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Illinois School District Agency v. the St. Charles Community Unit School

March 30, 2012

ILLINOIS SCHOOL DISTRICT AGENCY,
PLAINTIFF-APPELLANT, CROSS-APPELLEE,
v.
THE ST. CHARLES COMMUNITY UNIT SCHOOL DISTRICT 303, A UNIT OF LOCAL GOVERNMENT,
DEFENDANT-APPELLEE, CROSS-APPELLANT.



Appeal from the Circuit Court of Cook County. No. 03 CH 2413 The Honorable Nancy J. Arnold, Judge Presiding.

The opinion of the court was delivered by: Justice Garcia

PRESIDING JUSTICE GARCIA delivered the judgment of the court, with opinion. Justices McBride and R. Gordon concurred in the judgment and opinion.

OPINION

¶ 1 Plaintiff Illinois School District Agency (ISDA), a provider of commercial general liability insurance, appeals the circuit court's ruling that defendant St. Charles Community Unit School District 303 (District) properly targeted the ISDA to defend the District in a series of lawsuits stemming from mold infestation in the District's high school building, over other insurers that issued policies covering the District prior to the policy issued by the ISDA. Illinois is one of only three states that allow an insured to selectively tender the defense of a lawsuit to one insurer over other chronologically concurrent insurers. The Illinois Supreme Court has never approved extending this uncommon right to include chronologically consecutive insurance policies. The policy grounds underlying the selective tender rule do not apply to past insurers where the risk of increased premiums or the risk of policy cancellation does not exist. We reverse the circuit court's grant of summary judgment in favor of the District on counts II, III and IV of the ISDA's amended complaint; we remand for further proceedings consistent with this opinion. We reject the District's cross-appeal challenging the circuit court's judgment in favor of the ISDA on the District's claim that it was entitled to reimbursement for certain invoices from the same mold expert separately retained by the ISDA and the District.

¶ 2 BACKGROUND

¶ 3 The District is a public entity that oversees St. Charles East High School, which suffered a mold infestation that gave rise to this case. The ISDA was established by certain school districts of Illinois to pool their risk. It offers for purchase by its members insurance coverage, much like ordinary commercial insurance carriers. The ISDA provided commercial general liability (CGL) insurance coverage to the District from July 1, 1995, through July 11, 2001. Its policy provided that the ISDA "will have the right and duty to defend any 'suits' seeking *** damages." It also provided that the ISDA "will pay, with respect to any claim or 'suit' we defend: *** All reasonable expenses incurred by the [District] at our request to assist us in the investigation or defense of the claim or 'suit.' "

¶ 4 Prior to coverage by the ISDA, the District held CGL policies with General Casualty Company of Wisconsin (General Casualty) from September 1, 1971, to September 1, 1974, Employers Fire Insurance Company from October 1, 1974, to October 1, 1977, Hartford Accident and Indemnity Company (Hartford) from October 1, 1977, to July 1, 1985, and Indiana Insurance Company (Indiana) from October 1, 1985 to July 1, 1995.

¶ 5 The Mold Lawsuits

¶ 6 In March 1999, the District notified the ISDA that it faced potential tort liability stemming from mold exposure to St. Charles East High School students. The ISDA reserved its rights and retained attorney Robert Smyth of the law firm of Donohue, Brown, Mathewson & Smyth to investigate and monitor mold-based claims.

¶ 7 Between March 2001 and March 2002, three separate lawsuits were filed against the District alleging the District's negligence caused the former students to suffer mold-related injuries. In April 2001, the District tendered the defense of the suits to the ISDA and Indiana. On June 26, 2001, the ISDA accepted the defense of the suits against the District, subject to a reservation of rights; the ISDA retained attorney Smyth to represent and defend the District in the lawsuits. On August 21, 2001, the District tendered the defense of the lawsuits to Hartford and General Casualty as well. On September 7, 2001, Hartford acknowledged receipt of the tender. On September 24, 2001, Indiana agreed to defend the District pursuant to a reservation of rights. On October 1, 2001, General Casualty acknowledged receipt of the tender, reserved its rights, and declined to defend. On February 15, 2002, Hartford agreed to defend against the lawsuits under a reservation of rights.

¶ 8 In a letter dated March 19, 2002, the District's coverage counsel, Scott Reed, informed the ISDA that the District "has now obtained defense of the [action] under a reservation of rights from all primary general liability insurers with coverage in force on an occurrence basis from October 1, 1981 through July 11, 2001."

