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West Bend Mutual Insurance Co. v. United Road Towing Services

September 29, 2008


The opinion of the court was delivered by: Judge James B. Zagel


This is an insurance coverage controversy in which, as is common in these matters, there are no significant material facts in dispute. Accordingly, I recite a short version of the events.

West Bend is the insurer who filed the initial claim for declaratory judgment of non-coverage, and United Road Towing Services ("United Road") is the insured. The City of Chicago and T & B Limited are additional defendants in the declaratory action. United Road filed a counterclaim seeking a declaration that there is coverage.

The circumstances giving rise to the case are these. T & B owned property which it leased to the City as an auto pound from the summer of 1991 through early winter of 1992. United Road operated the pound under contract from the City. Among other actions, West Bend alleges United Road disassembled and crushed cars on the property, which caused the release of hazardous substances on the land. While government agencies have not commenced lawsuits, T & B says it will cost $3.5 million or more to remediate the contamination and has sued United Road and the City to recover those costs. T & B sued the City in this courthouse (04 C 2578) on April 9, 2004. The City tendered, by letter, the defense of the case to United Road around June 17, 2004, along with a demand for indemnification which, it said, was expressly required under its contract with United Road. It sent another letter to the same effect on August 12, 2004. Charles Baxter, an attorney, and the United Road officer for risk management was aware of the lawsuit and the letters though he does not recall seeing a copy of the complaint. Baxter did not review its policies or consult its insurance agent or notify insurers after either the June or August letters because he thought the matter was one of contractual indemnity which he believed was not covered by any of United Road's policies. United Road refused the City's demand on August 22nd.

The City threatened legal action in an October letter. That letter did not lead Baxter to research his insurance coverage and he did not accede to the City. The City filed a third-party complaint against United Road in the federal suit brought by T & B. It did this in March 2006 and then, in May, the City and United Road met. Eventually, in late June 2006, United Road agreed to assume the defense, and the City, which, unsurprisingly, had never notified West Bend of the T & B lawsuit, dismissed its third-party claim against United Road.

When it took over the defense, United Road reviewed its policies with its lawyers. T & B filed an amended complaint on August 1st, which named United Road as a direct defendant acting as the City's agent, and on August 8th United Road gave notice to West Bend. Baxter's position did not vary. He believed that there was no insurance coverage for contractual indemnity claims but, when sued, he saw a difference between indemnification and a direct action and so believed there was coverage.

United Road has spent over $350,000 in defending the City.

West Bend's decision to deny coverage was made by a senior attorney in consultation with outside counsel. They considered the issue of notice and the issue of whether, if proved, T & B's allegations would trigger coverage. In conjunction with this decision, West Bend filed this lawsuit as well. The insurer asserts that the notice provisions of the policies were not honored and that, in any event, the policies did not cover the claim, a conclusion which was not dependent on the premise that it was a contractual indemnity claim rather than a direct claim against United Road.

The insurance policies were acquired through an insurance agent for West Bend who did tell the insurer, in 1990, that United Road had a contract with the City to operate an auto pound fenced and guarded by Chicago Police Department, though the pound was not then in operation.

I will address the contractual provisions of the coverage and, to the extent relevant, the contract between the City and United Road in the course of dealing with the arguments of the parties.

A. Notice

West Bend notes that its policies require prompt notice of an accident and immediate dispatch to them of copies of any request or demand or notice or legal paper. United Road received a demand from the City in June 2004 and did not send a copy to West Bend. Its notice to the insurer came over two years later*fn1 after United Road agreed to take over the City's defense in the T & B lawsuit, at which time United Road was named as a direct defendant in that lawsuit. Failing to give notice may justify denial of coverage depending on the circumstances. Country Mut. Ins. Co. v. Livorsi Marine, Inc., 856 N.E.2d 338 (Ill., 2006) (finding a denial of coverage proper where there was a 20-month delay despite the absence of prejudice to the insurer in its defense of the underlying lawsuit considering the policy language, the insured's knowledge of insurance practices and diligence in looking at possible coverage). An insured must provide notice within a reasonable time, with reasonableness being determined by the facts and circumstances of each case. Id. at 311-12. While "lack of prejudice may be a factor in determining the question of whether a reasonable notice was given in a particular case . . . it is not a condition which will dispense with the requirement." Id. at 312 (quoting Simmon v. Iowa Mut. Cas. Co., 121 N.E.2d 509, 511 (Ill., 1954)).Other factors in the reasonable analysis include the specific language of the policy's notice provision, the insured's sophistication in commerce and insurance matters, the insured's awareness of an event which may trigger insurance coverage, and the insured's diligence in ascertaining whether policy coverage is available. 313 (citing Northbrook, 729 N.E.2d at 922).

Here, says West Bend, the insured was aware of the claim of environmental contamination for more than two years, as was United Road's management. The delay here is long enough that, under Illinois law, it has to be, as it can be, mitigated by other circumstances. Neither the City nor United Road are novices in insurance practices. See Northern Ins. Co. of New York v. City of Chicago, 759 N.E.2d 144, 150 (Ill. App. Ct. 2001) (noting the City is hardly unsophisticated in commercial and insurance matters). United Road is in a business which for all practical purposes (and probably legal ones) it has to carry insurance; it had many policies over the years, and, in fact, did consider whether there was coverage for the claim.

United Road was not diligent in looking at possible coverage; it assumed that contractual indemnity claims did not come under its coverage when it could have examined the policies and sought advice from professionals. See Northbrook 729 N.E.2d at 923-24 (no diligence where general counsel decided there was no coverage without reading the policy or asking for professional assistance). It appears that an indemnity claim based on an "insured contract" may be covered by the liability policy in question, if certain other requirements are met."Insured contracts" are an exception to the contractual ...

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