April 20, 1999
TRIBUNE COMPANY AND SENTINEL COMMUNICATIONS COMPANY, PLAINTIFFS-APPELLANTS,
ALLSTATE INSURANCE COMPANY, SUCCESSOR BY MERGER TO NORTHBROOK EXCESS AND SURPLUS INSURANCE COMPANY, FORMERLY NORTHBROOK INSURANCE COMPANY, AMERICAN INSURANCE COMPANY, AMERICAN REINSURANCE COMPANY, ASSOCIATED INTERNATIONAL INSURANCE COMPANY, CERTAIN UNDERWRITERS OF LLOYD'S, LONDON, COLUMBIA CASUALTY COMPANY, CONTINENTAL CASUALTY COMPANY, EMPLOYERS INSURANCE OF WAUSAU, EXECUTIVE RE INDEMNITY INC. (FORMERLY) ERIC REINSURANCE COMPANY, FORMERLY) AMERICAN EXCESS INSURANCE COMPANY), FIRST STATE INSURANCE COMPANY, THE HOME INSURANCE COMPANY, INSURANCE COMPANY OF NORTH AMERICA, LEXINGTON INSURANCE COMPANY, NORTH STAR REINSURANCE CORPORATION, STONEWALL INSURANCE COMPANY, AND ZURICH INSURANCE COMPANY, DEFENDANTS-APPELLEES.
The opinion of the court was delivered by: Justice McNULTY
Appeal from the Circuit Court of Cook County Honorable Arthur Dunne, Judge Presiding
Three parties filed separate lawsuits against Sentinel Communications Company, a subsidiary of Tribune Company. After Tribune and Sentinel sent notice of the lawsuits to their primary and excess general liability insurers, the insurers denied responsibility for defense of the suits or indemnification of Tribune and Sentinel. Tribune and Sentinel then sued all of their general liability insurers, seeking a judgment declaring the responsibilities of the insurers to the plaintiffs under the insurance policies. The trial court granted two primary insurers summary judgment on all claims against them, finding that their contracts imposed no duty to defend or indemnify plaintiffs in any of the three suits filed against them. The court granted all insurers summary judgment on all claims related to one of the three suits, due to late notice. Plaintiffs filed a timely appeal. This court has jurisdiction pursuant to Supreme Court Rule 304(a). 155 Ill. 2d R. 304(a).
On July 10, 1992, Robert Hester sued Sentinel for allegedly contaminating the soil of Hester's property with petroleum products. The Florida Department of Environmental Regulation (FDER) sent Sentinel a warning letter on July 24, 1992, advising Sentinel of FDER's investigation into the source of trichloroethene (TCE) found in groundwater near Sentinel's property. FDER later filed a suit against Sentinel related to TCE contamination.
On September 23, 1992, plaintiffs sent notice of the warning letter and the lawsuit Hester filed to their primary general liability insurers for the years 1975 through 1985. From 1975 until early 1980, Zurich Insurance Company provided primary coverage.
During 1980 Tribune began a program by which it purchased at a very low price general liability insurance policies in which the primary insurer's limits of liability matched the deductible. The Tribune's risk manager explained that under such a "fronting" or "matching deductible" policy, the insurer's affiliate provided claims handling services, but the policy holder effectively insured itself up to the primary policy's limits. With these policies the insured could set some of the terms and conditions for the excess insurance, and the insured could obtain necessary certificates of insurance in a cost-effective manner.
From 1980 through 1982, Tribune purchased as its primary coverage matching deductible policies from Insurance Company of North America (INA); from 1983 through 1985 American Insurance Company provided the matching deductible primary insurance.
Tribune purchased excess or umbrella insurance from at least 13 different insurers for various years between 1975 and 1985. When plaintiffs notified their primary insurers of the Hester suit and the FDER warning letter, they also sent notice to all excess general liability insurers.
Cheney Street, Inc., filed suit against Sentinel on November 30, 1992, alleging that Sentinel's activities caused TCE contamination of the soil and groundwater of Cheney Street's property. Plaintiffs sent notice of the suit to all their primary and excess general liability insurers on December 8, 1992.