¶ 9 As a result of the mold problem, the District employed several contractors and experts to investigate and remedy the mold infestation. On July 23, 2002, Reed provided the ISDA, Indiana, and Hartford with copies of the "expert and consultant bills to date" generated by these services, which totaled approximately $2.2 million.

¶ 10 Hartford, Indiana, and General Casualty Settle

¶ 11 On August 14, 2002, Hartford sued the District in federal court, asserting it was not obligated to reimburse the District for the expert and consultant bills the District had incurred. On or about October 16, 2002, Hartford and the District reached a settlement whereby Hartford paid the District $150,000 in exchange for the District's "de-activation" of its tender of defense, which rendered moot its claim for indemnity. The agreement was fully executed on November 20, 2002. It provided that Hartford's payment satisfied its obligations to the District, including

"any costs and expenses incurred by The School District in defense or indemnity of the Underlying Lawsuits, or any other costs associated with the mold remediation which were incurred on or before October 14, 2002. These costs and expenses include, but are not limited to, AAA Environmental, Golan Harris, Holian Asbestos Removal, Carnow Conibear, Judge & James, Raths Raths & Johnson, Shirmer Engineering, STS Consultants, Air Quality Services, HP Woods, and Donohue Brown Mathewson & Smyth [hereinafter, the vendors]."

In a letter dated November 22, 2002, the District informed the ISDA's in-house claims handler Nos. 1-10-0088, 1-10-2005 (cons.) and its outside counsel that the District and Hartford had reached a settlement agreement, "the terms of which are confidential." Pursuant to the settlement, the District withdrew its tender to Hartford effective October 14, 2002.

¶ 12 On December 9, 2002, the District settled with Indiana. It deactivated its tender in exchange for a $500,000 payment. The settlement included language substantially similar to that of the Hartford settlement in that Indiana's payment satisfied obligations as to both litigation defense and reimbursement of mold remediation expenses provided by the same vendors listed in the Hartford settlement. The District also informed the ISDA's claims handler and outside counsel of this agreement, the terms of which were declared confidential. A similar settlement was reached between the District and General Casualty for $10,000.

¶ 13 The District's reimbursement claims arose from its payment of certain vendors from its own funds. When it later received the settlement proceeds, it deposited the proceeds into the District's "Educational Fund," which it used to pay general operating expenses.

¶ 14 The Lawsuits

¶ 15 The District remained in settlement discussions with the ISDA, and apparently believed the discussions would continue. The ISDA, however, filed the instant action against the District on February 6, 2003. Count I of the lawsuit sought a declaration that the ISDA had no obligation to cover mold remediation expenses unrelated to the defense of the mold lawsuit; Count II alleged the District's "secret" settlements with the other three insurers breached its insurance contract with the ISDA. On September 30, 2005, the District filed an answer and a four-count counterclaim. Count I of the counterclaim sought a declaration that the ISDA was obliged to cover mold remediation costs in addition to litigation defense expenses; Count II alleged the ISDA had breached its contract with the District by failing to compensate the District for remediation and litigation defense costs; Count III sought to recover costs and attorney fees the District incurred in pursuing insurance coverage from the other insurers; and Count IV sought penalties against the ISDA pursuant to 215 ILCS 5/155 (West 2004) for the ISDA's "vexatious and unreasonable delay" in providing the insurance coverage to which the District was entitled.

¶ 16 The ISDA moved to dismiss all four counts of the counterclaim. On May 4, 2006, the circuit court denied the motion as to Counts I through III, but granted it as to Count IV. On June 21, 2010, the court entered judgment for the ISDA on Count III of the counterclaim. The District does not challenge these rulings on cross-appeal.

ΒΆ 17 On January 27, 2006, the District moved for partial summary judgment on Count I of its counterclaim that sought reimbursement under the ISDA policy for mold remediation expenses that it claimed also aided the litigation, and on Count II of the ISDA's lawsuit that claimed the settlements with the three other insurers and deactivations of tender breached the ISDA's insurance contract. Following oral argument, Judge Nancy Arnold denied the District's summary judgment motion as to Count I of the counterclaim. As to the District's summary judgment motion regarding Count II of the ISDA's complaint, the ISDA argued that the District's deactivations of tender to Hartford, Indiana, and General Casualty were improper because the District was compensated for the deactivations. Judge Arnold ruled no legal distinction existed between compensated and uncompensated deactivation of ...


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