Employers Insurance Bureau v. Ehlco Liquidating Trust
Annotate this Case
THIRD DIVISION
September 10, 1997
No. 1-95-1337
EMPLOYERS INSURANCE OF WAUSAU, )
A MUTUAL COMPANY, )
) Appeal from the Circuit
Plaintiff-Appellant, ) Court of Cook County
)
v. )
)
EHLCO LIQUIDATING TRUST, ) Honorable
NOEL H. GOODMAN, and ) Aaron Jaffe,
C.H. HEATH COMPENSATION AND ) Judge Presiding.
LIABILITY INSURANCE COMPANY, )
)
Defendants-Appellees. )
JUSTICE GORDON delivered the opinion of the court:
This insurance coverage dispute involves two underlying proceedings
against Ehlco Liquidating Trust (Ehlco) and affiliated entities for
environmental property damages allegedly caused by those parties at two
industrial sites, one located in Wyoming and the other in Mena, Arkansas.
Apparently, Ehlco Liquidating Trust is a trust created by order of the
Delaware Chancery Court to resolve the contingent liabilities of Edward Hines
Lumber Company (Hines), a dissolved Delaware corporation. The instant appeal
arises from a declaratory judgment action filed by plaintiff Employers
Insurance of Wausau, A Mutual Company (Wausau) against Ehlco; Ehlco's trustee,
Noel H. Goodman; and C.H. Heath Compensation and Liability Insurance Company
(Heath), which is identified as the successor to Employers Surplus Lines
Insurance Company, Hines' excess liability carrier. Wausau's original
declaratory complaint also named 15 other insurance carriers in addition to
Heath as defendants, who with the exception of Heath were each dismissed from
this action prior to the entry of the orders from which this appeal was taken.
In its first-amended complaint filed in this action, Wausau sought a
declaration that it owed no duty to defend or indemnify Ehlco in an underlying
suit concerning environmental property damage at an Ehlco-affiliated
industrial site in Wyoming. Ehlco filed its answer and a motion for judgment
on the pleadings pursuant to section 2-615(e) of the Illinois Code of Civil
Procedure (735 ILCS 5/2-615(e) (West 1994)), seeking defense and
indemnification coverage with respect to the underlying Wyoming action. While
that motion was pending, Ehlco moved for leave to file a counterclaim for
declaratory judgment against Wausau and Heath seeking defense and
indemnification coverage with respect to underlying administrative proceedings
and a subsequent consent decree action initiated by the United States
Environmental Protection Agency (USEPA) concerning environmental property
damage at an Ehlco-affiliated site in Mena, Arkansas. The underlying
proceedings in Mena, Arkansas concerned allegations of environmental property
damage similar to that which allegedly occurred at the Wyoming site. On
February 28, 1994, the court granted Ehlco leave to file its Mena
counterclaim.
Contemporaneously on that date, Wausau obtained leave of court to file
its second-amended complaint (in lieu of filing an answer to Ehlco's Mena
counterclaim), in which it reiterated its allegations regarding the Wyoming
site and additionally sought declaratory relief with respect to the Mena site.
Thereafter, Wausau moved to dismiss Ehlco's Mena counterclaim pursuant to
sections 2-615(e) and 2-619(a)(5) of the Code of Civil Procedure (735 ILCS
5/2-615(e), 2-619(a)(5) (West 1994) on statute of limitations grounds and on
the grounds that Hines' notice to Wausau regarding the Mena contamination had
been untimely. Ehlco then filed a cross-motion for judgment on the pleadings
with respect to the Mena counterclaim. Prior to any ruling on these motions,
Wausau filed a motion seeking leave of court to file its third-amended
complaint. The trial court granted Wausau leave to file its third-amended
complaint without prejudice to Ehlco's right to oppose the legal and factual
sufficiency thereof and without waiver of any defenses to it. That order also
provided that Ehlco's pending motions for judgment on the pleadings as to both
sites would stand as to the third-amended complaint, and that Ehlco's answer,
affirmative defenses and counterclaim would stand to the extent that Wausau's
third-amended complaint repeated the allegations and claims of its second-
amended complaint. In its third-amended complaint, Wausau repeated the
allegations in its previous complaint and added several new counts seeking a
determination of noncoverage under the subject policies. In response, Ehlco
filed a motion to strike all of the new counts of the third-amended complaint,
arguing that the new claims were unsupported by sufficient factual
allegations. In addition, Ehlco sought to strike Wausau's jury demand.
On November 7, 1994, the trial court granted both of Ehlco's motions for
judgment on the pleadings, finding that there was coverage in favor of Ehlco
as to both sites. In its order, the trial court held that Wausau had a duty
to defend Ehlco in both underlying actions, and that Ehlco had breached that
duty. The trial court therefore held that Ehlco was estopped from raising any
policy defenses to coverage and from arguing that Ehlco had failed to satisfy
conditions precedent to coverage such as timely notice. The trial court also
granted Ehlco's motion to strike the new counts and allegations of Wausau's
third-amended complaint, apparently on the grounds that the new allegations
therein were conclusory and unsupported by allegations of fact, and because in
any event, Wausau was estopped from asserting any of the policy defenses in
those new counts because of its breach of its duty to defend. In sustaining
that motion, the court also said that "the court agrees with all of Ehlco's
arguments presented in this motion," which Wausau now construes to be a
determination that the court struck its jury demand as well. After the denial
of various post-trial motions to reconsider filed by Wausau (addressed more
fully below in our discussion of our jurisdiction to hear this appeal), Wausau
appealed.
I. THE UNDERLYING ACTIONS
As noted above, this case involves two underlying proceedings, one in
Wyoming and one in Mena, Arkansas. The Wyoming action was initiated against
Ehlco by the Union Pacific Railroad Company (Union Pacific), and the Arkansas
proceedings were initiated against Hines by the USEPA. Each underlying
proceeding involved allegations of contamination and property damage caused by
Ehlco-affiliated entities which operated industrial wood-treatment facilities
in Wyoming and in Arkansas and which allegedly dispersed hazardous wastes into
the environment.[fn1]
[Nonpublishable material under Supreme Court Rule 23 omitted.]
The question concerning Wausau's duty to defend with respect to the
USEPA's proceedings against Hines relating to the Mena site requires a more
complex analysis. Wausau would urge that it had no duty to defend in those
proceedings since they did not constitute a "suit" as defined by the subject
policies and under Illinois law. We agree. Our supreme court's decision in
Lapham-Hickey Steel Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520,
655 N.E.2d 842 (1995) is directly in point. In Lapham-Hickey, the relevant
coverage provisions required the insurer to defend "suits" against the
insured. In that case, the insured received a letter from the USEPA stating
that it was potentially responsible for the costs of an environmental cleanup,
and also received a draft consent order and a "no action" letter informing the
insured that it probably would not be held responsible for the costs of any
cleanup. None of those written documents led to the filing of any suit
against the insured. The Lapham-Hickey court reasoned that since the subject
policy employed the term "suit" in discussing the carrier's duty to defend, no
such duty would be invoked absent the filing of a suit against the insured in
"actual court proceedings." 166 Ill. 2d at 532, 655 N.E.2d at 847. On that
basis, the Lapham-Hickey court held that no duty to defend was triggered since
a "suit" exists in an environmental coverage context only when there has been
a proceeding against the insured filed in a court of law. The Lapham-Hickey
court stated that its holding was consistent with the manner in which courts
determine whether a duty to defend exists, i.e., by comparing the allegations
of the underlying complaint to the relevant policy provisions to see if
coverage is even potentially alleged by the pleadings. Without the filing of
a suit in a judicial proceeding, there would be no such complaint, and
therefore, no duty to defend would arise.
In the instant case, as in Lapham-Hickey, the Wausau policies state that
Wausau
"shall have the right and duty to defend any suit against the insured
seeking damages***[for] property damage, even if the allegations of the
suit are groundless, false or fraudulent ***."
As in Lapham-Hickey, here, because no suit was filed with respect to the
underlying USEPA proceedings concerning the Mena site prior to 1988, Wausau's
duty to defend was not triggered prior to that time. See also Fruit of the
Loom, Inc. v. Travelers Indemnity Co., 284 Ill. App 3d 485, 672 N.E.2d 278
(1996) (no duty to defend because no suit was filed in that no judicial
proceeding was commenced); Forest Preserve District of DuPage County v.
Pacific Indemnity Co., 279 Ill. App. 3d 728, 665 N.E.2d 305 (1996).
Ehlco would urge that Lapham-Hickey should not be applied retroactively
to the facts here since that case was decided after this action was filed and
after judgment was entered. However, it is well-settled that Lapham-Hickey is
to be given retroactive application. See Benoy Motor Sales, Inc. v. Universal
Underwriters Insurance Co, No. 96-0536, slip op. at 6 (Ill. App. Ct. April 10,
1997) ("Lapham-Hickey's requirement of a lawsuit to trigger the insurance
company's duty to defend is to be applied retroactively."); Fruit of the Loom,
284 Ill. App. 3d at 496, 672 N.E.2d at 286 ("Lapham-Hickey is to be given
retroactive application because the Supreme Court's opinion in Lapham-Hickey
did not state that it was prospective, and the opinion on its face applies to
the litigants in the Lapham-Hickey case."); Forest Preserve, 279 Ill. App. 3d
728, 665 N.E.2d 305. See generally Lannom v. Kosco, 158 Ill. 2d 535, 634 N.E.2d 1097 (1994) (supreme court has power to declare when a decision will
apply prospectively only, and in the past has said so expressly when it
intended for prospective application alone; supreme court's decisions apply
retroactively to cases pending at time decision is announced).
In addition, Ehlco apparently contends that by virtue of the filing of
the federal consent decree action, Wausau became retroactively responsible for
Hines' defense costs incurred in response to the USEPA's administrative
proceedings and investigation of the Mena site, dating back to the USEPA's
letter to Hines of March 18, 1982. In support, Ehlco relies upon the decision
of Detrex Chemical Industries, Inc. v. Employers Insurance of Wausau, 681 F. Supp. 438 (N.D. Ohio 1987) (federal district court decision, applying Ohio
law, stating that even if a "potentially responsible party" ("PRP") letter
does not constitute a suit, once a court action is filed pursuant thereto, the
insured becomes entitled to all defense costs retroactively, dating back to
the date of the PRP letter). We disagree.
