ROGERS CARTAGE COMPANY, PHARMACIA CORPORATION, and SOLUTIA, INC., Plaintiffs-Appellees,
v.
THE TRAVELERS INDEMNITY COMPANY and TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, Defendants-Appellants.
Appeal
from the Circuit Court of St. Clair County. No. 11-MR-27
Honorable Brian A. Babka and Honorable Heinz M. Rudolf,
Judges, presiding.
Donna
J. Vobornik, John Grossbart, Steven L. Merouse, Geoffrey J.
Repo, Attorneys for Appellants
Bernard J. Ysursa, Cook, Ysursa, Bartholomew, Joseph G.
Nassif, Charles R. Hobbs II, Attorneys for Appellees
JUSTICE GOLDENHERSH delivered the judgment of the court, with
opinion. Justice Chapman concurred in the judgment and
opinion. Justice Cates dissented, with opinion.
OPINION
GOLDENHERSH JUSTICE
¶
1 This appeal is a consolidation of two declaratory judgment
actions related to insurance coverage for environmental
contamination and cleanup at two United States Environmental
Protection Agency (EPA) Superfund sites located mainly in the
Village of Sauget (Sauget) and the Village of Cahokia
(Cahokia). Claims were brought against plaintiffs, Pharmacia
Corporation (Pharmacia) and Solutia, Inc. (Solutia) (formerly
Monsanto Company), inter alia, in underlying
litigation (United States v. Pharmacia Corp., No.
99-63-GPM (S.D. Ill.)) in federal court in the Southern
District of Illinois pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of
1980 (CERCLA) (42 U.S.C. § 9601 et seq.
(2000)). The underlying litigation involves numerous direct
claims and claims for contribution arising out of or relating
to environmental response costs already expended, being
expended, and/or to be expended in the future in connection
with the two sites.
¶
2 Rogers Cartage Company (Rogers), a commercial trucking
company, was initially sued as a third-party defendant, but
the United States soon added direct claims against Rogers
under CERCLA. After the United States failed to prove its
case against Rogers, the district court dismissed the claims
that private parties, including Pharmacia and Solutia, filed
against Rogers. The district court found such claims barred
as a result of the trial outcome.
¶
3 In 2007, there was a major shift in the interpretation of
CERCLA when the United States Supreme Court found that a
defendant in a toxic cleanup of a Superfund site can file a
cross-claim against a fellow defendant. United States v.
Atlantic Research Corp., 551 U.S. 128 (2007). Pharmacia
and Solutia then filed a third-party claim against Rogers,
essentially arguing that Rogers's handling of toxic
materials, disposal of cleanup waste, and deposit of those
wastes in pools was the cause of the toxic environmental
situations in Sauget and Cahokia.
¶
4 The instant appeal pertains to plaintiffs' assertion
that defendants, The Travelers Indemnity Company and
Travelers Property Casualty Company of America (collectively,
Travelers), were obligated to defend and indemnify Rogers in
the underlying litigation pursuant to certain insurance
policies issued by Travelers. Travelers disagreed and filed
an action for declaratory judgment in the circuit court of
Cook County (No. 10-CH-55238). Ultimately, a settlement in
the amount of $7.5 million was reached in the underlying
litigation without the consent of Travelers. After Rogers
signed the settlement, plaintiffs filed suit for declaratory
judgment in the circuit court of St. Clair County (No.
11-MR-27).
¶
5 The Cook County and St. Clair County cases proceeded
simultaneously. However, the bulk of the Cook County lawsuit
was transferred to St. Clair County, where the trial court
agreed with plaintiffs and granted partial summary judgments
in favor of plaintiffs and against Travelers and granted
Rogers's petition for fees, costs, and penalties.
Travelers now appeals. The specific issues raised in this
appeal are (1) whether Travelers breached the duty to defend,
(2) whether the pollution exclusions in the policies apply,
(3) whether the settlement in the underlying litigation was
reasonable, (4) whether Travelers breached the good faith
duty to settle, (5) whether Travelers' conduct was
vexatious and unreasonable such that an award of attorney
fees was proper, and (6) whether the award of $2, 665,
384.90 in attorney fees was proper. We affirm.
