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March 26, 1999


The opinion of the court was delivered by: Gottschall, District Judge.


Plaintiff, Great Lakes Dredge & Dock Company ("Great Lakes"), filed this action under the federal Declaratory Judgment Act, 28 U.S.C. § 2201, seeking a declaratory judgment that various insurance policies purchased from a consortium of primarily London-based insurance companies led by the Commercial Union Assurance Company, P.L.C. (hereinafter collectively referred to as "London Insurers") and from Continental Insurance Company ("Continental") indemnify Great Lakes for liability it has incurred or may incur in litigation arising out of the Chicago flood of April 13, 1992. London Insurers subsequently filed a counterclaim seeking the opposite declaratory judgment. Other parties have joined the lawsuit, including the City of Chicago ("City"), which seeks coverage as an additional insured under the policies purchased by Great Lakes, and various businesses and individuals damaged by the flood ("the underlying claimants"). The court's diversity jurisdiction was originally invoked, but following the Seventh Circuit's opinion in Indiana Gas Co. v. Home Ins. Co., 141 F.3d 314 (7th Cir. 1998), the court revisited the issue of jurisdiction and determined that the case falls within its admiralty jurisdiction. Venue is proper in the Northern District of Illinois.

Factual Background

Great Lakes is in the business of marine excavation with worldwide operations encompassing dredging waterways, renourishing beaches and marine construction. In May 1991, Great Lakes entered into a contract with the City of Chicago in which Great Lakes agreed to replace pilings at five bridges on the Chicago River, including the Kinzie Street Bridge. In the course of its work, Great Lakes removed deteriorating pilings from the riverbed near the Kinzie Street Bridge and installed new pilings by driving them into the riverbed.

During all relevant times, the City owned an underground tunnel system, including a tunnel underneath the Chicago River near the Kinzie Street Bridge. It is undisputed, for the purpose of this declaratory judgment action, that Great Lakes negligently damaged the tunnel while driving pilings during September 1991. It is also undisputed, for purposes of this declaratory judgment action, that the tunnel damage caused by Great Lakes in September 1991 "progressed,"*fn1 that at some time the Chicago River began flowing into the underground tunnel, and that as a result of the initial tunnel damage, buildings in the Chicago loop were flooded on April 13, 1992.

The underlying claimants have sued Great Lakes and the City for losses suffered as a result of the flood. The total losses claimed by the underlying claimants exceed $300 million.

In July 1991, Great Lakes purchased primary comprehensive general liability ("CGL") insurance, with a limit of $1 million per occurrence, that provided coverage for the time period July 31, 1991 to July 31, 1992 (the "primary layer"). (Ex. 7102.) Also in July 1991, Itel Corporation ("Itel"), Great Lakes' parent company, purchased two layers of coverage in excess of the primary coverage for the period July 31, 1991 to July 31, 1992. The first layer of excess coverage provided a $40 million limit for excess liabilities arising out of the operations of Great Lakes, written on an occurrence basis, together with additional coverage for Itel and certain specified Great Lakes activities, not at issue here, written on a claims-made basis. (Ex. 7103.) The second layer of excess coverage provided a $60 million layer in excess of both the $40 million first excess layer and the $1 million primary layer. Great Lakes was a named insured, together with Itel, on both excess layers. Although the final policy wording of the $60 million second excess layer has never been agreed upon, all parties agree, for purposes of this litigation, that the wording of the $60 million second excess layer should be considered identical to the wording of the $40 million first excess layer.

When the excess layers were placed for the period July 31, 1991-July 31, 1992, it was anticipated that Great Lakes might be sold by Itel during the policy period. Accordingly, the parties reached an agreement that in the event Great Lakes were sold, London Insurers would "issue, if required, a separate policy with separate limits in respect of Great Lakes International, Inc., et al." See, e.g., Ex. 7103A at LI 00127, LI 006491.