It would seem that a pro forma lawsuit, which only serves to reduce to
judgment by agreement of the parties a settlement to which the parties had
already consented in an administrative proceeding, is but an extension or
implementation of that administrative proceeding. Consequently, to invoke
coverage for the filing of a lawsuit already consented to in a settlement
agreement in the underlying administrative action, where the outcome of that
lawsuit is pre-ordained by that agreement, would contravene the thrust of the
holding of Lapham-Hickey, which precludes any duty to defend against
administrative proceedings. Once a consent decree is fully agreed upon in the
underlying administrative settlement, a suit which is filed pursuant thereto
as a mere formality provides nothing to defend upon which to invoke any duty
to defend. Although Lapham-Hickey did not expressly address this issue, we do
not believe that in that case the court intended to extend the duty to defend
to non-adversarial suits in which the insured had already fully agreed with
the liabilities ultimately imposed by the court, which as a mere formality
legitimatized the agreement prepared by the parties prior to the filing of the
action.
In the instant case, Wausau avers in its brief that the consent decree
was entered into and fully executed prior to the filing of the federal action,
and that the decree was filed contemporaneously with the federal complaint.
Ehlco does not anywhere controvert these averments. Moreover, the signature
page of the consent decree bears the date of May 16, 1987, which purports to
be well in advance of the filing of the federal action in March 1988.[fn2]
The consent decree, when agreed upon, contemplated the filing of a federal
lawsuit in which the consent decree would be filed. Thus, the entry into the
consent decree prior to the filing of the federal suit completely neutralized
the anticipated federal action and rendered it non-adversarial in nature.
There is nothing on the face of the decree that is inconsistent with the
non-adversarial nature of the federal action in which it was contemporaneously
filed. The provisions of the decree wholly define and predetermine the full
nature and extent of the judicial action to be taken pursuant to the filing of
the lawsuit and the entry of the decree. As noted, the consent decree
provides in pertinent part as follows:
"This Consent Decree shall be lodged with the Court for a period
of 30 days for public comment pursuant to the provisions of 28
C.F.R. 50.7 and Section 122(i) of the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499, 100 Stat 1613
(1986)."
The decree further provided that
"the parties agree and the Court finds that settlement of these
matters without further litigation is in the public interest and
that the entry of this Decree is the most appropriate means of
resolving these matters."
In addition, the consent decree contained penalties for violations of the
decree to which the parties had stipulated. The decree also provided that the
federal court would maintain jurisdiction
"for the duration of this Consent Decree for the purposes of
issuing such further directions as may be necessary or appropriate
to construe, implement, modify, enforce, terminate, or reinstate
the terms of this Consent Decree ***."
As is apparent from its face, the consent decree was fully executed
prior to the filing of the federal action and was filed simultaneously with
it. Second, the role of the federal court was clearly limited and defined on
the face of the consent decree to the future enforcement of the settlement if
necessary, and did not call for any concurrent defense of the action by Ehlco.
Third, the decree provided its own stipulated penalties. Fourth, the stated
purpose of the federal action, as disclosed in the decree itself, was to
prevent any further litigation, and to permit the statutorily required "public
comment" on the terms of the settlement agreement. Hence, the federal consent
decree action was wholly non-adversarial, entered into by prior consent of the
parties to implement an agreement negotiated and executed in the underlying
prior administrative proceedings.
It is therefore apparent that Ehlco did not require any defense in the
federal consent decree action, since that action was filed by agreement of the
parties merely to reduce the settlement decree to an enforceable judgment
pursuant to the prior agreement of the parties, and since the insured's
liability in the lawsuit was a foregone conclusion, fully negotiated by the
parties prior to the filing of the action. We would further surmise that, if
anything, the cost of attorney fees actually incurred in the federal consent
decree action would at best be nominal, since every detail appears to have
been fully orchestrated pursuant to the settlement reached at the
administrative level prior to the filing of the implementational consent
decree action.[fn3]
Ehlco would further urge that the decision of our Supreme Court in
Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 607 N.E.2d 1204 (1992) precludes our finding that the federal consent decree
action here did not constitute a suit or therefore invoke Wausau's duty to
defend. We disagree. In Outboard Marine, the State of Illinois and the USEPA
each filed suit in federal court in 1978 against Outboard Marine Corporation
(OMC), the insured, alleging that in the course of its normal business
operations it had contaminated waters including Waukegan Harbor and Lake
Michigan. Those suits sought to enjoin OMC from further contaminating those
waters and to compel OMC to select and implement a safe and swift method of
cleaning them up. The governmental agencies ultimately moved for voluntary
dismissal of those actions, which the federal district court granted without
prejudice. Thereafter, in October 1988, those agencies both filed new federal
complaints against OMC, in which they made the same factual allegations as
those set forth in their initial complaints, and in which they prayed for
response costs and in addition damages under CERCLA. In April 1989, the
federal district court approved of and entered a consent decree which had been
negotiated and entered into by OMC, the EPA and the State of Illinois.
Pursuant to that decree, OMC was required to make payments into a trust fund
for the costs associated with the cleanup of the contaminated waters.
OMC tendered its defense of the underlying actions to its insurers
pursuant to the provisions of certain comprehensive general liability
insurance policies, but the insurers refused to defend, alleging that the
underlying actions were not covered under the policies. OMC therefore
defended itself and eventually negotiated and entered into the aforementioned
consent decree settlement, and then instituted its declaratory judgment action
against its carriers. In its declaratory suit, OMC sought a declaration that
its insurance carriers had duties to defend and indemnify it in the underlying
actions, and sought reimbursement for its underlying defense costs and
liabilities. The Outboard Marine court held in relevant part as follows:
"Liberty Mutual [one of OMC's primary carriers] initially asserts
that the governmental agencies' 1988 complaints are not involved
in this appeal and cannot be considered in determining whether the
insurers had a duty to defend OMC. However, it is clear from the
record that the 1988 complaints were before the trial court when
it ruled on OMC's motion for partial summary judgment and are,
therefore, part of the record on appeal. The 1988 complaints are
the only complaints which specifically pray for response costs and
damages pursuant to section 107 of CERCLA. Therefore, these 1988
complaints clearly constitute 'suits seeking damages.'
Accordingly, we hold that, absent an applicable policy exclusion,
Liberty Mutual had a duty to defend OMC and we affirm the
appellate court in this regard." Outboard Marine, 154 Ill. 2d at
112, 607 N.E.2d at 1214. (Emphasis supplied in original).
Ehlco would urge that this language from Outboard Marine regarding the
underlying 1988 complaints in that case precludes us from holding that the
federal action here was a non-adversarial "suit," insufficient to invoke
Wausau's duty to defend. In support, Ehlco has supplemented the record here
with Liberty Mutual's (a defendant-insurer in Outboard Marine) brief to our
supreme court in the Outboard Marine case, in which Liberty Mutual argued that
the consent decree settlement agreement involved in that case was filed
simultaneously with the underlying 1988 federal complaints and that therefore,
there was nothing for it to defend in the federal action. Ehlco would appear
to argue on the basis of the representations in that brief that since Liberty
Mutual was ultimately found to have had a duty to defend in Outboard Marine,
the fact that a consent decree may be filed simultaneously with a federal
action does not prevent such an action from constituting a "suit" sufficient
to trigger a duty to defend.
However, the above-referenced language from the Outboard Marine decision
is not susceptible to Ehlco's interpretation. Despite the statements in
Liberty Mutual's brief regarding the timing of the filing of the consent
decree settlement in that case, nowhere does the Outboard Marine decision
indicate or otherwise rely upon the date of the filing of the consent decree
in that case. Whatever the background facts and arguments consisted of in
Outboard Marine (i.e., as presented in the Liberty Mutual brief in that case),
the precedential value of that case can only be gleaned from how the court
there chose to present the facts and characterize the issues before it. As is
clear from the above-referenced passage, the court in Outboard Marine did not
concern itself with the issue of whether the federal consent decree action
involved in that case constituted a "suit" as that issue was raised and
addressed in the later decision of Lapham-Hickey with respect to an
administrative proceeding versus a court proceeding. Rather, the Outboard
Marine court was concerned with the issue of whether "damages" had been sought
against OMC in the underlying actions as required by the policies in question
in order to invoke Liberty Mutual's duty to defend. As noted above, the
Outboard Marine court distinguished between the 1978 federal actions against
OMC which sought solely equitable relief, and the 1988 federal actions which
sought monetary damages and thereby invoked Liberty Mutual's duty to defend.
Having distinguished Outboard Marine, as previously discussed, it follows from
the decision in Lapham-Hickey that a consent decree settlement memorialized in
a federal lawsuit does not give rise to an independent duty to defend, unless,
perhaps, it was shown that there was some complication in its implementation
that knocked the consent decree action out of its fixed orbit around the
settlement agreement, or that the federal lawsuit deviated from the consent
decree and took on a life of its own. Thus, since the USEPA's underlying
proceedings against Hines with respect to the Mena, Arkansas site did not
constitute a suit, we must conclude that no duty to defend arose which would
have obligated Wausau to participate in Hines' defense with respect to that
site. See Lapham-Hickey, 166 Ill. 2d 520, 655 N.E.2d 842.[fn4]
Wausau contends with respect to Ehlco's Mena claim that even if Lapham-
Hickey would not apply to preclude coverage, coverage would nevertheless be
precluded because of Ehlco's late notice. Wausau also contends that
notwithstanding our determination that the Wyoming action falls within the
coverage provisions of the policy, Wausau would nevertheless have no duty to
defend due to Ehlco's late notice with respect to that action. Wausau urges
that the trial court was in error in estopping it from asserting Ehlco's
breach of the timely notice provisions in the subject policies by reason of
Wausau's failure to undertake Ehlco's defense, since those provisions are
conditions precedent to any coverage and not subject to estoppel.
The purpose of a notice requirement is to enable the insurer to make a
timely and thorough investigation of a claim. INA Insurance Co. v. City of
Chicago, 62 Ill. App. 3d 80, 379 N.E.2d 34 (1978). Notice provisions are
considered valid conditions precedent to coverage, and should not be
considered mere technical requirements for the convenience of the insurer.
See Kerr v. Illinois Central Railroad Co., 283 Ill. App. 3d 574, 670 N.E.2d 759 (1996) (stating that compliance with notice provision is a condition
precedent to coverage and if breached, the insurer will not be liable under
the policy); Industrial Coatings Group, Inc. v. American Motorists Insurance
Co., 276 Ill. App. 3d 799, 658 N.E.2d 1338 (1995) (stating that the
requirement of timely notice is a condition precedent of the policy). See
also Millers Mutual Insurance Ass'n v. Graham Oil Co., 282 Ill. App. 3d 129,
668 N.E.2d 223 (1996); American Country Insurance Co. v. Cash, 171 Ill. App.
3d 9, 524 N.E.2d 1016 (1988); Equity General Insurance Co. v. Patis, 119 Ill.
App. 3d 232, 456 N.E.2d 348 (1983); INA Insurance Co., 62 Ill. App. 3d 80, 379 N.E.2d 34; City of Chicago v. United States Fire Insurance Co., 124 Ill. App.