Zurich sent plaintiffs a letter requesting more information so that Zurich could determine whether it had a duty to defend the lawsuits. Zurich reserved the right to dispute coverage pending the outcome of the investigation. All other insurers denied coverage. On February 17, 1994, plaintiffs filed this suit for a judgment declaring the insurers had a duty to indemnify them for any judgment in favor of Hester, Cheney Street or FDER. Plaintiffs also sought specific performance of the duty to defend.
The insurers filed a flurry of motions for summary judgment, most insurers joining motions other insurers filed. All insurers moved to dismiss the complaint for coverage related to the Hester suit on grounds of late notice. They supported the motion with documents showing that Sentinel employees knew of its potential liability for years before providing notice to the insurers.
In their response plaintiffs argued that the court should find Zurich estopped from raising late notice as a defense to coverage because Zurich did not take over defense of the lawsuits and it did not file an action for a judgment declaring that it had no duty to defend. Zurich alleged that plaintiffs failed to answer the request for information that would have allowed Zurich to determine whether it had a duty to defend. The court did not decide whether Zurich breached its duty to defend because it found that the alleged breach would not estop it from raising late notice as a defense to coverage.
Plaintiffs admitted that by May 1990 Sentinel knew that Exxon, which owned neighboring property, had retained an environmental consultant, and after that consultant conducted tests, Exxon blamed Sentinel for petroleum contamination. On June 5, 1990, Sentinel contacted an attorney regarding the allegations of petroleum contamination, and Sentinel later retained an environmental consultant. Sentinel's consultant also found petroleum contamination, but it reported Exxon as the most likely source of the oil. The consultant acknowledged the possibility of contamination due to release of petroleum from a source on Sentinel's property, for which Sentinel would be liable.
According to plaintiffs, in October 1990 Hester sent them a letter in which he "demanded *** $10 million" for his property. Hester said an environmental consultant found "leaked fuel has migrated" from Sentinel's tanks to his property. The resulting contamination hindered Hester's efforts to sell his property and caused banks to refuse to refinance his mortgage.
Sentinel responded that its environmental consultant found no evidence of leakage and did not support the Conclusion that Sentinel contaminated Hester's property. Sentinel concluded: "[W]e would consider institution of a lawsuit at this time against *** Sentinel *** to be premature and without merit."
In April 1991 Hester's attorney sent plaintiffs a draft of a complaint in which Hester sought damages from both Sentinel and Exxon for the petroleum contamination. Plaintiffs provided notice to none of their insurers, continuing to rely on their environmental consultant's report. The consultants still had not determined the source of the contamination, although they believed Sentinel was not a likely source. Even when Hester filed the long-threatened suit, in July 1992, plaintiffs did not immediately notify their insurers. They did not send notice until September 23, 1992.
In August 1996 plaintiffs settled Hester's suit, obtaining dismissal of the action and a covenant not to sue for any other possible contamination of Hester's property, in exchange for payment of $320,000.
After reviewing the extensive documents and arguments, the trial court held that plaintiffs had a duty to notify all their insurers of the potential lawsuit at least by April 1991, when they received the draft complaint from Hester's attorney. They breached that duty by failing to notify the insurers until September 1992. The court granted all insurers summary judgment on all claims related to Hester's lawsuit.
The trial court also granted INA and American summary judgment on grounds that the matching deductible policies imposed no duty to defend or indemnify plaintiffs. The court found no reason to delay enforcement or appeal from the orders for summary judgment.
On appeal from summary judgment for INA, plaintiffs argue that the fronting policy is ambiguous and therefore the court should construe it to require INA to pay for defense of lawsuits against plaintiffs. Plaintiffs concede that INA has no duty to indemnify them for their liability because the deductible matches the policy limits of liability.
The policy provides that INA "shall have the right and duty to defend any suit against the insured seeking damages on account of *** property damage." However, the parties appended an endorsement to the policy, and endorsements supersede conflicting policy provisions. Central Illinois Public Service Co. v. Allianz Underwriters Insurance Co., 240 Ill. App. 3d 598, 604, 608 N.E.2d 155 (1992). In section 7 of the endorsement the parties agreed that INA "has no obligation to pay or contribute to any 'Loss Adjustment Expense.' Rather, the Named Insured shall pay all such expenses." Section 8 of the endorsement defines loss adjustment expense to include "[a]attorney's fees for claims in suit [and] Court costs and other expense in connection with investigation, defense or settlement."
