Rogers Cartage Co. v. Travelers Indemnity Co.

          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 ...