2d 340, 260 N.E.2d 276 (1970). Whether an insured complied with its
contractual duty to notify its carrier of an occurrence is resolved by
determining whether a reasonably prudent person would have foreseen a lawsuit
and would have either contacted his attorney or his liability carrier. Graham
Oil Co., 282 Ill. App. 3d 129, 668 N.E.2d 223; Industrial Coatings Group, 276
Ill. App. 3d 799, 658 N.E.2d 1338; Twin City Fire Insurance Co. v. Old World
Trading Co., 266 Ill. App. 3d 1, 639 N.E.2d 584 (1993). Prejudice to the
insurer from late notice of an occurrence is only a factor to be considered in
determining whether notice was reasonable. Graham Oil Co., 282 Ill. App. 3d
129, 668 N.E.2d 223. Whether an insured has been given reasonable notice
usually is a question for the trier of fact, and becomes a question of law for
the court only when the facts are undisputed. See generally University of
Illinois v. Continental Casualty Co., 234 Ill. App. 3d 340, 599 N.E.2d 1338
(1992).
As noted, a liability carrier has a duty to defend an action which
alleges a claim that potentially comes within the coverage of the policy, even
where the facts ultimately show that no coverage is available. Outboard
Marine Corp., 154 Ill. 2d 90, 607 N.E.2d 1204; Zurich Insurance Co., 118 Ill. 2d 23, 514 N.E.2d 150; Sundance Homes, Inc., 238 Ill. App. 3d 335, 606 N.E.2d 326; Western Casualty & Surety Co., 179 Ill. App. 3d 752, 534 N.E.2d 1066.
The breach of that duty will estop the carrier from arguing policy defenses to
coverage in a later declaratory action brought against it. Murphy, 88 Ill. 2d 444, 430 N.E.2d 1079; Peppers, 64 Ill. 2d 187, 355 N.E.2d 24; M/A Com, 187
Ill. App. 3d 358, 543 N.E.2d 228; Sims, 43 Ill. App. 2d 184, 193 N.E.2d 123.
The first question presented here is whether a carrier which has failed
to defend or reimburse its insured in an underlying action or to file a timely
declaratory judgment action is estopped under the foregoing rule from arguing
conditions precedent to coverage such as the requirement of timely notice.
Illinois courts are divided on this issue. On the one hand, there is a line
of cases which support Wausau's position that a carrier is not estopped from
asserting that it had no duty to defend or to indemnify due to late notice
since the giving of timely notice is a condition precedent to coverage. See
Industrial Coatings Group, 276 Ill. App. 3d 799, 658 N.E.2d 1338; M/A Com Inc.
v. Perricone, 187 Ill. App. 3d 358, 543 N.E.2d 228 (1989); Del Grosso v.
Casualty Insurance Co., 170 Ill. App. 3d 1098, 524 N.E.2d 1042 (1988); City of
Chicago v. United States Fire Insurance Co., 124 Ill. App. 2d 340, 260 N.E.2d 276 (1970); International Environmental Corp. v. National Union Fire Insurance
Co., 860 F. Supp. 511 (N.D. Ill. 1994); and La Salle National Trust, N.A. v.
Schaffner, 818 F. Supp. 1161 (N.D. Ill. 1993). See also D. Caswell and M.
Warnick, The Illinois Insurer Estoppel Doctrine: The Consequences of Wrongful
Denial of the Duty to Defend, 7 Environmental Claims Journal 5 (Summer 1995)
(stating that where an insurer fails to file a declaratory action or defend
under a reservation of rights, it need not be estopped from introducing
extrinsic evidence of the insured's breach of a condition precedent to
coverage such as timely notice as a defense to any coverage in a subsequent
coverage action).
On the other hand, there is a line of cases which appear to be aligned
with Ehlco's position that due to its alleged failure to defend Hines or to
file a timely declaratory action, Wausau is estopped from asserting any policy
coverage defenses, including that of late notice. See La Rotunda v. Royal
Globe Insurance Co., 87 Ill. App. 3d 446, 408 N.E.2d 928 (1980); McFadyen v.
North River Insurance Co., 62 Ill. App. 2d 164, 209 N.E.2d 833 (1965);
Maneikis v. St. Paul Insurance Co., 655 F.2d 818 (7th Cir. 1981); Petersen
Sand & Gravel, Inc. v. Maryland Casualty Co., 881 F. Supp. 309 (N.D. Ill.
1995); and Attorney's Title Guaranty Fund, Inc. v. Maryland Casualty Co., No.
90 C 3916 (N.D. Ill. August 23, 1991). See also Central Mutual Insurance Co.
v. Kammerling, 212 Ill. App. 3d 744, 571 N.E.2d 806 (1991). See generally S.
Nardoni and J. Vishneski, The Illinois Estoppel Doctrine: Illinois Courts
Make it Costly for Insurers To Breach Their Duty To Defend, 8 Environmental
Claims Journal 45 (Autumn 1995) (hereinafter, the title to this article will
be referred to by the names of its authors, Nardoni and Vishneski).
Based upon our review of these authorities, we find those cases which
support Wausau's view to be more persuasive. Nardoni and Vishneski have
articulated the rationale of Ehlco's line of cases, which would invoke
estoppel to preclude the interposition of a late notice defense, as being an
extrapolation of the general principal of estopping an insurer who breaches
his duty to defend from then seeking to interpose defenses. In order to
preserve that rule, they would make no distinction between late notice
defenses and other defenses to coverage. They further state that to permit an
insurer to refuse to defend its insured while conducting an inquiry into facts
extrinsic to the underlying complaint regarding late notice would leave the
insured unprotected while the insurer decides whether to provide a defense.
In support, the article states that
"[c]reating an exception to the rule for condition precedent-type
defenses would destroy the effectiveness of the [estoppel] rule.
It would permit carriers to safely deny their duty to defend,
without fear of estoppel, as long as they include a 'late notice'
*** condition precedent defense in their denial letter. This
would instruct all insurance company claims representatives to
include such defenses in their denial of coverage letters in every
case. The exception would swallow the rule whole." Nardoni and
Vishneski, The Illinois Estoppel Doctrine, at 56.
The better reasoned cases, however, would challenge these assertions.
The general rationale for the invocation of the estoppel rule is that it
prevents an insurer who has breached the duty to defend provision in its
policy from relying on other policy defenses in that insurance contract which
it has already repudiated. Murphy, 88 Ill. 2d 444, 430 N.E.2d 1079; Peppers,
64 Ill. 2d 187, 355 N.E.2d 24; M/A Com, 187 Ill. App. 3d 358, 543 N.E.2d 228;
Sims, 43 Ill. App. 2d 184, 193 N.E.2d 123. However, where conditions
precedent to coverage are involved, including the requirement to serve timely
notice (see Kerr, 283 Ill. App. 3d 574, 670 N.E.2d 759; Industrial Coatings,
276 Ill. App. 3d 799, 658 N.E.2d 1338), the argument is reversed. First, the
insurance contract does not take effect without timely notice. Second, the
party in breach is the policyholder, not the insurer
Thus, it would be conceptually incoherent to permit estoppel to arise
where a duty to defend may well not have been breached because of the prior
breach by the insured of a condition precedent regarding the giving of timely
notice. The insured's breach of the timely notice provision, if proven, would
preclude the vesting of any right in the insured to a defense and any
correlative duty to defend on the part of the insurer. In that regard, we
note that the estoppel rule initially germinated in a context where the
allegations of the underlying complaint were sufficient to invoke the
possibility that the underlying cause of action, if proven, would fall within
the coverage provisions of the policy. Murphy, 88 Ill. 2d 444, 452, 430 N.E.2d 1079, 1083 ("The starting point of analysis under either the general
rule of estoppel or the exception is the same-the allegations of the
complaint"); Peppers, 64 Ill. 2d 187, 193, 355 N.E.2d 24, 28 ("In determining
whether the insurer owes a duty to defend *** it is the general rule that the
allegations of the complaint determine the duty"); Federal Insurance Co. v.
Economy Fire & Casualty Co., 189 Ill. App. 3d 732, 735, 545 N.E.2d 541 (1989)
("In determining whether an insurer owes a duty to defend the insured, courts
look to the four corners of the complaint brought against the insured").
However, the allegations in the underlying complaint against the policyholder
would not ordinarily contain assertions pertaining to the timely notice issue,
since the underlying complaint would not, and, under ordinary circumstances,
could not, deal with matters pertaining to the insurability of the underlying
tort defendant. Rather, resolution of that issue would require a
consideration of matters wholly extrinsic to the underlying complaint. See D.
Caswell and M. Warnick, The Illinois Insurer Estoppel Doctrine: The
Consequences of Wrongful Denial of the Duty to Defend, 7 Environmental Claims
Journal 5 (Summer 1995). Furthermore, where the question is whether the
allegations in the underlying tort complaint fall within the coverage
provisions of the policy, the facts proving or disproving coverage would
ordinarily be revealed and established during the course of the trial of that
action. Not so those matters pertaining to timely notice, since the question
of timely notice is irrelevant in the context of the underlying tort
litigation.
Any concern that the Illinois estoppel rule will be vitiated by our
holding ignores the fact that carriers would only escape the consequences of
being estopped from contesting their duty to defend or pay the cost of defense
if the court ultimately sustains their condition precedent defense based on
late notice, a defense to which they then would have been clearly entitled.
Furthermore, the estoppel rule remains in full force and effect with respect
to all other defenses.
The decisions in M/A Com Inc. v. Perricone, 187 Ill. App. 3d 358, 543 N.E.2d 228 (1989) and Industrial Coatings Group, Inc. v. American Motorists
Insurance Co., 276 Ill. App. 3d 799, 658 N.E.2d 1338 (1995) are wholly in
point. In M/A Com, the insurer refused to defend the insured on late notice
grounds. Thereafter, the underlying tort plaintiff received a judgment
against the insured and brought garnishment proceedings against the insurer,
urging that the insurer was estopped from asserting late notice as a defense
to payment under its policy because it had breached its duty to defend the
insured. The M/A Com court rejected that argument, stating that the insurer
was not estopped from establishing that a breach of the subject policy's
timely notice provision precluded any coverage. In so holding, the M/A Com
court stated as follows:
"The case at bar represents a departure from the typical policy
coverage case exemplified by Sims [Sims v. Illinois National
Casualty Co., 43 Ill. App. 2d 184, 193 N.E.2d 123 (1963)]. This
case involves an alleged breach of contract not by the insurer,
but rather by the insured. In our estimation, this difference
does not affect the proposition of law to be applied. The
essential proposition of law stated in Sims is that an insurer
which has breached its duty under the policy to defend the insured
is estopped from later asserting any provision of the policy as a
defense. That proposition is based upon the general principle of
contract law that a party which has breached the terms of a
contract may not rely on other terms of the same contract.