On October 15, 1991, the Blackstone Dredging Partnership L.P. ("Blackstone") purchased Great Lakes from Itel. At that time, London Insurers canceled Great Lakes from the $40 million first layer excess policy, # 90H6337/41-FO33342 (Ex. 7103 at GLDD 13045), and issued a $40 million excess policy numbered # 90H6337/41(a)-FO33983 to Blackstone for the period October 15, 1991-July 31, 1992. (Ex. 7105.) Further, as of October 15, 1991, Itel canceled the $60 million second excess layer and received a refund of the unearned premium. Instead of replacing the $60 million excess policy, Blackstone purchased a substitute second excess layer for the October 15, 1991-July 31, 1992 period from Continental with a $10 million per occurrence limit for the operations of Great Lakes. The Continental policy was a "following form" policy, meaning that it adopted and used the policy wording of the underlying $40 million excess policy. For convenience, the court and the parties have referred to the July 31, 1991-October 15, 1991 period preceding the sale of Great Lakes as the "first period." The period October 15, 1991-July 31, 1992 is referred to as the "second period."

While the only policy that has actually been issued is the first period $40 million first excess layer, the parties agree that for purposes of this action, the relevant coverage wording for all the policies can be deemed to read as follows:


2.1 Coverage

  Underwriters hereby agree, subject to the
  limitations, terms and conditions hereinafter
  mentioned, to pay on behalf of the Assured all sums
  which the Assured shall be obligated to pay by reason
  of the liability:

(a) imposed upon the Assured by law, or

  (b) assumed under contract or agreement (verbal,
    written or implied) by the Named Assured and/or any
    officer, director, stockholder, partner or employee
    of the Named Assured, while acting in his capacity
    as such

for damages on account of:

(i) Personal Injury

(ii) Property Damage

(iii) Advertising Liability,

  caused by or arising out of each occurrence happening
  anywhere in the world.

(Ex. 7103 at GLDD 13002.)

The excess policies at issue define an "occurrence" as

  an accident or a happening or event or a continuous
  or repeated exposure to conditions which
  unintentionally results in Personal Injury, Property
  Damage or Advertising Liability during the policy
  period. All such exposure to substantially the same
  general conditions existing at or emanating from one
  premises or location shall be deemed one Occurrence.

(Ex. 7103 at GLDD 13005.)

"Property Damage" is defined as:

  (a) physical injury to or destruction of tangible
    property, including the loss of use thereof at any
    time resulting therefrom; and/or
  (b) loss of use of tangible property which has not
    been physically injured or destroyed; and/or
  (c) evacuation losses arising from actual or
    threatened physical injury to or destruction of
    tangible property or bodily injury.

(Ex. 7103 at GLDD 13004.)

In the London market, a "declaration" is a summary of the terms and conditions of a proposal of insurance. The declaration is prepared by the London broker and submitted to the underwriter, who signifies agreement to the terms of the declaration by placing his initials or "scratch" on the declaration. At a subsequent time the actual policy or "wordings" are prepared.

Declaration No. 41 (Ex. 7161 at LI 001953-54) was the proposal for the $40 million first excess layer for the period July 31, 1991 through July 31, 1992. This insurance was placed under a Facultative Master Liability Slip ("Line Slip") which permitted coverage to be bound upon the agreement of four leading underwriters without submission to all of the "following" underwriters. Declaration No. 41's limit for the coverage at issue here was "US$40,000,000 any one occurrence and in the aggregate where applicable." Declaration 41 indicated that the policy to be issued was to follow a standard form, "London 1971," with certain indicated deletions, and was to be "amended as expiring policy." The $60 million second excess layer, because in excess of the $40 million per occurrence limit permitted under the Line Slip, was placed in the open market, requiring Lloyd Thompson to submit the risk to all the underwriters before coverage could be bound.

On August 29, 1991, London Insurers agreed to an endorsement to Declaration No. 41 indicating that Itel had agreed to sell Great Lakes and that London Insurers would "continue coverage hereunder in respect to both Itel Corporation et al and Great Lakes et al, subject to separate policies and statistics. . . ." (Ex. 7161 at L1001960.)

