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U.S. Fire Insurance Co. v. Zurich Insurance Co.

March 29, 2002

U.S. FIRE INSURANCE COMPANY, A NEW YORK CORPORATION, PLAINTIFF-APPELLANT,
v.
ZURICH INSURANCE COMPANY, AN ILLINOIS CORPORATION, DEFENDANT-APPELLEE.



The opinion of the court was delivered by: Presiding Justice Campbell.

UNPUBLISHED

APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE JOHN K. MADDEN, JUDGE PRESIDING.

This appeal involves an action for declaratory judgment filed by one insurance company against another for costs incurred in connection with the defense of a lawsuit. Plaintiff, U. S. Fire Insurance Company (U.S. Fire), appeals from: (1) an order of the circuit court of Cook County granting summary judgment on count I of U.S. Fire's second amended complaint in favor of defendant, Zurich Insurance Company (Zurich); and (2) from an order dismissing counts II through IV of U.S. Fire's second amended complaint. For the following reasons, we affirm the judgment of the trial court.

U.S. Fire filed an action for declaratory judgment against Zurich for claims arising out of a civil action known as Eastbank Ltd. Partnership v. Laticrete International (Eastbank), formerly pending in the circuit court for Kent County, Michigan. At the time of the Eastbank litigation, Laticrete International (Laticrete) was insured under a Zurich primary policy and under a U.S. Fire excess policy. U.S. Fire sought to recover (a) defense costs it incurred defending a portion of the Eastbank action (count I) and (b) monies U.S. Fire allegedly paid to settle the Eastbank action (counts II through IV).

I. CHRONOLOGY

The following chronology of events is provided as an introduction to the facts as revealed in the record: 1989 Construction commenced on high rise building in Grand Rapids, Michigan.

1991 Spring 1991: Construction completed on building. Serious leakage begins; entire building recaulked.

1992 Exterior wall of building appears damaged.

November 16, 1992: Zurich assumes Laticrete's defense.

December 1992: Panel fabricator sues general contractor; Eastbank brings action against building contractors.

1993 25 parties involved in litigation in Wisconsin and Michigan.

June 1993: Zurich notifies U.S. Fire of existence of Eastbank lawsuit.

July 1993: Zurich's internal liability report estimates potential verdict against Laticrete between $18 million and $30 million.

1994 Trial court suspends discovery and orders mediation.

November 22, 1994: Zurich advises U.S. Fire by letter that mediation begins on February 6, 1995, and that Zurich will review mediation briefs.

1995 February 1995: Endispute mediation begins. At mediation conference, Zurich offers $250,000 toward settlement. Mediator advises Zurich that its required contribution is in the "mid-millions." Eastbank settles with all defendants except Laticrete.

Building owner implements remedial construction (completed in 1997).

1999 June 23, 1999: Zurich completes defense of Laticrete upon entering into a settlement and limited release. Zurich pays Eastbank $956,648.11 and Laticrete pays Eastbank $6,043,351,89.

July 1, 1999: Zurich advises U.S. Fire that it has withdrawn from Eastbank case.

August 1999: U.S. Fire assumes Laticrete's defense and files one-count complaint against Zurich.

September 2, 1999: Laticrete settles with Eastbank. Amount paid by U.S. Fire exceeded limits of excess policy.

2000 May 19, 2000: U.S. Fire files second amended complaint.

August 23, 2000: Hearing on Zurich's motion for summary judgment on count I.

September 8, 2000: Trial court grants Zurich's motion for summary judgment.

October 6, 2000: Hearing on Zurich's motion to dismiss counts II through IV.

October 13, 2000: Trial court dismisses counts II through IV.

November 9, 2000: U.S. Fire files notice of appeal.

II. BACKGROUND

The record reveals the following relevant facts. In 1989, a private limited partnership known as Eastbank Limited Partners (Eastbank) commenced construction of the largest building in Grand Rapids, Michigan. The 33-story mixed-use residential high-rise included a hotel, rental apartments and condominiums and was completed in 1991.

The building began to experience serious leakage at the moment of occupancy, manifested by interior walls and floors becoming soaked after rainstorms. In 1991, the entire building was recaulked between panel and window joints. Nevertheless, leaking continued. Further examination of interior surfaces revealed serious defects in the cementitious backer board panels which comprised the exterior curtain of the building. The backer boards and their waterproofing membrane and adhesive mortar covering were supplied by Laticrete.