[Citations.] By estopping the insurer from raising the
affirmative defense [of late notice], the trial court never
reached the issue of whether the insured did in fact breach the
policy and thereby relieve the insurer of its duty to defend. The
court apparently accepted the plaintiff's position that the
insurer is in all cases obligated to either defend under a
reservation of rights or seek a declaratory judgment as to the
scope of its duty to defend. The duty to defend, although broad,
is not boundless. The doctrine of estoppel arises only where a
duty to defend exists and has been breached by the insurer. It
does not prevent the insurer from raising the issue of whether it
did in fact breach a duty to defend its insured. M/A Com, 187
Ill. App. 3d at 361-62, 543 N.E.2d at 231.
As in M/A Com, in Industrial Coatings, the insurer refused to defend its
insured in an underlying USEPA potentially responsible party (PRP) action and
failed to file any declaratory judgment action on late notice grounds. The
insured ultimately filed a declaratory judgment action almost three years
after it first sent notice to the insurer of the underlying matter.
Thereafter, the insurer filed a motion for summary judgment in which it urged
that despite its inaction and refusal to defend, it should not be estopped
from asserting its late notice defense as a bar to defense or indemnification
coverage. The trial court granted that motion. The Industrial Coatings court
affirmed, stating that in order for estoppel to apply, the insurer must first
be found to have had a duty to defend, and then must be found to have breached
that duty. The Industrial Coatings court cited to M/A Com in support of its
conclusion that if an insurer could show that the insured breached its duty to
provide timely notice, it would be relieved of its duty to defend and estoppel
would not apply. Accord Del Grosso v. Casualty Insurance Co., 170 Ill. App.
3d 1098, 524 N.E.2d 1042 (1988) (holding that an insurer should not be
estopped from raising the late notice issue although it had neither defended
the insured in the underlying lawsuit nor filed a declaratory judgment
action.).
Based upon the rationale and holdings in M/A Com and Industrial
Coatings, here, Wausau should have been given the opportunity to establish
that its insured breached a condition precedent to coverage.[fn5] As noted
by the court in M/A Com, the duty to defend is not boundless. Just as an
insurer that breaches the terms of its policy should not be permitted to rely
on other terms of the same policy to deny coverage, an insured that breaches a
condition precedent to policy coverage should not be permitted to invoke the
coverage provisions of that same policy. See also United States Fire
Insurance Co., 124 Ill. App. 2d 340, 260 N.E.2d 276; International
Environmental Corp., 860 F. Supp. 511; Schaffner, 818 F. Supp. 1161.[fn6]
Hence, the trial court erred in precluding Wausau from arguing whether the
insured had breached the notice provisions of the applicable policies with
respect to the underlying Wyoming action and, for that matter, with respect to
the Mena action as well.[fn7]
[Nonpublishable material under Supreme Court Rule 23 omitted.]
For the foregoing reasons, the judgment of the Circuit Court of Cook
County is reversed and remanded for proceedings in accordance herewith.
Reversed and remanded.
COUSINS, P.J. and LEAVITT, J., concur.
[fn1] This opinion is only an excerpt of a memorandum decision running 95
pages in length. In order to comply with appellate court page limitations
specified by revised Supreme Court Rule 23 (Official Reports Advance Sheet No.
15 (July 20, 1994), R. 23, eff. July 1, 1994), we have omitted in excess of 15
pages from our statement of facts, and in excess of 50 pages of discussion
involving more than 18 separate issues. Consequently, the published
discussion portion of this decision only addresses the following two issues:
(1) the question of Wausau's duty to defend in the underlying Mena, Arkansas
proceedings under the recent decision of our supreme court in Lapham-Hickey
Steel Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520, 655 N.E.2d 842 (1995); and (2) whether Wausau is precluded from interposing a defense
predicated upon the delayed notification of claims by its insured.
The unpublished portion of this memorandum decision addresses, among
other things, the subject matter jurisdiction of this court on appeal in light
of the contention that the judgment at the trial level lacked finality;
whether the allegations of the underlying Union Pacific complaint in Wyoming
were sufficient to invoke a duty to defend; whether the facts support the
contention that the carrier was served with late notice; the impact of a non-
waiver agreement upon the rule that a breach of a duty to defend will estop
the carrier from invoking defenses to coverage; the impact of the filing of a
declaratory judgment action upon the foregoing estoppel rule, including the
question as to when the declaratory judgment action must be filed to preclude
invocation of the estoppel rule; whether prejudice is required to invoke
estoppel; when the invocation of estoppel can, if at all, permit recovery in
excess of policy limits; the sufficiency of Ehlco's tender of its defense; as
well as numerous other more incidental matters.
Because of these omissions, there may be gaps in the continuity of the
aforementioned published excerpts. However, a full, unabridged text of this
decision is on file with the clerk of this court under Docket No. 95-1337.
[fn2] The parties did not refer to these dates, but no one contravenes
the assertion by Wausau that the execution of the consent decree preceded the
filing of the federal action and that the consent decree was filed
contemporaneously with that action.
[fn3] Ehlco also apparently contends that Wausau is estopped from
denying that a suit was filed in the underlying Mena proceedings and from
denying that therefore, no duty to defend was invoked since, according to
Ehlco, Wausau made statements in its pleadings to the contrary. In support,
Ehlco refers to Wausau's third-amended complaint, wherein Wausau stated that
the USEPA filed suit against Hines in 1988 in Arkansas. However, this
statement cannot reasonably be construed as an admission by Wausau that the
USEPA administrative proceedings invoked Wausau's duty to defend, nor, for
that matter, as an admission that the 1988 federal consent decree action
invoked Wausau's duty to defend.
[fn4]Since we conclude that Wausau's duty to defend was not
invoked by the underlying USEPA administrative proceedings or the
federal consent decree action against Ehlco, we need not address
Ehlco's contention that under the aforementioned Detrex decision,
the filing of the federal action entitled them to defense costs
both for the defense of that action and retroactively, for the
defense of the USEPA administrative proceedings leading up to
that action. Under the holding in Detrex, the question as to
whether an insured would be entitled to such a retroactive
payment of defense costs would not arise unless the insurer's
duty to defend has been invoked in the first instance.
[fn5]We note at this juncture that the same reasoning with
respect to conditions precedent and timely notice also applies to
Wausau's interposition of the "suit" defense under Lapham-Hickey.
Consequently, we agree with Wausau's contention that the trial
court erred in striking its allegations regarding the suit issue
from Wausau's third amended complaint. As noted, in its November
7, 1994 order, the trial court granted Ehlco's motion to strike
all of the new counts in that complaint, including the suit
issue, apparently because the court had found that Wausau had
breached its duty to defend, and was therefore estopped from
arguing any policy defenses. The trial court also stated in
striking those claims that it agreed with the arguments in
Ehlco's motion to strike, which as noted alleged that Wausau's
new claims were unsupported by allegations of fact. However, the
trial court's estoppel of Wausau to argue the suit issue was
erroneous since, as with the timely notice issue, no duty to
defend is triggered in the first instance unless a suit has been
filed against the insured. See generally Lapham-Hickey Steel
Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520, 655 N.E.2d 842 (1995); Fruit of the Loom, Inc. v. Travelers Indemnity
Co., 284 Ill. App 3d 485, 672 N.E.2d 278 (1996). Moreover, the
suit defense alleged in the third-amended complaint stated
sufficient facts to withstand a motion to strike. As noted, in
its complaint, Wausau specifically set forth the facts regarding
the 1982 USEPA letter informing Hines that it was potentially
responsible for the Mena cleanup, and further specified that in
1988, the USEPA filed its consent decree action in federal court
in Arkansas. Wausau then alleged that under these facts, it had
no duty to defend because no suit had been filed as defined by
its policies. Wausau could not have provided more complete
allegations on this issue.
[fn6] Ehlco would urge in particular that the decision in Central
Mutual Insurance Co. v. Kammerling, 212 Ill. App. 3d 744, 571 N.E.2d 806
(1991) supports its position that Wausau must be estopped from arguing the
late notice issue. We disagree, as that case is distinguishable. In
Kammerling, the insurer received the insured's tender of defense and notified
the insured that it was reserving its rights due among other reasons to the
late notice of the loss. The insurer indicated that it would proceed with a
declaratory judgment action against its insured and explicitly recognized its
obligation to provide a defense until that declaratory action had been
resolved. The carrier further indicated that it would file an additional
appearance on behalf of the insured in the underlying matter (the insured was
being represented by another carrier). However, the carrier did not file its
declaratory judgment action until several months had passed, and in the
interim, never filed an appearance for the insured or participated in any way
in the underlying defense.
On appeal, the Kammerling court held that the insurer was estopped from
asserting a late notice defense due to "[t]he peculiar facts of this case"
(Kammerling, 212 Ill. App. 3d at 749, 571 N.E.2d at 809), insofar as the
insurer acknowledged its duty to defend under a reservation of rights and in
fact indicated that it would file a declaratory judgment action and honor its
defense obligations until the resolution of that action. Unlike in
Kammerling, here, Wausau did not acknowledge its duty to defend, nor did it
represent that it would file a declaratory judgment action or, for that
matter, file an appearance on behalf of its insured and otherwise participate
in the underlying defense.
[fn7]Wausau also contends that the cooperation, mitigation
and voluntary payments clauses in its policies are conditions
precedent to coverage which it should not have been estopped from
arguing and which should have precluded judgment on the
pleadings. We disagree. We first note that in making this
argument in its brief, Wausau provides no factual basis for
asserting that Ehlco failed to cooperate with Wausau, to mitigate
the underlying claims made against it, or that Ehlco voluntarily
made any payments which it was not legally required to make. In
addition, Wausau has not cited to any cases which support its
proposition that those clauses are conditions precedent to
coverage. The one case which Wausau did cite in support of this
argument, Waste Management, Inc. v. International Surplus Lines
Insurance Co., 144 Ill. 2d 178, 579 N.E.2d 322 (1991), is
inapposite. That decision merely states with respect to the
cooperation clause that under its auspices, an insured must
disclose to its insurer the contents of communications which the
insured had with defense counsel representing them on a claim for
which their insurer had the ultimate duty to satisfy. Because in
making this argument Wausau has failed to apply its legal
conclusions to the facts of this case and has merely cited to one
irrelevant decision in support of this argument, it is waived.
See, e.g., Illinois Supreme Court Rule 341(e)(7) (134 Ill. 2d R.
341(e)(7)); In re Marriage of Winton, 216 Ill. App. 3d 1084, 576 N.E.2d 856 (1991) (where party cited to only one case which was
inapposite in support of its argument, the court held that the
argument was waived under Rule 341(e)(7)).