¶
6 BACKGROUND
¶
7 Rogers's business includes hauling toxic and hazardous
materials. After delivery of such materials, the interior and
exterior of its tank trailers are cleaned at trucking
terminals. During the 1950s through the 1970s, Rogers
operated terminals in Cahokia and Sauget. Rogers first used
the Cahokia Terminal, where it used containment ponds for the
hazardous materials, but moved to Sauget in 1970, where it
utilized the sewer system to transport truck washing waste to
the local publicly owned treatment works (POTW). The
underlying litigation pertained to two CERCLA Superfund
sites, Sauget Area 1 and Sauget Area 2, both named and
identified by the EPA.
¶
8 Area 1 includes three closed landfills (Sites G, H, and I),
two former surface impoundments (Site L), one formerly
flooded borrow pit that is now filled (Site M), one filled
borrow pit (Site N), Dead Creek, and Borrow Pit Lake Area,
located within the corporate limits of Sauget and extending
into Cahokia and extending west of Illinois Route 3, as well
as all other areas immediately adjacent or contiguous
thereto. Area 2 includes four closed landfills (Sites P, Q,
R, and S) and sludge dewatering ponds (Site O), as well as
the contamination in soils, sediment, surface water,
leachate, and groundwater located or released therein. Area 2
sites are located within Sauget and extend into Cahokia and
East St. Louis. To the extent the contamination has spread
from Area 1 to Area 2, any contamination from the Area 1 site
is included in the definition of Area 2.
¶
9 Rogers was first sued in the underlying litigation in the
United States District Court for the Southern District of
Illinois (district court) as a third-party defendant (United
States v. Pharmacia Corp., No. 99-63-GPM (S.D. Ill.)). The
United States later added direct claims against Rogers. The
claims alleged Rogers operated truck terminals and truck
washing facilities from which hazardous substances were
released into the environment. The underlying litigation
involved numerous parties and millions of dollars.
¶
10 Beginning in 1960 and over the course of the next several
years, Travelers issued policies of insurance to Rogers which
required that, in the event of litigation against Rogers
and/or if Rogers became legally obligated to pay damages
because of bodily injury or property damage as defined in the
policies, Travelers would defend and indemnify Rogers. When
Rogers was sued in the underlying litigation, it asked
Travelers to defend and to indemnify it pursuant to the
policies Rogers purchased from Travelers. In a letter dated
June 30, 2000, Travelers (1) agreed to "contribute to
the payment of reasonable and necessary fees for
defense-related work performed by counsel of Rogers'
choice, " subject to a reservation of rights, and (2)
identified 20 policies pursuant to which it agreed to fulfill
its duty to defend.
¶
11 Attorney Rob Schultz was Rogers's defense counsel of
choice throughout the underlying litigation. An opportunity
to settle the underlying litigation for $3.54 million arose
before the United States was to try its first claims against
Rogers and Paul Sauget (Mr. Sauget) (now deceased) in the
district court in 2003. At that time, Travelers sent Rogers a
letter in which it advised Rogers that Rogers "act in a
manner that will best protect its interests with respect to
any settlement opportunity." Travelers went on to advise
that it would "not consider any resolution which may be
reached by Rogers Cartage to be in violation of any policy
conditions prohibiting voluntary payment or assumption of
obligation." Rogers did not settle, but proceeded to
trial.
¶
12 Mr. Sauget settled during trial. His settlement took the
form of a consent decree with the United States. Mr.
Sauget's liability was fixed at $9.2 million, of which he
paid $60, 000 and agreed to pursue insurance for the
remainder.
¶
13 Because the United States failed to comply with disclosure
rules, the district court barred several witnesses from
testifying, and the United States was unable to meet its
burden of proof. In 2004, the district court dismissed the
section 113 CERCLA claims that private parties, including
Pharmacia and Solutia, filed against Rogers on the basis that
such claims were contribution claims barred as a matter of
law due to the trial outcome. While the underlying litigation
remained open, there were no longer any claims against
Rogers.
¶
14 In 2009, Pharmacia, Solutia, and others (referred to
collectively hereinafter as claimants) sought leave to file
direct cost recovery claims against Rogers in the underlying
litigation for cleanup of Area 1 pursuant to the new
interpretation of CERCLA following the Supreme Court's
decision in Atlantic Research Corp., 551 U.S. 128.