Plaintiffs claim that section 5 of the endorsement creates an ambiguity. That section provides:
"Whereas the Named Insured has entered into a written agreement with a qualified claims servicing organization *** under which the *** Organization agrees to provide investigation defense and settlement services on behalf of the Insured *** it is understood and agreed that [INA] has no duty or obligation to provide investigation, defense or settlement services with respect to such claims or suits so long as such agreement with the *** Organization remains in effect." The agreement with the claims servicing organization ended with the termination of the insurance contract in 1982, when plaintiffs obtained new matching deductible insurance from American and arranged servicing with an organization not affiliated with INA.
In Allianz Underwriters, 240 Ill. App. 3d at 602, the court held:
"The question of whether a policy is ambiguous is a matter of law, in which the court makes the determination by examining the language at issue in light of the policy as a whole. Thus, the court must construe the policy in its entirety, giving effect to all parts of the policy as is possible, including endorsements. [Citation.] Where the language of the policy is unambiguous, the policy must be understood according to its plain, ordinary and popular meaning." Courts should not distort the language of the policy to find an ambiguity. Dixon Distributing Co. v. Hanover Insurance Co., 161 Ill. 2d 433, 441, 641 N.E.2d 395 (1994).
Sections 7 and 8 of the endorsement unambiguously relieve INA from any obligation to pay for defense of any lawsuit brought against plaintiffs, and they unambiguously require plaintiffs to pay all such defense costs. In the context of the entire endorsement, the relationship with section 5 becomes clear. Section 1 of the endorsement establishes that INA has no duty to pay damages within the deductible, unless the claims servicing organization fails to pay the required damages. In that limited circumstance INA "shall pay such damages and the Named Insured shall reimburse [INA] promptly."
Section 5 similarly establishes that generally INA has no duty to provide defense services, but in the limited circumstance of the claims servicing organization's failure to provide the services, INA would provide them. Section 7 establishes that plaintiffs must reimburse INA for the defense services INA provides, just as plaintiffs must reimburse INA for any damages the claims servicing organization fails to pay. Section 7 includes no qualifications to its imposition of all defense costs on the plaintiffs. INA has no obligation under any circumstance to contribute to loss adjustment expenses, including attorney fees or other costs of defending lawsuits.
Plaintiffs concede that they do not seek to have INA, at plaintiffs' expense, find legal counsel for defense of the lawsuits against plaintiffs. The only relief they seek from INA is payment of costs of defending the suits. Because the policy unambiguously relieves INA from responsibility for any such costs, the trial court correctly granted it summary judgment on all counts.
American Insurance sold plaintiffs matching deductible insurance covering 1983 through 1985. The policies differ from INA's policies, and they even change somewhat from year to year. The 1984 policy includes the following endorsement:
"1. The limits of liability stated in the policy shall not be in excess of the deductible amount.
"2. The deductible amount shall equal:
"a. The respective limits of liability stated in the policy for all coverages provided by the policy; and
"b. The amounts of all supplementary payments (including but not limited to allocated loss adjustment expenses) ***.
5. The words 'allocated loss adjustment expenses' shall mean all paid expenses by [American] in connection with claim settlements."
The 1983 and 1985 policies also include supplementary payments as part of the deductible, but they include a longer parenthetical clause concerning allocated loss adjustment expenses for foreign claims. As with the 1984 policy, the parenthetical clauses in the 1983 and 1985 policies expressly do not limit the meaning of "supplementary payments." The 1985 policy alone expressly includes the supplementary payments as part of the limit of liability.
The trial court noted that no policy defines "supplementary payments," and the court found that term ambiguous. But in his deposition, plaintiffs' risk manager admitted that such payments would include "the expenses incurred in connection with the handling of the claim, for investigation, investigative reports, legal fees, whatever sundry expenses associated with adjusting the loss, fees other than the direct fees of the claims management company."
He agreed that supplementary payments would include defense costs with regard to any claim. He also admitted that he could not think of any circumstances in which plaintiffs could tender defense of a claim to American under the policy. Plaintiffs presented no contrary affidavits or depositions. Based on the deposition, the court concluded that the parties understood the supplementary payments to include defense costs, including the costs plaintiffs sought to recover in this lawsuit.