September 10, 1997
No. 1-95-1337
EMPLOYERS INSURANCE OF WAUSAU, )
A MUTUAL COMPANY, )
) Appeal from the Circuit
Plaintiff-Appellant, ) Court of Cook County
)
v. )
)
EHLCO LIQUIDATING TRUST, ) Honorable
NOEL H. GOODMAN, and ) Aaron Jaffe,
C.H. HEATH COMPENSATION AND ) Judge Presiding.
LIABILITY INSURANCE COMPANY, )
)
Defendants-Appellees. )
JUSTICE GORDON delivered the opinion of the court:
This insurance coverage dispute involves two underlying proceedings
against Ehlco Liquidating Trust (Ehlco) and affiliated entities for
environmental property damages allegedly caused by those parties at two
industrial sites, one located in Wyoming and the other in Mena, Arkansas.
Apparently, Ehlco Liquidating Trust is a trust created by order of the
Delaware Chancery Court to resolve the contingent liabilities of Edward Hines
Lumber Company (Hines), a dissolved Delaware corporation. The instant appeal
arises from a declaratory judgment action filed by plaintiff Employers
Insurance of Wausau, A Mutual Company (Wausau) against Ehlco; Ehlco's trustee,
Noel H. Goodman; and C.H. Heath Compensation and Liability Insurance Company
(Heath), which is identified as the successor to Employers Surplus Lines
Insurance Company, Hines' excess liability carrier. Wausau's original
declaratory complaint also named 15 other insurance carriers in addition to
Heath as defendants, who with the exception of Heath were each dismissed from
this action prior to the entry of the orders from which this appeal was taken.
In its first-amended complaint filed in this action, Wausau sought a
declaration that it owed no duty to defend or indemnify Ehlco in an underlying
suit concerning environmental property damage at an Ehlco-affiliated
industrial site in Wyoming. Ehlco filed its answer and a motion for judgment
on the pleadings pursuant to section 2-615(e) of the Illinois Code of Civil
Procedure (735 ILCS 5/2-615(e) (West 1994)), seeking defense and
indemnification coverage with respect to the underlying Wyoming action. While
that motion was pending, Ehlco moved for leave to file a counterclaim for
declaratory judgment against Wausau and Heath seeking defense and
indemnification coverage with respect to underlying administrative proceedings
and a subsequent consent decree action initiated by the United States
Environmental Protection Agency (USEPA) concerning environmental property
damage at an Ehlco-affiliated site in Mena, Arkansas. The underlying
proceedings in Mena, Arkansas concerned allegations of environmental property
damage similar to that which allegedly occurred at the Wyoming site. On
February 28, 1994, the court granted Ehlco leave to file its Mena
counterclaim.
Contemporaneously on that date, Wausau obtained leave of court to file
its second-amended complaint (in lieu of filing an answer to Ehlco's Mena
counterclaim), in which it reiterated its allegations regarding the Wyoming
site and additionally sought declaratory relief with respect to the Mena site.
Thereafter, Wausau moved to dismiss Ehlco's Mena counterclaim pursuant to
sections 2-615(e) and 2-619(a)(5) of the Code of Civil Procedure (735 ILCS
5/2-615(e), 2-619(a)(5) (West 1994) on statute of limitations grounds and on
the grounds that Hines' notice to Wausau regarding the Mena contamination had
been untimely. Ehlco then filed a cross-motion for judgment on the pleadings
with respect to the Mena counterclaim. Prior to any ruling on these motions,
Wausau filed a motion seeking leave of court to file its third-amended
complaint. The trial court granted Wausau leave to file its third-amended
complaint without prejudice to Ehlco's right to oppose the legal and factual
sufficiency thereof and without waiver of any defenses to it. That order also
provided that Ehlco's pending motions for judgment on the pleadings as to both
sites would stand as to the third-amended complaint, and that Ehlco's answer,
affirmative defenses and counterclaim would stand to the extent that Wausau's
third-amended complaint repeated the allegations and claims of its second-
amended complaint. In its third-amended complaint, Wausau repeated the
allegations in its previous complaint and added several new counts seeking a
determination of noncoverage under the subject policies. In response, Ehlco
filed a motion to strike all of the new counts of the third-amended complaint,
arguing that the new claims were unsupported by sufficient factual
allegations. In addition, Ehlco sought to strike Wausau's jury demand.
On November 7, 1994, the trial court granted both of Ehlco's motions for
judgment on the pleadings, finding that there was coverage in favor of Ehlco
as to both sites. In its order, the trial court held that Wausau had a duty
to defend Ehlco in both underlying actions, and that Ehlco had breached that
duty. The trial court therefore held that Ehlco was estopped from raising any
policy defenses to coverage and from arguing that Ehlco had failed to satisfy
conditions precedent to coverage such as timely notice. The trial court also
granted Ehlco's motion to strike the new counts and allegations of Wausau's
third-amended complaint, apparently on the grounds that the new allegations
therein were conclusory and unsupported by allegations of fact, and because in
any event, Wausau was estopped from asserting any of the policy defenses in
those new counts because of its breach of its duty to defend. In sustaining
that motion, the court also said that "the court agrees with all of Ehlco's
arguments presented in this motion," which Wausau now construes to be a
determination that the court struck its jury demand as well. After the denial
of various post-trial motions to reconsider filed by Wausau (addressed more
fully below in our discussion of our jurisdiction to hear this appeal), Wausau
appealed.
I. THE UNDERLYING ACTIONS
As noted above, this case involves two underlying proceedings, one in
Wyoming and one in Mena, Arkansas. The Wyoming action was initiated against
Ehlco by the Union Pacific Railroad Company (Union Pacific), and the Arkansas
proceedings were initiated against Hines by the USEPA. Each underlying
proceeding involved allegations of contamination and property damage caused by
Ehlco-affiliated entities which operated industrial wood-treatment facilities
in Wyoming and in Arkansas and which allegedly dispersed hazardous wastes into
the environment.[fn1]
[Nonpublishable material under Supreme Court Rule 23 omitted.]
The question concerning Wausau's duty to defend with respect to the
USEPA's proceedings against Hines relating to the Mena site requires a more
complex analysis. Wausau would urge that it had no duty to defend in those
proceedings since they did not constitute a "suit" as defined by the subject
policies and under Illinois law. We agree. Our supreme court's decision in
Lapham-Hickey Steel Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520,
655 N.E.2d 842 (1995) is directly in point. In Lapham-Hickey, the relevant
coverage provisions required the insurer to defend "suits" against the
insured. In that case, the insured received a letter from the USEPA stating
that it was potentially responsible for the costs of an environmental cleanup,
and also received a draft consent order and a "no action" letter informing the
insured that it probably would not be held responsible for the costs of any
cleanup. None of those written documents led to the filing of any suit
against the insured. The Lapham-Hickey court reasoned that since the subject
policy employed the term "suit" in discussing the carrier's duty to defend, no
such duty would be invoked absent the filing of a suit against the insured in
"actual court proceedings." 166 Ill. 2d at 532, 655 N.E.2d at 847. On that
basis, the Lapham-Hickey court held that no duty to defend was triggered since
a "suit" exists in an environmental coverage context only when there has been
a proceeding against the insured filed in a court of law. The Lapham-Hickey
court stated that its holding was consistent with the manner in which courts
determine whether a duty to defend exists, i.e., by comparing the allegations
of the underlying complaint to the relevant policy provisions to see if
coverage is even potentially alleged by the pleadings. Without the filing of
a suit in a judicial proceeding, there would be no such complaint, and
therefore, no duty to defend would arise.
In the instant case, as in Lapham-Hickey, the Wausau policies state that
Wausau
"shall have the right and duty to defend any suit against the insured
seeking damages***[for] property damage, even if the allegations of the
suit are groundless, false or fraudulent ***."
As in Lapham-Hickey, here, because no suit was filed with respect to the
underlying USEPA proceedings concerning the Mena site prior to 1988, Wausau's
duty to defend was not triggered prior to that time. See also Fruit of the
Loom, Inc. v. Travelers Indemnity Co., 284 Ill. App 3d 485, 672 N.E.2d 278
(1996) (no duty to defend because no suit was filed in that no judicial
proceeding was commenced); Forest Preserve District of DuPage County v.
Pacific Indemnity Co., 279 Ill. App. 3d 728, 665 N.E.2d 305 (1996).
Ehlco would urge that Lapham-Hickey should not be applied retroactively
to the facts here since that case was decided after this action was filed and
after judgment was entered. However, it is well-settled that Lapham-Hickey is
to be given retroactive application. See Benoy Motor Sales, Inc. v. Universal
Underwriters Insurance Co, No. 96-0536, slip op. at 6 (Ill. App. Ct. April 10,
1997) ("Lapham-Hickey's requirement of a lawsuit to trigger the insurance
company's duty to defend is to be applied retroactively."); Fruit of the Loom,
284 Ill. App. 3d at 496, 672 N.E.2d at 286 ("Lapham-Hickey is to be given
retroactive application because the Supreme Court's opinion in Lapham-Hickey
did not state that it was prospective, and the opinion on its face applies to
the litigants in the Lapham-Hickey case."); Forest Preserve, 279 Ill. App. 3d
728, 665 N.E.2d 305. See generally Lannom v. Kosco, 158 Ill. 2d 535, 634 N.E.2d 1097 (1994) (supreme court has power to declare when a decision will
apply prospectively only, and in the past has said so expressly when it
intended for prospective application alone; supreme court's decisions apply
retroactively to cases pending at time decision is announced).
In addition, Ehlco apparently contends that by virtue of the filing of
the federal consent decree action, Wausau became retroactively responsible for
Hines' defense costs incurred in response to the USEPA's administrative
proceedings and investigation of the Mena site, dating back to the USEPA's
letter to Hines of March 18, 1982. In support, Ehlco relies upon the decision
of Detrex Chemical Industries, Inc. v. Employers Insurance of Wausau, 681 F. Supp. 438 (N.D. Ohio 1987) (federal district court decision, applying Ohio
law, stating that even if a "potentially responsible party" ("PRP") letter
does not constitute a suit, once a court action is filed pursuant thereto, the
insured becomes entitled to all defense costs retroactively, dating back to
the date of the PRP letter). We disagree.
It would seem that a pro forma lawsuit, which only serves to reduce to
judgment by agreement of the parties a settlement to which the parties had
already consented in an administrative proceeding, is but an extension or
implementation of that administrative proceeding. Consequently, to invoke
coverage for the filing of a lawsuit already consented to in a settlement
agreement in the underlying administrative action, where the outcome of that
lawsuit is pre-ordained by that agreement, would contravene the thrust of the
holding of Lapham-Hickey, which precludes any duty to defend against
administrative proceedings. Once a consent decree is fully agreed upon in the
underlying administrative settlement, a suit which is filed pursuant thereto
as a mere formality provides nothing to defend upon which to invoke any duty
to defend. Although Lapham-Hickey did not expressly address this issue, we do
not believe that in that case the court intended to extend the duty to defend
to non-adversarial suits in which the insured had already fully agreed with
the liabilities ultimately imposed by the court, which as a mere formality
legitimatized the agreement prepared by the parties prior to the filing of the
action.