Procedural Background

In March 1996, pursuant to a referral from District Judge Norgle, Magistrate Judge Lefkow recommended that summary judgment be granted on a number of the parties' policy interpretation claims. On September 11, 1996, Judge Norgle rejected that recommendation and, shortly thereafter, transferred the case to this court. At the parties' request, this court reviewed the prior opinions in this case in an attempt to identify issues for trial and issued Memorandum Opinions on December 19, 1996 and December 20, 1996, opining, in part, that it viewed the September 1991 tunnel damage as an occurrence triggering the first period policies. As the court believes all parties understood, the court agreed to revisit this issue in light of the evidence at trial.

The issues to be decided at this point are as follows: (1) Were the first period policies triggered by the September 1991 tunnel damage and must they respond to the April 1992 flood damage (the issue which the court preliminarily decided in Great Lakes' favor before trial); (2) Should the second period $40 million first excess layer be viewed as a policy separate from the first period $40 million first excess layer so that there are two $40 million first layer limits available to respond to the flood damage; (3) If the second period policies are viewed as policies separate from the first period policies, were the second period policies triggered; (4) If the first and second period $40 million first layer excess policies are separate policies with separate limits, can those policies be "stacked" or "cumulated" so that both must respond to the flood damage, and if so, should damages be allocated to the policy period in which they were sustained;*fn2 (5) Is the City an additional insured on the excess liability policies; and (6) Is there owners' and contractors' protective insurance ("OCP") coverage available to the City for the April 1992 flood damage?

  1. Must The First Period Policies Respond to the April 1992
    Flood Damage?

In its Memorandum Opinion of December 19, 1996, this court opined that the September 1991 damage to the City's tunnel was an occurrence within the meaning of the excess policies and that the first period policies were required to respond to the April 1992 flood damage sustained by the underlying claimants. The court now reiterates that conclusion.

London Insurers maintain that it is an established principle of insurance law that when occurrence policies define "occurrence" as an accident resulting in property damage during the policy period, "property damage" means "property damage to the claimant." Accordingly, London Insurers argue, only those policies in effect at the time when the complaining party was actually damaged afford liability coverage to the insured with respect to that claimant, regardless of when the insured's negligent conduct first caused injury to a third party. London Insurers thus maintain that even assuming the existence of tunnel damage negligently caused in September 1991, the only party that sustained injury at that time was the owner of the tunnel, the City, and the only damages to which the policies then in effect — the first period policies — must respond (assuming, which London Insurers dispute, that this was an occurrence) are the damages that the tunnel itself sustained. The underlying claimants, London Insurers maintain, were not injured at all during the first period. They were injured only when the flood occurred, in April 1992, and only the policies then in effect would be required to respond to their damage. Essentially, what London Insurers argue is that even though there was property damage to a third party, the City, during the first period, there was no occurrence as to the underlying claimants, and as to any damage they suffered, the first period policies were never triggered. Put another way, London Insurers argue that persons injured after the expiration of a policy period as a result of damage to other persons during the policy period cannot seek coverage under the policy.

The court recognizes, as London Insurers point out, that many cases and treatises assert that only policies in effect at the time a claimant is actually injured are required to respond to the claimant's damages. Most of those authorities address circumstances in which the negligent act complained of and the injury arising from it were separated in time. The principle they establish is that until there is injury, there is no occurrence within the meaning of an occurrence policy such as those here, which define occurrence in terms of property damage and define property damage in terms of physical injury. The court notes, however, that most of those authorities do not focus on the circumstance present here: where physical injury to one third party, and hence property damage to a third party, occurs during the policy period but gives rise to injury to other claimants at a subsequent time.