We agree with the trial court's interpretation of the policy, but we do not find the policy itself ambiguous. Where an insurance contract is ambiguous, and other evidence does not resolve the ambiguity, the court must adopt any reasonable interpretation the policyholder suggests. Allianz Underwriters, 240 Ill. App. 3d at 602. The court need not adopt unreasonable interpretations. Allianz Underwriters, 240 Ill. App. 3d at 602.
The 1984 policy expressly includes all allocated loss adjustment expenses as part of the policy deductible, for which plaintiffs must reimburse American. Such expenses include any amount American spends settling claims, including any cost for legal services. Therefore, if American provided legal services for settling a claim, plaintiffs would be required to reimburse it for the expense. Plaintiffs interpret the policy to require American to pay them for any amounts they spent on legal services to settle a claim. Under plaintiffs' interpretation, the parties either have endless responsibilities to keep paying each other for any such services, or each party must pay the cost of whatever legal services the other obtained to defend claims against plaintiffs. American would need to pay only for services plaintiffs obtained on their own, while plaintiffs would pay only for services American obtained for them. Plaintiffs' interpretation of the contract is not reasonable. Insofar as the contract makes plaintiffs responsible for allocated loss adjustment expenses American incurs, it leaves plaintiffs also responsible for all such expenses.
The extended parenthetical clauses in the 1983 and 1985 policies are somewhat less clear, but they do not alter the meaning of the "supplementary payments" expressly included in the deductible amount. Because the policies include payment of the defense costs plaintiffs seek to recover as part of the deductible supplementary payments, the trial court correctly granted American summary judgment on all counts.
The trial court granted Zurich summary judgment on claims related to the Hester suit due to late notice. At oral argument plaintiffs asked this court to find Zurich estopped from raising late notice as a defense to the claim for coverage. Plaintiffs waived this issue by failing to raise it in their briefs on appeal. See Kubian v. Alexian Brothers Medical Center, 272 Ill. App. 3d 246, 256, 651 N.E.2d 231 (1995). However, we choose to address it here in the interest of preserving a uniform body of precedent. See Bituminous Casualty Corp. v. Fulkerson, 212 Ill. App. 3d 556, 563, 571 N.E.2d 256 (1991).
In Industrial Coatings Group, Inc. v. American Motorists Insurance Co., 276 Ill. App. 3d 799, 810-12 (1995), this court held that an insurer's breach of the duty to defend did not estop the insurer from raising late notice as a defense to coverage. The trial court here followed this holding. Our supreme court, in Employers Insurance of Wausau v. Ehlco Liquidating Trust, No. 84684 (January 22, 1999), slip op. at 21, partially overruled Industrial Coatings. The court held: "The estoppel doctrine has long provided insurers *** with the proper recourse. If an insurer believes that it received notice too late to trigger its obligations, it should defend its insured under a reservation of rights or litigate the matter in a declaratory judgment action. [Citations.] The insurer cannot simply abandon its insured. We therefore hold that there is no exception to the estoppel doctrine for late-notice defenses of the types asserted here." Ehlco, slip op. at 21.
Here, Zurich allegedly failed to assume defense of the lawsuits, and it did not file a declaratory judgment action. The parties presented conflicting evidence concerning Zurich's investigation to determine whether it had a duty to defend. The court expressly refused to make any factual findings on the conflicting evidence. Following Ehlco, we reverse the court's decision to grant Zurich summary judgment on Hester's claim, and we remand for findings of fact regarding estoppel.
The trial court also found plaintiffs breached the notice requirements of the excess insurance policies. The excess policies vary significantly from each other, as each insurer used the language it preferred in its policies. Several insurers promised to pay damages in excess of $250,000; one promised to pay up to $100,000 if damages exceed a mere $150,000 for a single occurrence. Other insurers had no liability unless damages exceeded $1 million, and some had no liability for amounts less than $5 million.
The phrasing of the notice requirements also varies from policy to policy. However, most require notice when an occurrence "appears likely to result in liability" in excess of the policy's minimum, or when an occurrence is "reasonably likely to involve" the insurer. Other policies require notice of any occurrence that involves damages that are likely to involve the policy, if the insured is found liable. Several policies explicitly provide that the insured meets the notice requirement by giving notice once the insured has information showing that the policy is likely to be involved, even if the insured gathers such information long after knowledge of the occurrence.