In the instant case, Wausau avers in its brief that the consent decree
was entered into and fully executed prior to the filing of the federal action,
and that the decree was filed contemporaneously with the federal complaint.
Ehlco does not anywhere controvert these averments. Moreover, the signature
page of the consent decree bears the date of May 16, 1987, which purports to
be well in advance of the filing of the federal action in March 1988.[fn2]
The consent decree, when agreed upon, contemplated the filing of a federal
lawsuit in which the consent decree would be filed. Thus, the entry into the
consent decree prior to the filing of the federal suit completely neutralized
the anticipated federal action and rendered it non-adversarial in nature.
There is nothing on the face of the decree that is inconsistent with the
non-adversarial nature of the federal action in which it was contemporaneously
filed. The provisions of the decree wholly define and predetermine the full
nature and extent of the judicial action to be taken pursuant to the filing of
the lawsuit and the entry of the decree. As noted, the consent decree
provides in pertinent part as follows:
"This Consent Decree shall be lodged with the Court for a period
of 30 days for public comment pursuant to the provisions of 28
C.F.R. 50.7 and Section 122(i) of the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499, 100 Stat 1613
(1986)."
The decree further provided that
"the parties agree and the Court finds that settlement of these
matters without further litigation is in the public interest and
that the entry of this Decree is the most appropriate means of
resolving these matters."
In addition, the consent decree contained penalties for violations of the
decree to which the parties had stipulated. The decree also provided that the
federal court would maintain jurisdiction
"for the duration of this Consent Decree for the purposes of
issuing such further directions as may be necessary or appropriate
to construe, implement, modify, enforce, terminate, or reinstate
the terms of this Consent Decree ***."
As is apparent from its face, the consent decree was fully executed
prior to the filing of the federal action and was filed simultaneously with
it. Second, the role of the federal court was clearly limited and defined on
the face of the consent decree to the future enforcement of the settlement if
necessary, and did not call for any concurrent defense of the action by Ehlco.
Third, the decree provided its own stipulated penalties. Fourth, the stated
purpose of the federal action, as disclosed in the decree itself, was to
prevent any further litigation, and to permit the statutorily required "public
comment" on the terms of the settlement agreement. Hence, the federal consent
decree action was wholly non-adversarial, entered into by prior consent of the
parties to implement an agreement negotiated and executed in the underlying
prior administrative proceedings.
It is therefore apparent that Ehlco did not require any defense in the
federal consent decree action, since that action was filed by agreement of the
parties merely to reduce the settlement decree to an enforceable judgment
pursuant to the prior agreement of the parties, and since the insured's
liability in the lawsuit was a foregone conclusion, fully negotiated by the
parties prior to the filing of the action. We would further surmise that, if
anything, the cost of attorney fees actually incurred in the federal consent
decree action would at best be nominal, since every detail appears to have
been fully orchestrated pursuant to the settlement reached at the
administrative level prior to the filing of the implementational consent
decree action.[fn3]
Ehlco would further urge that the decision of our Supreme Court in
Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 607 N.E.2d 1204 (1992) precludes our finding that the federal consent decree
action here did not constitute a suit or therefore invoke Wausau's duty to
defend. We disagree. In Outboard Marine, the State of Illinois and the USEPA
each filed suit in federal court in 1978 against Outboard Marine Corporation
(OMC), the insured, alleging that in the course of its normal business
operations it had contaminated waters including Waukegan Harbor and Lake
Michigan. Those suits sought to enjoin OMC from further contaminating those
waters and to compel OMC to select and implement a safe and swift method of
cleaning them up. The governmental agencies ultimately moved for voluntary
dismissal of those actions, which the federal district court granted without
prejudice. Thereafter, in October 1988, those agencies both filed new federal
complaints against OMC, in which they made the same factual allegations as
those set forth in their initial complaints, and in which they prayed for
response costs and in addition damages under CERCLA. In April 1989, the
federal district court approved of and entered a consent decree which had been
negotiated and entered into by OMC, the EPA and the State of Illinois.
Pursuant to that decree, OMC was required to make payments into a trust fund
for the costs associated with the cleanup of the contaminated waters.
OMC tendered its defense of the underlying actions to its insurers
pursuant to the provisions of certain comprehensive general liability
insurance policies, but the insurers refused to defend, alleging that the
underlying actions were not covered under the policies. OMC therefore
defended itself and eventually negotiated and entered into the aforementioned
consent decree settlement, and then instituted its declaratory judgment action
against its carriers. In its declaratory suit, OMC sought a declaration that
its insurance carriers had duties to defend and indemnify it in the underlying
actions, and sought reimbursement for its underlying defense costs and
liabilities. The Outboard Marine court held in relevant part as follows:
"Liberty Mutual [one of OMC's primary carriers] initially asserts
that the governmental agencies' 1988 complaints are not involved
in this appeal and cannot be considered in determining whether the
insurers had a duty to defend OMC. However, it is clear from the
record that the 1988 complaints were before the trial court when
it ruled on OMC's motion for partial summary judgment and are,
therefore, part of the record on appeal. The 1988 complaints are
the only complaints which specifically pray for response costs and
damages pursuant to section 107 of CERCLA. Therefore, these 1988
complaints clearly constitute 'suits seeking damages.'
Accordingly, we hold that, absent an applicable policy exclusion,
Liberty Mutual had a duty to defend OMC and we affirm the
appellate court in this regard." Outboard Marine, 154 Ill. 2d at
112, 607 N.E.2d at 1214. (Emphasis supplied in original).
Ehlco would urge that this language from Outboard Marine regarding the
underlying 1988 complaints in that case precludes us from holding that the
federal action here was a non-adversarial "suit," insufficient to invoke
Wausau's duty to defend. In support, Ehlco has supplemented the record here
with Liberty Mutual's (a defendant-insurer in Outboard Marine) brief to our
supreme court in the Outboard Marine case, in which Liberty Mutual argued that
the consent decree settlement agreement involved in that case was filed
simultaneously with the underlying 1988 federal complaints and that therefore,
there was nothing for it to defend in the federal action. Ehlco would appear
to argue on the basis of the representations in that brief that since Liberty
Mutual was ultimately found to have had a duty to defend in Outboard Marine,
the fact that a consent decree may be filed simultaneously with a federal
action does not prevent such an action from constituting a "suit" sufficient
to trigger a duty to defend.
However, the above-referenced language from the Outboard Marine decision
is not susceptible to Ehlco's interpretation. Despite the statements in
Liberty Mutual's brief regarding the timing of the filing of the consent
decree settlement in that case, nowhere does the Outboard Marine decision
indicate or otherwise rely upon the date of the filing of the consent decree
in that case. Whatever the background facts and arguments consisted of in
Outboard Marine (i.e., as presented in the Liberty Mutual brief in that case),
the precedential value of that case can only be gleaned from how the court
there chose to present the facts and characterize the issues before it. As is
clear from the above-referenced passage, the court in Outboard Marine did not
concern itself with the issue of whether the federal consent decree action
involved in that case constituted a "suit" as that issue was raised and
addressed in the later decision of Lapham-Hickey with respect to an
administrative proceeding versus a court proceeding. Rather, the Outboard
Marine court was concerned with the issue of whether "damages" had been sought
against OMC in the underlying actions as required by the policies in question
in order to invoke Liberty Mutual's duty to defend. As noted above, the
Outboard Marine court distinguished between the 1978 federal actions against
OMC which sought solely equitable relief, and the 1988 federal actions which
sought monetary damages and thereby invoked Liberty Mutual's duty to defend.
Having distinguished Outboard Marine, as previously discussed, it follows from
the decision in Lapham-Hickey that a consent decree settlement memorialized in
a federal lawsuit does not give rise to an independent duty to defend, unless,
perhaps, it was shown that there was some complication in its implementation
that knocked the consent decree action out of its fixed orbit around the
settlement agreement, or that the federal lawsuit deviated from the consent
decree and took on a life of its own. Thus, since the USEPA's underlying
proceedings against Hines with respect to the Mena, Arkansas site did not
constitute a suit, we must conclude that no duty to defend arose which would
have obligated Wausau to participate in Hines' defense with respect to that
site. See Lapham-Hickey, 166 Ill. 2d 520, 655 N.E.2d 842.[fn4]
Wausau contends with respect to Ehlco's Mena claim that even if Lapham-
Hickey would not apply to preclude coverage, coverage would nevertheless be
precluded because of Ehlco's late notice. Wausau also contends that
notwithstanding our determination that the Wyoming action falls within the
coverage provisions of the policy, Wausau would nevertheless have no duty to
defend due to Ehlco's late notice with respect to that action. Wausau urges
that the trial court was in error in estopping it from asserting Ehlco's
breach of the timely notice provisions in the subject policies by reason of
Wausau's failure to undertake Ehlco's defense, since those provisions are
conditions precedent to any coverage and not subject to estoppel.
The purpose of a notice requirement is to enable the insurer to make a
timely and thorough investigation of a claim. INA Insurance Co. v. City of
Chicago, 62 Ill. App. 3d 80, 379 N.E.2d 34 (1978). Notice provisions are
considered valid conditions precedent to coverage, and should not be
considered mere technical requirements for the convenience of the insurer.
See Kerr v. Illinois Central Railroad Co., 283 Ill. App. 3d 574, 670 N.E.2d 759 (1996) (stating that compliance with notice provision is a condition
precedent to coverage and if breached, the insurer will not be liable under
the policy); Industrial Coatings Group, Inc. v. American Motorists Insurance
Co., 276 Ill. App. 3d 799, 658 N.E.2d 1338 (1995) (stating that the
requirement of timely notice is a condition precedent of the policy). See
also Millers Mutual Insurance Ass'n v. Graham Oil Co., 282 Ill. App. 3d 129,
668 N.E.2d 223 (1996); American Country Insurance Co. v. Cash, 171 Ill. App.
3d 9, 524 N.E.2d 1016 (1988); Equity General Insurance Co. v. Patis, 119 Ill.
App. 3d 232, 456 N.E.2d 348 (1983); INA Insurance Co., 62 Ill. App. 3d 80, 379 N.E.2d 34; City of Chicago v. United States Fire Insurance Co., 124 Ill. App.