In December 1992, Eastbank brought an action against the building contractors including Laticrete. Laticrete sued the general contractor and owner for nonpayment. By 1993, many related claims were pending in both Wisconsin and Michigan.

Laticrete was insured under a Zurich primary policy containing an aggregate limit of $1 million, and a U.S. Fire excess (umbrella) policy containing an aggregate limit of $10 million, in excess of Zurich's policy. As the primary insurer, Zurich undertook Laticrete's defense in the Eastbank action and notified U.S. Fire of the action in June 1993.

Zurich's policy states that its duty to defend ended "when we [Zurich] had used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C." U.S. Fire's excess policy states that its duty to defend was triggered when the applicable limits of the underlying insurance had "been exhausted by payments."

By mid-1994, 25 parties, including Laticrete, were involved in the Eastbank action and the trial court suspended discovery to allow all parties to participate in mediation. In preparation for mediation, the parties submitted summaries which described the nature and extent of their alleged claims and defenses. Zurich advised U.S. Fire that it was reviewing the summaries in order to prepare an evaluation of the case and offered U.S. Fire the opportunity to view the summaries and any other documents at Zurich's offices. Eastbank's mediation summary claimed damages in excess of $39 million and identified Laticrete as one of the primary defendants.

Zurich undertook Laticrete's defense in the Eastbank action subject to a reservation of rights. Zurich advised U.S. Fire that the curtain wall problems were resolved, that the curtain wall problems were attributable to other co-defendants, and that Laticrete's true exposure was within Zurich's policy limit. Zurich specifically informed U.S. Fire that it continued to view the Eastbank action as a case of "no liability" and that it would offer no more than $250,000 at the mediation. U.S. Fire alleged that at this point in time Zurich should have realized, and did realize, that Laticrete's exposure would exceed Zurich's primary policy limits based on documents in Zurich's possession. Prior to the mediation, Zurich advised U.S. Fire that its (U.S.Fire's) presence at the mediation was unnecessary.

At the mediation, in compliance with its reports to U.S. Fire, Zurich offered to contribute $250,000 toward a global settlement of the Eastbank action. However, the mediator advised Zurich that its offer was inadequate and the mediator suggested that an offer in the "mid-millions" would be more appropriate. Zurich declined to increase its offer at that point, and the mediator ordered Zurich to withdraw from the mediation. Subsequently, Eastbank entered into a settlement with all defendants except Laticrete for $8,500,000; individual defendant contributions ranged between $1,500,000 and $4 million.

Laticrete, Zurich and Eastbank began settlement negotiations in June 1999. During the negotiations, Zurich postponed the performance of certain expert witness services (tests) which were recommended by defense counsel for Laticrete. Defense counsel for Laticrete also notified Zurich that the tests could potentially damage the defense of Laticrete and that "substitute evidence" potentially existed. On June 23, 1999, Laticrete and Zurich settled with Eastbank. Under this settlement, Laticrete paid Eastbank $6,043,351.89 and Zurich paid Eastbank $956,648.11, the remaining aggregate limit at the time, in exchange for a covenant not to enforce any judgment Eastbank obtained in Eastbank's action against the assets of Laticrete or Zurich. As part of this settlement, Laticrete executed a limited release in favor of Zurich. After Zurich exhausted its policy limits through the settlement, U.S. Fire assumed the defense of the Eastbank action, which was scheduled for trial in September 1999. U.S. Fire settled the Eastbank action prior to trial.

On September 2, 1999, U.S. Fire and Eastbank reached an agreement extinguishing Eastbank's remaining claims. The amount paid by U.S. Fire to extinguish Eastbank's claims exceeded the limits of U.S. Fire's excess policy

Meanwhile, on August 5, 1999, U.S. Fire filed its complaint for declaratory judgment against Zurich in one count, seeking recovery of U.S. Fire's defense costs incurred following Zurich's withdrawal in June of 1999. On January 14, 2000, U.S. Fire filed a first amended complaint, re-alleging count I of the original complaint and adding count II, seeking recovery of settlement monies paid by U.S. Fire in the Eastbank litigation based on Zurich's direct duty to U.S. Fire according to the case Schal Bovis, Inc. v. Casualty Insurance Co., 314 Ill. App. 3d 562, 732 N.E. 2d 1179 (1999). The trial court granted U.S. Fire's motion to compel discovery as to count I of the first amended complaint and stayed discovery on the issues raised in count II.

On February 14, 2000, Zurich filed a motion to dismiss count II of the first amended complaint. On March 23, 2000, Zurich filed a motion for summary judgment ...


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