There are a few decisions that address the occurrence of property damage which is separated in time from the injury to claimants for which coverage is sought and which support London Insurers' position. In Browder v. U.S. Fidelity & Guaranty Co., 873 P.2d 16 (Colo.Ct.App. 1993), aff'd, 893 P.2d 132 (Colo. 1995), USF & G issued an insurance policy which was in effect during the construction of a motel in 1975. In 1976, the Browders bought the motel and the insurance policy was assigned to them. In 1985, construction defects in the motel were discovered. The Browders sued. The appellate court affirmed the grant of summary judgment for USF & G, reasoning that even though there may have been damage to the property during the policy period, the Browders were not damaged during the policy period because they owned no interest in the motel at that time. In order to trigger an occurrence policy, the court held, there must be actual damage to the complaining party during the policy period. Affirming, the Colorado Supreme Court described as a "basic tenet of liability insurance" the principle that "a third party must suffer actual damage within the policy period to recover under a liability policy." Browder, 893 P.2d at 134. Because no third party was injured during the policy period, the court had no occasion to consider the issue of resulting damage.*fn3

Another arguably analogous case is Whittaker Corp. v. Allianz Underwriters, Inc., 11 Cal.App.4th 1236, 14 Cal.Rptr.2d 659 (1992). During 1983, while covered by the insurance policy in question, Whittaker changed the composition of its cansealing compound. One of its customers, American Can, reported leakage of the sealant in 1983, but two other customers, Ball and Reynolds, did not experience difficulties with the sealant until years later. The court held that the Ball and Reynolds claims were not covered by the policy because the time of an occurrence is "when the complaining party was actually damaged." Id. at 1241, 14 Cal.Rptr.2d 659. The court observed that there was no proof that the claimants other than American Can incorporated the defective sealant into their products during the policy period, noting that one of the parties, Reynolds, did not even buy the sealing compound during the policy year and the other, Ball, could not determine whether it utilized the defective sealant during the policy period.

In Whittaker, unlike Browder (where no third party injury occurred during the policy period), one of the third-party claimants suffered an injury during the policy period: American Can incorporated the defective sealant into its products and reported leaks during the policy period. Nevertheless, as to Ball and Reynolds, in the absence of proof that they incorporated the sealant into their products while the policy was in effect, coverage was denied on the grounds that there had been no occurrence as to them during the policy period.

A different approach was taken in Trustees of Tufts University v. Commercial Union Ins. Co., 415 Mass. 844, 616 N.E.2d 68 (1993). Tufts purchased a policy from the Commercial Union, running from July 1, 1968 to November 7, 1972, and a policy from St. Paul, running from November 7, 1972 through July 1, 1975. In 1977, the Jacksonville Electric Authority acquired by condemnation land that had once been owned by a Tufts subsidiary. Jacksonville sued Tufts to recover cleanup and response costs under CERCLA, alleging that during Tufts' subsidiary's ownership, various contaminants had been released into the soil. The trial court granted summary judgment in favor of the insurers, ruling that Jacksonville did not acquire the property until after the expiration of the insurance policies and thus could not have sustained property damage during the policy periods. The Massachusetts Supreme Judicial Court reversed, finding that the terms of the policies required only that property damage occur during the policy period, not that the damage be sustained by the entity making the claim. The court stated:

  The policy language does not require that
  Jacksonville have a property interest in the
  contaminated property during the policy period, but
  only that the property damage itself occur during
  that time. Had the insurers intended to exclude
  coverage whenever the underlying plaintiff did not
  own the property at the time of the occurrence, the
  insurers could have expressed such an exclusion.

In Illinois, it is well-established that where a policy provision is clear and unambiguous, its language should generally be taken in its plain, ordinary and popular sense. Travelers Ins. Cos. v. Penda Corp., 974 F.2d 823, 828 (7th Cir. 1992). This principle is subject to the qualification that context, in a contract between sophisticated business entities, should also be considered. Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805, 809 (7th Cir. 1992). Where ambiguities exist in insurance contracts, doubts must be resolved in favor of the insured. Allen v. Transamerica Insurance Co., 115 F.3d 1305, 1309 (7th Cir. 1997); Travelers, 974 F.2d at 828.*fn4 Since the policies before the court do not explicitly limit their coverage to accidents or events which cause property damage to the claimant during the policy period, this rule of construction would argue against imposing such a limitation.