2d 340, 260 N.E.2d 276 (1970). Whether an insured complied with its
contractual duty to notify its carrier of an occurrence is resolved by
determining whether a reasonably prudent person would have foreseen a lawsuit
and would have either contacted his attorney or his liability carrier. Graham
Oil Co., 282 Ill. App. 3d 129, 668 N.E.2d 223; Industrial Coatings Group, 276
Ill. App. 3d 799, 658 N.E.2d 1338; Twin City Fire Insurance Co. v. Old World
Trading Co., 266 Ill. App. 3d 1, 639 N.E.2d 584 (1993). Prejudice to the
insurer from late notice of an occurrence is only a factor to be considered in
determining whether notice was reasonable. Graham Oil Co., 282 Ill. App. 3d
129, 668 N.E.2d 223. Whether an insured has been given reasonable notice
usually is a question for the trier of fact, and becomes a question of law for
the court only when the facts are undisputed. See generally University of
Illinois v. Continental Casualty Co., 234 Ill. App. 3d 340, 599 N.E.2d 1338
(1992).
As noted, a liability carrier has a duty to defend an action which
alleges a claim that potentially comes within the coverage of the policy, even
where the facts ultimately show that no coverage is available. Outboard
Marine Corp., 154 Ill. 2d 90, 607 N.E.2d 1204; Zurich Insurance Co., 118 Ill. 2d 23, 514 N.E.2d 150; Sundance Homes, Inc., 238 Ill. App. 3d 335, 606 N.E.2d 326; Western Casualty & Surety Co., 179 Ill. App. 3d 752, 534 N.E.2d 1066.
The breach of that duty will estop the carrier from arguing policy defenses to
coverage in a later declaratory action brought against it. Murphy, 88 Ill. 2d 444, 430 N.E.2d 1079; Peppers, 64 Ill. 2d 187, 355 N.E.2d 24; M/A Com, 187
Ill. App. 3d 358, 543 N.E.2d 228; Sims, 43 Ill. App. 2d 184, 193 N.E.2d 123.
The first question presented here is whether a carrier which has failed
to defend or reimburse its insured in an underlying action or to file a timely
declaratory judgment action is estopped under the foregoing rule from arguing
conditions precedent to coverage such as the requirement of timely notice.
Illinois courts are divided on this issue. On the one hand, there is a line
of cases which support Wausau's position that a carrier is not estopped from
asserting that it had no duty to defend or to indemnify due to late notice
since the giving of timely notice is a condition precedent to coverage. See
Industrial Coatings Group, 276 Ill. App. 3d 799, 658 N.E.2d 1338; M/A Com Inc.
v. Perricone, 187 Ill. App. 3d 358, 543 N.E.2d 228 (1989); Del Grosso v.
Casualty Insurance Co., 170 Ill. App. 3d 1098, 524 N.E.2d 1042 (1988); City of
Chicago v. United States Fire Insurance Co., 124 Ill. App. 2d 340, 260 N.E.2d 276 (1970); International Environmental Corp. v. National Union Fire Insurance
Co., 860 F. Supp. 511 (N.D. Ill. 1994); and La Salle National Trust, N.A. v.
Schaffner, 818 F. Supp. 1161 (N.D. Ill. 1993). See also D. Caswell and M.
Warnick, The Illinois Insurer Estoppel Doctrine: The Consequences of Wrongful
Denial of the Duty to Defend, 7 Environmental Claims Journal 5 (Summer 1995)
(stating that where an insurer fails to file a declaratory action or defend
under a reservation of rights, it need not be estopped from introducing
extrinsic evidence of the insured's breach of a condition precedent to
coverage such as timely notice as a defense to any coverage in a subsequent
coverage action).
On the other hand, there is a line of cases which appear to be aligned
with Ehlco's position that due to its alleged failure to defend Hines or to
file a timely declaratory action, Wausau is estopped from asserting any policy
coverage defenses, including that of late notice. See La Rotunda v. Royal
Globe Insurance Co., 87 Ill. App. 3d 446, 408 N.E.2d 928 (1980); McFadyen v.
North River Insurance Co., 62 Ill. App. 2d 164, 209 N.E.2d 833 (1965);
Maneikis v. St. Paul Insurance Co., 655 F.2d 818 (7th Cir. 1981); Petersen
Sand & Gravel, Inc. v. Maryland Casualty Co., 881 F. Supp. 309 (N.D. Ill.
1995); and Attorney's Title Guaranty Fund, Inc. v. Maryland Casualty Co., No.
90 C 3916 (N.D. Ill. August 23, 1991). See also Central Mutual Insurance Co.
v. Kammerling, 212 Ill. App. 3d 744, 571 N.E.2d 806 (1991). See generally S.
Nardoni and J. Vishneski, The Illinois Estoppel Doctrine: Illinois Courts
Make it Costly for Insurers To Breach Their Duty To Defend, 8 Environmental
Claims Journal 45 (Autumn 1995) (hereinafter, the title to this article will
be referred to by the names of its authors, Nardoni and Vishneski).
Based upon our review of these authorities, we find those cases which
support Wausau's view to be more persuasive. Nardoni and Vishneski have
articulated the rationale of Ehlco's line of cases, which would invoke
estoppel to preclude the interposition of a late notice defense, as being an
extrapolation of the general principal of estopping an insurer who breaches
his duty to defend from then seeking to interpose defenses. In order to
preserve that rule, they would make no distinction between late notice
defenses and other defenses to coverage. They further state that to permit an
insurer to refuse to defend its insured while conducting an inquiry into facts
extrinsic to the underlying complaint regarding late notice would leave the
insured unprotected while the insurer decides whether to provide a defense.
In support, the article states that
"[c]reating an exception to the rule for condition precedent-type
defenses would destroy the effectiveness of the [estoppel] rule.
It would permit carriers to safely deny their duty to defend,
without fear of estoppel, as long as they include a 'late notice'
*** condition precedent defense in their denial letter. This
would instruct all insurance company claims representatives to
include such defenses in their denial of coverage letters in every
case. The exception would swallow the rule whole." Nardoni and
Vishneski, The Illinois Estoppel Doctrine, at 56.
The better reasoned cases, however, would challenge these assertions.
The general rationale for the invocation of the estoppel rule is that it
prevents an insurer who has breached the duty to defend provision in its
policy from relying on other policy defenses in that insurance contract which
it has already repudiated. Murphy, 88 Ill. 2d 444, 430 N.E.2d 1079; Peppers,
64 Ill. 2d 187, 355 N.E.2d 24; M/A Com, 187 Ill. App. 3d 358, 543 N.E.2d 228;
Sims, 43 Ill. App. 2d 184, 193 N.E.2d 123. However, where conditions
precedent to coverage are involved, including the requirement to serve timely
notice (see Kerr, 283 Ill. App. 3d 574, 670 N.E.2d 759; Industrial Coatings,
276 Ill. App. 3d 799, 658 N.E.2d 1338), the argument is reversed. First, the
insurance contract does not take effect without timely notice. Second, the
party in breach is the policyholder, not the insurer
Thus, it would be conceptually incoherent to permit estoppel to arise
where a duty to defend may well not have been breached because of the prior
breach by the insured of a condition precedent regarding the giving of timely
notice. The insured's breach of the timely notice provision, if proven, would
preclude the vesting of any right in the insured to a defense and any
correlative duty to defend on the part of the insurer. In that regard, we
note that the estoppel rule initially germinated in a context where the
allegations of the underlying complaint were sufficient to invoke the
possibility that the underlying cause of action, if proven, would fall within
the coverage provisions of the policy. Murphy, 88 Ill. 2d 444, 452, 430 N.E.2d 1079, 1083 ("The starting point of analysis under either the general
rule of estoppel or the exception is the same-the allegations of the
complaint"); Peppers, 64 Ill. 2d 187, 193, 355 N.E.2d 24, 28 ("In determining
whether the insurer owes a duty to defend *** it is the general rule that the
allegations of the complaint determine the duty"); Federal Insurance Co. v.
Economy Fire & Casualty Co., 189 Ill. App. 3d 732, 735, 545 N.E.2d 541 (1989)
("In determining whether an insurer owes a duty to defend the insured, courts
look to the four corners of the complaint brought against the insured").
However, the allegations in the underlying complaint against the policyholder
would not ordinarily contain assertions pertaining to the timely notice issue,
since the underlying complaint would not, and, under ordinary circumstances,
could not, deal with matters pertaining to the insurability of the underlying
tort defendant. Rather, resolution of that issue would require a
consideration of matters wholly extrinsic to the underlying complaint. See D.
Caswell and M. Warnick, The Illinois Insurer Estoppel Doctrine: The
Consequences of Wrongful Denial of the Duty to Defend, 7 Environmental Claims
Journal 5 (Summer 1995). Furthermore, where the question is whether the
allegations in the underlying tort complaint fall within the coverage
provisions of the policy, the facts proving or disproving coverage would
ordinarily be revealed and established during the course of the trial of that
action. Not so those matters pertaining to timely notice, since the question
of timely notice is irrelevant in the context of the underlying tort
litigation.
Any concern that the Illinois estoppel rule will be vitiated by our
holding ignores the fact that carriers would only escape the consequences of
being estopped from contesting their duty to defend or pay the cost of defense
if the court ultimately sustains their condition precedent defense based on
late notice, a defense to which they then would have been clearly entitled.
Furthermore, the estoppel rule remains in full force and effect with respect
to all other defenses.
The decisions in M/A Com Inc. v. Perricone, 187 Ill. App. 3d 358, 543 N.E.2d 228 (1989) and Industrial Coatings Group, Inc. v. American Motorists
Insurance Co., 276 Ill. App. 3d 799, 658 N.E.2d 1338 (1995) are wholly in
point. In M/A Com, the insurer refused to defend the insured on late notice
grounds. Thereafter, the underlying tort plaintiff received a judgment
against the insured and brought garnishment proceedings against the insurer,
urging that the insurer was estopped from asserting late notice as a defense
to payment under its policy because it had breached its duty to defend the
insured. The M/A Com court rejected that argument, stating that the insurer
was not estopped from establishing that a breach of the subject policy's
timely notice provision precluded any coverage. In so holding, the M/A Com
court stated as follows:
"The case at bar represents a departure from the typical policy
coverage case exemplified by Sims [Sims v. Illinois National
Casualty Co., 43 Ill. App. 2d 184, 193 N.E.2d 123 (1963)]. This
case involves an alleged breach of contract not by the insurer,
but rather by the insured. In our estimation, this difference
does not affect the proposition of law to be applied. The
essential proposition of law stated in Sims is that an insurer
which has breached its duty under the policy to defend the insured
is estopped from later asserting any provision of the policy as a
defense. That proposition is based upon the general principle of
contract law that a party which has breached the terms of a
contract may not rely on other terms of the same contract.