On January 20, 2010, the district court granted leave to
claimants to file section 107 CERCLA claims over Rogers's
objection. The district court later determined the claims
against Pharmacia and Solutia could proceed.
¶
15 Rogers tendered the claims to Travelers. In a letter dated
May 28, 2010, Travelers once again agreed to contribute to
the payment of reasonable and necessary fees for Rogers's
defense in the underlying litigation, but reserved its right
to contest coverage. Travelers specifically stated that the
defense could be conducted by counsel of Rogers's choice
"in any manner deemed appropriate to protect the
interests of Rogers." Travelers agreed to fulfill its
duty to defend Rogers under the 20 policies previously
identified.
¶
16 Travelers later confirmed it issued two additional
policies covering the period 1965-67. The combined policy
limits of the 22 policies are $7.3 million. There is an issue
regarding allegedly lost/missing policies that has been
retained by the circuit court of Cook County and is not an
issue in this appeal. The policies issued by Travelers
between 1960 and 1970 do not contain pollution exclusions;
the policies issued by Travelers between 1971 and 1986
contain pollution exclusions that are applicable only if the
pollution was "expected or intended" from the
policyholder's viewpoint.
¶
17 Rogers again chose Schultz as independent counsel. Prior
to a status conference on August 30, 2010, claimants told
Rogers they had new evidence allegedly connecting
Rogers's operations at the Cahokia Terminal to
polychlorinated biphenyl (PCB) contamination in Dead Creek,
which had been cleaned up at a cost of $30.3 million. In
particular, claimants possessed an updated environmental
sampling by Dr. Menzie connecting Rogers's operations at
the Cahokia Terminal to contamination in Dead Creek.
Claimants also alleged Rogers once owned portions of Area 1.
¶
18 Claimants presented evidence that future cleanup costs
would be over $21 million. In addition to Area 1 cleanup
costs, claimants presented evidence that (1) $40 million had
already been spent on groundwater remediation for Area 1 and
Area 2 together, (2) further groundwater remediation was
expected to cost an additional $2 to $3 million per year, and
(3) Rogers's damages would be at least $10 million,
excluding groundwater. Rob Schultz told claimants'
counsel they would need time to conduct discovery on this new
evidence.
¶
19 During the status conference on August 30, 2010, the
district court set a trial date of January 31, 2011. The
district court also ordered Rogers to share financial
information with Pharmacia and Solutia regarding Rogers's
solvency in an attempt to facilitate settlement discussions.
Ultimately, the financial information Rogers shared showed it
could not withstand an adverse judgment in the case and
remain solvent without insurance coverage.
¶
20 On September 9, 2010, Rogers informed Travelers of the
January 31, 2011, trial date and that Rogers was planning to
have an informal settlement meeting with the underlying
claimants. Schultz told Travelers he would advise Travelers
when Rogers received a settlement demand.
¶
21 On September 27, 2010, another status conference was held
during which the parties informed the court that they had
made significant progress toward settlement. The district
court encouraged the parties to continue to work toward a
settlement, with the court adding, "It would be nice if
Rogers Cartage can stay in business, too." The court
issued an order directing the parties to file a joint status
report by October 29, 2010.
¶
22 On October 8, 2010, claimants sent Rogers a letter in
which they proposed settling for $4 million if Travelers
would participate and resolve the claims for cash. If
Travelers refused to participate, claimants proposed Rogers
settle on its own for $7.5 million, with Rogers paying $50,
000 and promising to pursue insurance proceeds for the
remainder using Pharmacia and Solutia's counsel. In
addition, Pharmacia and Solutia would share 10% of any sums
recovered in excess of $5 million and 15% of any sums
recovered in excess of $6 million. Negotiations continued.
¶
23 On October 12, 2010, Travelers requested by letter
"copies of all pertinent correspondence." Travelers
never received a copy of the October 8 demand letter. On
October 29, 2010, the parties filed a joint status report in
which they reported continuing serious negotiations. On
November 2, 2010, claimants sent a letter in which they
renewed their demand of $4 million to be paid by Travelers.