Resort to this rule of construction, however, does not appear necessary in this case, because the clear policy language, read literally, does not support the position of London Insurers. The underwriters, by the policy language, agree to indemnify the insured for all sums that the insured is required to pay for personal injury and property damage caused by or arising out of "each occurrence" (emphasis added). An "occurrence" is defined as an accident or happening or event or continuous or repeated exposure to conditions which unintentionally results in personal injury or property damage during the policy period. Property damage is defined, in relevant part, as physical injury. The definition of property damage is not limited to physical injury during the policy period. The "during the policy period" limitation on property damage is found only in the definition of "occurrence." So if an accident results in physical injury to property during the policy period, there is an occurrence triggering the excess policies, and coverage is provided for personal injury or property damage caused by or arising out of the occurrence. The limitation that the London Insurers seek to have the court impose — that the claimant in question must suffer his or her property damage or personal injury during the policy period, rather than suffering property damage caused by or arising out of property damage during the policy period — is nowhere stated in or suggested by the policy language.

Moreover, since the definition of occurrence makes plain that in order for there to be an occurrence, there must be "[p]roperty [d]amage . . . during the policy period," the policies' express coverage of "[p]roperty [d]amage . . . caused by or arising out of each occurrence" must encompass resulting property damage (not simply the property damage constituting the occurrence) or the "caused by or arising out of" language would be surplusage. If the insurers intended to limit coverage for such resulting property damage to only such individuals who or entities which themselves sustained damage during the policy period, they need only have said so.

While the matter is not entirely clear, the court believes that its reading of the policy language is also more consistent with the law of Illinois than is the reading advanced by London Insurers. Illinois cases appear in general to read literally the language defining the conditions for triggering an insurance policy and to decline to imply qualifications limiting the policy's coverage.

For instance, as the Seventh Circuit interpreted Illinois law in Travelers, supra, Illinois law does not require that the underlying claimant sustain property damage during the policy period for an occurrence policy to be triggered. In Travelers, Penda, a commercial plastics extrusion company, supplied its customer, U.S. Sample, with white styrene sheets. Sample hired Bruce Offset Company to lithograph and varnish the sheets. Then Sample affixed color and material swatches to the sheets and bound them into sample books which it delivered to its customer, Joanna Western Mills. Some months later, Joanna informed Sample that the pages had yellowed and refused to pay for the books. Sample sued Penda and Bruce Offset, asserting that the sheets were unusable and unacceptable. Penda requested defense of its claim from Travelers Insurance Companies. Among the arguments asserted by Travelers against coverage was the contention that, under a policy that provided that Travelers would cover any amounts Penda became obligated to pay because of property damage caused by an occurrence, the plaintiff in the underlying suit, Sample, had not sustained covered property damage since, at the time of the yellowing, Joanna rather than Penda owned the books. Looking to the wording of the policy, the Seventh Circuit observed that the policy covered liability that the insured incurred "because of property damage," and declined to require that the damaged property belong to the plaintiff in the underlying action. Travelers, 974 F.2d at 830. The court observed, "Illinois cases do not consider who owned the property in question when determining if a claim is within policy coverage." Id.

Zurich Ins. Co. v. Raymark Industries, Inc., 118 Ill.2d 23, 112 Ill.Dec. 684, 514 N.E.2d 150 (1987), established that under Illinois law, an occurrence policy which is triggered by injury is triggered even by non-manifest, microscopic injury. In Zurich, the court dealt with an occurrence policy that defined an occurrence as "an accident, including injurious exposure to conditions, which results during the policy period, in bodily injury." Id. at 154. The claimants had suffered asbestos-related injury, and the issue was whether inhalation of asbestos fibers or manifestation of asbestos-related disease triggered the policy. After an evidentiary hearing, the trial court concluded that asbestosis begins when a person first inhales asbestos fibers, that the fibers that settle in the small air passages in the lower respiratory tract continuously injure the lung, that the body's futile efforts ...

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