejudgment interest. With regard to both sites, the circuit court found that Wausau's conduct was unreasonable and vexatious, and ordered Wausau to pay all attorney fees and costs in the declaratory judgment action, pursuant to section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 1994)).

On December 22, 1994, Ehlco filed in the circuit court, pursuant to statute (735 ILCS 5/2-701(c) (West 1994)), a petition entitled "Petition for Relief Pursuant to Declaratory Judgment." The petition sought an order from the circuit court awarding money damages in accordance with the declaratory relief already awarded in the judgments on the pleadings. The petition sought in excess of $10 million from Wausau. For the Mena site, Ehlco sought recovery of $8,443,659.93 in clean-up costs and $369,783.90 in defense costs. For the Wyoming site, Ehlco sought recovery of $750,000 in damages paid pursuant to that settlement and $415,051.93 in defense costs. In addition, the petition sought certain amounts for prejudgment interest and declaratory suit fees. Wausau filed two motions for reconsideration, which the circuit court denied in orders dated December 23, 1994, and March 21, 1995. Also, in the latter order, the circuit court entered judgment for Heath, concluding that the case against Heath was moot. Finally, the circuit court entered a finding of no just reason to delay enforcement or appeal pursuant to Supreme Court Rule 304(a) (155 Ill. 2d R. 304(a)). On April 7, 1995, Wausau filed its notice of appeal in the appellate court. The notice stated that the appeal was being taken from the circuit court's orders of February 28, 1994; November 7, 1994; December 23, 1994; and March 21, 1995.

On May 18, 1995, while Wausau's appeal was pending in the appellate court, this court issued Lapham-Hickey Steel Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520 (1995). Lapham-Hickey held that a lawsuit must be filed in order to trigger an insurer's duty to defend. Lapham-Hickey, 166 Ill. 2d at 529-33. The appellate court reversed some of the circuit court's rulings and affirmed others. 292 Ill. App. 3d 1036. The appellate court agreed that Wausau was estopped from raising defenses to coverage, with one exception. This exception was that Wausau was not estopped from raising Ehlco's alleged late notice in an attempt to defeat coverage. According to the appellate court, timely notice is a condition precedent to coverage and, thus, it is not subject to estoppel.

With respect to the Mena site, the appellate court reversed the circuit court and held that Wausau owed no duty to defend Ehlco in the Arkansas lawsuit filed by the EPA. Relying on this court's decision in Lapham-Hickey, the appellate court held that the Arkansas suit did not constitute a "suit" within the meaning of the "any suit" language in the insurance policies. Rather, the appellate court found, this suit was "pro forma" in nature, "a mere formality," and "but an extension or implementation of the administrative proceeding," because the parties had executed, and contemporaneously filed with the federal complaint, the proposed consent decree.

In addressing the Wyoming site, the appellate court affirmed the circuit court's ruling to the extent that the suit filed by Union Pacific triggered Wausau's duty to defend. Nonetheless, the appellate court held that Wausau should not have been estopped from pursuing its claim that Ehlco provided late notice of this claim to Wausau, thereby negating coverage. According to the appellate court, no duty to defend could arise if Ehlco had breached this condition precedent to coverage. The appellate court therefore remanded the cause to the circuit court for further proceedings. The appellate court stated that, if Wausau's late-notice defense was not successful on remand, then Wausau could still be subjected to an estoppel and a section 155 award as to the Wyoming site. As a final matter, the appellate court concluded that Wausau waived its right to pursue alternative claims against Heath. The appellate court thus affirmed the judgment for Heath. Ehlco and its trustee appeal. 166 Ill. 2d R. 315. Wausau requests cross-relief. 166 Ill. 2d R. 315(g); 155 Ill. 2d R. 318(a).

ANALYSIS

This is an action for declaratory relief (see 735 ILCS 5/2-701 (West 1992)) in which the circuit court granted Ehlco's motions for judgment on the pleadings (see 735 ILCS 5/2-615(e) (West 1994))."[A] motion for judgment on the pleadings is like a motion for summary judgment limited to the pleadings." 3 R. Michael, Illinois Practice §27.2, at 494 (1989), citing Tompkins v. France, 21 Ill. App. 2d 227 (1959); see Brown v. Zehnder, 295 Ill. App. 3d 1031, 1033 (1998). Judgment on the pleadings is proper"[i]f the admissions in the pleadings disclose that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law." 3 R. Michael, Illinois Practice §27.2, at 494 (1989), citing Baker-Wendell, Inc. v. Edward M. Cohon & Associates, Ltd., 100 Ill. App. 3d 924, 927 (1981). For purposes of resolving the motion, the court must consider as admitted all well-pleaded facts set forth in the pleadings of the nonmoving party, and the fair inferences drawn therefrom. Baker-Wendell, Inc., 100 Ill. App. 3d at 927. The court must also examine the pleadings to determine whether an issue of material fact exists, and, if not, determine whether the controversy can be resolved solely as a matter of law. Baker-Wendell, Inc., 100 Ill. App. 3d at 927. Copies of written instruments attached to a pleading as an exhibit are considered a part of the pleading. 735 ILCS 5/2-606 (West 1994).

In granting Ehlco's motions for judgment on the pleadings, the circuit court examined various pleadings including Wausau's third amended complaint for declaratory judgment, Ehlco's answer, and Ehlco's counterclaim. Parenthetically, the record on appeal contains a fourth amended complaint by Wausau, which was filed long after Ehlco's motions were granted and which the circuit court never considered. Curiously, both Ehlco and Wausau rely on allegations contained in this fourth amended complaint to support their respective arguments, and neither party challenges the propriety of doing so. We decline to participate in this procedural irregularity. Our analysis is confined to the pleadings that were before the circuit court when it ruled on the motions.

I. Duty to Defend as to the ...


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