This letter did not contain any reference to the $7.5 million
alternative proposal. Another letter was sent on November 3,
2010, and was forwarded to Travelers. Travelers subsequently
asked Rob Schultz for his evaluation of the case.
¶
24 On November 16, 2010, Schultz sent Travelers his
evaluation of the case. While he characterized some of the
allegations as "weak, " he told Travelers the
allegations relating to groundwater contamination were
"moderately strong." Schultz specifically discussed
the testing by claimants that showed a trail of PCBs from the
Cahokia property to Dead Creek and proclaimed these
allegations "a winner" for claimants. Schultz
advised Travelers that pursuant to section 107 of CERCLA,
claimants would be entitled to judgment for all of their
response costs if they could show one tablespoon of
contamination originated from Rogers's operations.
¶
25 Schultz told Travelers he thought the $4 million demand
was reasonable in light of the fact that cleanup costs
exceeded $30 million, but he believed the litigation could be
settled for between $2 and $3 million. He advised Travelers
he did not think he could win at the trial level but also
advised Travelers he thought there was at least an 85%
percent chance of ultimately prevailing on appeal even if
contamination was proven since Solutia had already been sued
by and settled with the EPA and the previous section 113
claims against Rogers had been dismissed. Schultz told
Travelers that Rogers could not sustain and satisfy even a $1
million judgment and that "[t]his is a bet the company
case, " meaning the company could neither afford to go
to trial nor afford to lose. In his deposition, Schultz noted
Rogers would be unable to post bond should the case go to the
Seventh Circuit for review. Schultz concluded there were only
two reasonable options: (1) negotiate and settle with Solutia
or (2) indemnify Rogers and post the bond on appeal.
¶
26 On November 19, 2010, Travelers sent a letter to Rogers in
which it disputed coverage, noted the trial date, and
requested a meeting with claimants' counsel. Travelers
asserted Rogers had "less than $300, 000" in
applicable coverage and explained this coverage amount
assumed that the partial pollution exclusions in the policies
from 1971 to 1986 would preclude coverage for Rogers.
¶
27 A settlement meeting took place on December 14, 2010,
during which Travelers made a counteroffer of $275, 000 to
claimants' $4 million demand. Claimants rejected the
counteroffer and countered at $3.75 million. Rogers's
in-house counsel, Michelle Larson, sent an e-mail to
Travelers on December 28, 2010, in which she said claimants
might settle with Travelers for around $2 million. Both
Larson and Schultz testified in their depositions that Rogers
preferred to settle with Travelers' participation over
the alternative $7.5 million settlement that would require
Rogers to give up a number of its insurance policies.
¶
28 On December 30, 2010, Travelers sent Rogers a letter in
which it rejected the $3.75 million demand, acknowledged
claimants would likely settle at $2 million, but refused to
make a counteroffer. The letter went on to state that (1) if
Rogers was "contemplating entering into a settlement on
its own, please be advised that Rogers *** does so at its own
peril, " (2) Travelers was retaining the right to
control the defense of the litigation, which included any
settlement, and (3) it did not consent to Rogers's
unilateral settlement negotiations with claimants. Travelers
concluded by telling Rogers that if it was negotiating or
already negotiated a settlement, Travelers would consider
that a breach of the cooperation and anti-assignment clauses
in its policies and such actions could negate coverage that
might otherwise have been available. Travelers then filed
suit in Cook County, seeking, inter alia, a
declaration of no coverage under its policies.
¶
29 On January 7, 2011, the parties filed a joint status
report in which they informed the district court that it was
likely Travelers was not going to contribute in any
meaningful way toward a settlement, but the parties were
nevertheless trying to resolve the matter without
Travelers' participation. Ultimately, Rogers settled for
$7.5 million, out of which it agreed to pay $50, 000 and
promised to seek reimbursement of the remainder through
Travelers.
¶
30 The agreement further provides that any money recovered
from Travelers would first be used to reimburse Rogers's
coverage counsel (up to $3 million) for recovering the $7.45
million and to reimburse Rogers for any retrospective
premiums to Travelers. Any money recovered in excess of these
amounts is to be divided between claimants as follows: (1) if
the excess is greater than $3 million, Rogers receives 40%
and the other claimants receive 60%; (2) if less than $3
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