One policy had a markedly different notice requirement. Executive Re Indemnity provided coverage for losses in excess of $250,000, up to a limit of $1million, for 1979 through 1981. Its policy requires immediate notice of any "occurrence which, in the Insured's or underlying insurer's estimate of the value of injuries or damages sought, WITHOUT REGARD TO LIABILITY, might result in a judgment in an amount sufficient to involve [the insurance]."
Under this policy, plaintiffs needed to notify the insurer of any occurrence in which the injured party's total damages appeared likely to exceed $250,000, even if the insured believed it could not be held liable for those damages.
The trial court held that all of the policies required plaintiffs to notify the insurers at the latest by the time plaintiffs received the draft complaint from Hester's attorney, especially because Hester had previously demanded $10 million from plaintiffs in exchange for his property. Plaintiffs point out that from the time they learned of the petroleum contamination they investigated the claim, hiring an environmental consultant, and they concluded they were not likely to be found liable.
The fundamental principles governing notice to primary insurers also apply to notice to excess insurers. Twin City Fire Insurance Co. v. Old World Trading Co., 266 Ill. App. 3d 1, 9, 639 N.E.2d 584 (1993). "[T]he insured *** is required to act as a reasonably prudent person. [Citation.] Among the facts and circumstances to be considered in ascertaining whether the insured has met such standard are (1) the language chosen by the insurer to define the policy's notice requirement [citation]; (2) the presence or absence of the insured's sophistication in the world of commerce and insurance [citation]; (3) awareness on the part of the insured that an occurrence as defined by the policy has taken place [citation]; and (4) once aware of an occurrence, the diligence with which the insured ascertains whether policy coverage is available." Brownlee v. Western Chain Co., 74 Ill. App. 3d 804, 808- 09, 393 N.E.2d 515 (1979).
Although these principles apply to both primary and excess insurance, some systematic differences between primary and excess insurance lead to differences in the application of the principles. Most significantly, excess policies
"generally do not require immediate notice of an occurrence as do provisions in primary policies. [Citation.] Excess insurers are not interested in every accident, '"but only in those that may be serious enough to involve [them.]"' [Citation.] Since excess coverage is contingent on exhaustion of primary or underlying policies, excess insurers generally do not require notification of occurrences until the excess policy is reasonably likely to be implicated. [Citation.] Consequently, insurance policies for excess coverage generally grant the insured some discretion in evaluating the case." American States Insurance Co. v. National Cycle, Inc., 260 Ill. App. 3d 299, 311, 631 N.E.2d 1292 (1994).
All of the excess policies here grant the insured such discretion.
This court reviews summary judgments de novo to determine whether the record presents a genuine issue of fact. Kerr v. Illinois Central R.R. Co., 283 Ill. App. 3d 574, 583, 670 N.E.2d 759 (1996). "[W]here reasonable persons could draw divergent inferences from the undisputed material facts or where there is a dispute as to a material fact, summary judgment should be denied and the issue decided by the trier of fact." Espinoza v. Elgin, Joliet & Eastern Ry. Co., 165 Ill. 2d 107, 114, 649 N.E.2d 1323 (1995). On appeal, then, we must determine whether all reasonable persons would agree that plaintiffs acted unreasonably by waiting until September 1992 to notify their excess insurers of Hester's claim. To answer this question we must determine when a reasonable person would have believed it reasonably likely that the claim would implicate the excess insurance. See Hartford Accident & Indemnity Co. v. Rush-Presbyterian-St. Luke's Medical Center, 231 Ill. App. 3d 143, 150, 595 N.E.2d 1311 (1992); Atlanta International Insurance Co. v. Checker Taxi Co., 214 Ill. App. 3d 440, 444, 574 N.E.2d 22 (1991).
According to plaintiffs' own statement of facts, Hester demanded $10 million from them in October 1990, in exchange for Hester's property. Plaintiffs responded that a lawsuit over the pollution appeared "premature." Six months later Hester's attorney sent plaintiffs a draft complaint that he threatened to file if plaintiffs refused to purchase the property. The ad damnum of the complaint specified no amount of claimed damages. Instead, it stated only that Hester had suffered damages in excess of the jurisdictional amount.