[Citations.] By estopping the insurer from raising the
affirmative defense [of late notice], the trial court never
reached the issue of whether the insured did in fact breach the
policy and thereby relieve the insurer of its duty to defend. The
court apparently accepted the plaintiff's position that the
insurer is in all cases obligated to either defend under a
reservation of rights or seek a declaratory judgment as to the
scope of its duty to defend. The duty to defend, although broad,
is not boundless. The doctrine of estoppel arises only where a
duty to defend exists and has been breached by the insurer. It
does not prevent the insurer from raising the issue of whether it
did in fact breach a duty to defend its insured. M/A Com, 187
Ill. App. 3d at 361-62, 543 N.E.2d at 231.
As in M/A Com, in Industrial Coatings, the insurer refused to defend its
insured in an underlying USEPA potentially responsible party (PRP) action and
failed to file any declaratory judgment action on late notice grounds. The
insured ultimately filed a declaratory judgment action almost three years
after it first sent notice to the insurer of the underlying matter.
Thereafter, the insurer filed a motion for summary judgment in which it urged
that despite its inaction and refusal to defend, it should not be estopped
from asserting its late notice defense as a bar to defense or indemnification
coverage. The trial court granted that motion. The Industrial Coatings court
affirmed, stating that in order for estoppel to apply, the insurer must first
be found to have had a duty to defend, and then must be found to have breached
that duty. The Industrial Coatings court cited to M/A Com in support of its
conclusion that if an insurer could show that the insured breached its duty to
provide timely notice, it would be relieved of its duty to defend and estoppel
would not apply. Accord Del Grosso v. Casualty Insurance Co., 170 Ill. App.
3d 1098, 524 N.E.2d 1042 (1988) (holding that an insurer should not be
estopped from raising the late notice issue although it had neither defended
the insured in the underlying lawsuit nor filed a declaratory judgment
action.).
Based upon the rationale and holdings in M/A Com and Industrial
Coatings, here, Wausau should have been given the opportunity to establish
that its insured breached a condition precedent to coverage.[fn5] As noted
by the court in M/A Com, the duty to defend is not boundless. Just as an
insurer that breaches the terms of its policy should not be permitted to rely
on other terms of the same policy to deny coverage, an insured that breaches a
condition precedent to policy coverage should not be permitted to invoke the
coverage provisions of that same policy. See also United States Fire
Insurance Co., 124 Ill. App. 2d 340, 260 N.E.2d 276; International
Environmental Corp., 860 F. Supp. 511; Schaffner, 818 F. Supp. 1161.[fn6]
Hence, the trial court erred in precluding Wausau from arguing whether the
insured had breached the notice provisions of the applicable policies with
respect to the underlying Wyoming action and, for that matter, with respect to
the Mena action as well.[fn7]
[Nonpublishable material under Supreme Court Rule 23 omitted.]
For the foregoing reasons, the judgment of the Circuit Court of Cook
County is reversed and remanded for proceedings in accordance herewith.
Reversed and remanded.
COUSINS, P.J. and LEAVITT, J., concur.
[fn1] This opinion is only an excerpt of a memorandum decision running 95
pages in length. In order to comply with appellate court page limitations
specified by revised Supreme Court Rule 23 (Official Reports Advance Sheet No.
15 (July 20, 1994), R. 23, eff. July 1, 1994), we have omitted in excess of 15
pages from our statement of facts, and in excess of 50 pages of discussion
involving more than 18 separate issues. Consequently, the published
discussion portion of this decision only addresses the following two issues:
(1) the question of Wausau's duty to defend in the underlying Mena, Arkansas
proceedings under the recent decision of our supreme court in Lapham-Hickey
Steel Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520, 655 N.E.2d 842 (1995); and (2) whether Wausau is precluded from interposing a defense
predicated upon the delayed notification of claims by its insured.
The unpublished portion of this memorandum decision addresses, among
other things, the subject matter jurisdiction of this court on appeal in light
of the contention that the judgment at the trial level lacked finality;
whether the allegations of the underlying Union Pacific complaint in Wyoming
were sufficient to invoke a duty to defend; whether the facts support the
contention that the carrier was served with late notice; the impact of a non-
waiver agreement upon the rule that a breach of a duty to defend will estop
the carrier from invoking defenses to coverage; the impact of the filing of a
declaratory judgment action upon the foregoing estoppel rule, including the
question as to when the declaratory judgment action must be filed to preclude
invocation of the estoppel rule; whether prejudice is required to invoke
estoppel; when the invocation of estoppel can, if at all, permit recovery in
excess of policy limits; the sufficiency of Ehlco's tender of its defense; as
well as numerous other more incidental matters.
Because of these omissions, there may be gaps in the continuity of the
aforementioned published excerpts. However, a full, unabridged text of this
decision is on file with the clerk of this court under Docket No. 95-1337.
[fn2] The parties did not refer to these dates, but no one contravenes
the assertion by Wausau that the execution of the consent decree preceded the
filing of the federal action and that the consent decree was filed
contemporaneously with that action.
[fn3] Ehlco also apparently contends that Wausau is estopped from
denying that a suit was filed in the underlying Mena proceedings and from
denying that therefore, no duty to defend was invoked since, according to
Ehlco, Wausau made statements in its pleadings to the contrary. In support,
Ehlco refers to Wausau's third-amended complaint, wherein Wausau stated that
the USEPA filed suit against Hines in 1988 in Arkansas. However, this
statement cannot reasonably be construed as an admission by Wausau that the
USEPA administrative proceedings invoked Wausau's duty to defend, nor, for
that matter, as an admission that the 1988 federal consent decree action
invoked Wausau's duty to defend.
[fn4]Since we conclude that Wausau's duty to defend was not
invoked by the underlying USEPA administrative proceedings or the
federal consent decree action against Ehlco, we need not address
Ehlco's contention that under the aforementioned Detrex decision,
the filing of the federal action entitled them to defense costs
both for the defense of that action and retroactively, for the
defense of the USEPA administrative proceedings leading up to
that action. Under the holding in Detrex, the question as to
whether an insured would be entitled to such a retroactive
payment of defense costs would not arise unless the insurer's
duty to defend has been invoked in the first instance.
[fn5]We note at this juncture that the same reasoning with
respect to conditions precedent and timely notice also applies to
Wausau's interposition of the "suit" defense under Lapham-Hickey.
Consequently, we agree with Wausau's contention that the trial
court erred in striking its allegations regarding the suit issue
from Wausau's third amended complaint. As noted, in its November
7, 1994 order, the trial court granted Ehlco's motion to strike
all of the new counts in that complaint, including the suit
issue, apparently because the court had found that Wausau had
breached its duty to defend, and was therefore estopped from
arguing any policy defenses. The trial court also stated in
striking those claims that it agreed with the arguments in
Ehlco's motion to strike, which as noted alleged that Wausau's
new claims were unsupported by allegations of fact. However, the
trial court's estoppel of Wausau to argue the suit issue was
erroneous since, as with the timely notice issue, no duty to
defend is triggered in the first instance unless a suit has been
filed against the insured. See generally Lapham-Hickey Steel
Corp. v. Protection Mutual Insurance Co., 166 Ill. 2d 520, 655 N.E.2d 842 (1995); Fruit of the Loom, Inc. v. Travelers Indemnity
Co., 284 Ill. App 3d 485, 672 N.E.2d 278 (1996). Moreover, the
suit defense alleged in the third-amended complaint stated
sufficient facts to withstand a motion to strike. As noted, in
its complaint, Wausau specifically set forth the facts regarding
the 1982 USEPA letter informing Hines that it was potentially
responsible for the Mena cleanup, and further specified that in
1988, the USEPA filed its consent decree action in federal court
in Arkansas. Wausau then alleged that under these facts, it had
no duty to defend because no suit had been filed as defined by
its policies. Wausau could not have provided more complete
allegations on this issue.
[fn6] Ehlco would urge in particular that the decision in Central
Mutual Insurance Co. v. Kammerling, 212 Ill. App. 3d 744, 571 N.E.2d 806
(1991) supports its position that Wausau must be estopped from arguing the
late notice issue. We disagree, as that case is distinguishable. In
Kammerling, the insurer received the insured's tender of defense and notified
the insured that it was reserving its rights due among other reasons to the
late notice of the loss. The insurer indicated that it would proceed with a
declaratory judgment action against its insured and explicitly recognized its
obligation to provide a defense until that declaratory action had been
resolved. The carrier further indicated that it would file an additional
appearance on behalf of the insured in the underlying matter (the insured was
being represented by another carrier). However, the carrier did not file its
declaratory judgment action until several months had passed, and in the
interim, never filed an appearance for the insured or participated in any way
in the underlying defense.
On appeal, the Kammerling court held that the insurer was estopped from
asserting a late notice defense due to "[t]he peculiar facts of this case"
(Kammerling, 212 Ill. App. 3d at 749, 571 N.E.2d at 809), insofar as the
insurer acknowledged its duty to defend under a reservation of rights and in
fact indicated that it would file a declaratory judgment action and honor its
defense obligations until the resolution of that action. Unlike in
Kammerling, here, Wausau did not acknowledge its duty to defend, nor did it
represent that it would file a declaratory judgment action or, for that
matter, file an appearance on behalf of its insured and otherwise participate
in the underlying defense.
[fn7]Wausau also contends that the cooperation, mitigation
and voluntary payments clauses in its policies are conditions
precedent to coverage which it should not have been estopped from
arguing and which should have precluded judgment on the
pleadings. We disagree. We first note that in making this
argument in its brief, Wausau provides no factual basis for
asserting that Ehlco failed to cooperate with Wausau, to mitigate
the underlying claims made against it, or that Ehlco voluntarily
made any payments which it was not legally required to make. In
addition, Wausau has not cited to any cases which support its
proposition that those clauses are conditions precedent to
coverage. The one case which Wausau did cite in support of this
argument, Waste Management, Inc. v. International Surplus Lines
Insurance Co., 144 Ill. 2d 178, 579 N.E.2d 322 (1991), is
inapposite. That decision merely states with respect to the
cooperation clause that under its auspices, an insured must
disclose to its insurer the contents of communications which the
insured had with defense counsel representing them on a claim for
which their insurer had the ultimate duty to satisfy. Because in
making this argument Wausau has failed to apply its legal
conclusions to the facts of this case and has merely cited to one
irrelevant decision in support of this argument, it is waived.
See, e.g., Illinois Supreme Court Rule 341(e)(7) (134 Ill. 2d R.
341(e)(7)); In re Marriage of Winton, 216 Ill. App. 3d 1084, 576 N.E.2d 856 (1991) (where party cited to only one case which was
inapposite in support of its argument, the court held that the
argument was waived under Rule 341(e)(7)).
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