Plaintiffs also admit that even before Hester's demand, they had begun investigation of the petroleum contamination of their property and the surrounding properties. Their environmental consultant reported that Exxon probably caused the contamination. Based largely on this report, plaintiffs apparently concluded that the claim was not likely to involve excess coverage. No internal memorandum or report shows that plaintiffs or their officers at any time prior to notifying insurers believed they faced a likelihood of substantial liability for the petroleum contamination. Plaintiffs eventually settled the lawsuit for $320,000, an amount insufficient to implicate coverage for many of the excess policies.
We find that under the facts of this case, reasonable persons could have believed that Hester's claim was not likely to rise to the level of involving at least some of the excess policies. For the policies that provide no coverage unless plaintiffs' liability exceeds $1 million, the eventual settlement apparently vindicates plaintiffs' belief that the claim would not implicate the policies. As the time for notice under those policies may never have arisen, we cannot affirm summary judgment for all of the excess insurers on grounds of late notice.
Some of the excess insurers, including Columbia Casualty, require notice only when an occurrence appears reasonably likely to result in liability within the coverage. For all such insurers, we reverse the decision granting them summary judgment.
Other insurers, including the underwriters at Lloyd's, London, require notice of an occurrence which "involves injuries or damages which, in the event that the Assured should be held liable, is likely to involve this policy." When "words in the policy are susceptible to more than one reasonable interpretation, they are ambiguous [citation] and will be construed in favor of the insured and against the insurer who drafted the policy." Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 108-09, 607 N.E.2d 1204 (1992). Construing the policy language narrowly in favor of the insured, the policies require notice only when plaintiffs reasonably believe that their probable share of the total liability will exceed the underlying insurance.
Here, Hester accused both Exxon and plaintiffs of damaging his property. The plaintiffs presented evidence that they reasonably believed that even if they were held liable, they would be liable for only a small part of Hester's loss, because their consultant believed Exxon was primarily responsible for the contamination. We cannot conclude as a matter of law that plaintiffs violated the policy by failing to notify Lloyd's until September 1992.
Executive Re Indemnity's policy required notice whenever a claimant's total damages, without regard to liability, appeared likely to exceed $250,000. At least by April 1991 plaintiffs knew Hester claimed substantial damage to his property from petroleum contamination. Plaintiffs' own costs for cleaning up the petroleum on their property, and the report of Exxon's environmental consultant, provided ample indication that Hester's costs would likely exceed $250,000. Plaintiffs presented no contrary indication that they ever found any evidence that Hester had not suffered substantial petroleum contamination. Plaintiffs focused their investigation on whether Exxon or plaintiffs had greater fault for the damages. Under the circumstances of this case, we find that plaintiffs have not presented an adequate excuse for their failure to notify Executive Re Indemnity of the occurrence until September 1992, 17 months after they received the draft complaint and 27 months after they began concerted investigation to determine possible liability for the uncontested, substantial petroleum contamination of Hester's property. We affirm summary judgment for Executive Re Indemnity on claims based on Hester's claim against plaintiffs.
The facts of this case suggest many possible alternate grounds for summary judgment. The insurers have filed several motions for summary judgment on several different bases, including pollution exclusions and other pertinent policy defenses. The parties have not yet argued those motions in the trial court. Although we have the power to affirm summary judgment on any basis supported by the record, we believe that in this complex litigation we should allow the parties a full opportunity to argue before the trial court any possible alternate grounds for summary judgment.
We affirm summary judgment in favor of the insurers who issued matching deductible policies, because the policies included all amounts paid for defense of claims as part of the deductible, for which plaintiffs retained sole responsibility. We reverse summary judgment for Zurich and we remand for findings concerning plaintiffs' allegations that Zurich breached its duty to defend. We affirm summary judgment for Executive Re Indemnity because plaintiffs failed to inform Executive of Hester's claims until long after they should reasonably have known that Hester's total damages from petroleum contamination would likely exceed the $250,000 minimum needed to involve Executive's excess coverage. We reverse summary judgment for all other excess insurers and remand for further proceedings on their various motions for summary judgment, and for other proceedings in accord with this opinion.
Affirmed in part and reversed in part; cause remanded.
GORDON, P.J. and RAKOWSKI, J., concur.