Recent Developments In Illinois Insurance Law
December, 2002
No Indemnity Owed Where Response Costs Paid Voluntarily
Northern Ill. Gas Co. v. Home Ins. Co., 777 N.E.2d 417 (Ill. App. 2002)
Facts
NICOR sued its liability insurers to recover costs it incurred investigating and remediating environmental contamination at six manufactured gas plant (MGP) sites. The MGPs were in operation as early as the mid 1800s. One of the by-products of the gas manufacturing process was tar, which was either sold or stored underground at the MGPs. In the 1900s, the introduction of natural gas made manufactured gas production obsolete. By the early 1950s, the facilities were no longer operational. Although the owners made efforts to extract some of the tar from the underground containers, some tar remained when the MGPs were closed. Eventually, coal tar and coal tar water was released from the containers contaminating the groundwater, soil and the surrounding environment.
In 1987, the Illinois Environmental Protection Agency (IEPA) informed Illinois utility companies that the companies “may want to investigate” potential environmental problems at MGPs under their control. This request was voluntary as opposed to action under 415 ILCS 5/4(q) wherein IEPA provides notice of a potential adversarial action. In 1992, NICOR began to enroll its sites into the IEPA’s voluntary cleanup program. NICOR’s suit sought reimbursement from its insurers for the costs incurred during the remediation and cleanup of its MGPs. All of the policies issued to NICOR contained language similar to the following:
Underwriters hereby agree to indemnify the Assured for all sums which the Assured shall be obligated to pay by reason of the liability imposed upon by law for damages on account of property damage caused by or growing out of each occurrence.
“Occurrence” was defined as “one happening or series of happenings, arising out of or due to one event taking place during the term of this policy.” None of the policies in question were in effect during the time the NICOR MGPs were operational.
Some of the insurers moved for summary judgment on the ground that NICOR was not “legally obligated to pay” for the investigation and remediation of these sites as the policies required. NICOR argued that it was legally obligated to pay the cleanup costs by reason of liability imposed by law or, alternatively, because the cleanup was conducted in consultation with the IEPA.
Analysis
After conducting an extensive review of law from various jurisdictions, the court followed the holding of Certain Underwriters at Lloyd’s of London v. Superior Court, 16 P.3d (Cal. 2001), wherein the Supreme Court of California determined that “an insurer’s duty to indemnify the insured under a standard comprehensive general liability insurance policy for ‘all sums that the insured becomes legally obligated to pay as damages’ is limited to money ordered by a court.” The California court held that “while the immediate cleanup of environmental contamination should be encouraged, the polluter should not be allowed to shift to the insurer some or all of the costs that might be imposed on the insured at the end of a proceeding conducted by an administrative agency pursuant to an environmental statute.”
Noting that Illinois courts have held that one does not become legally obligated to pay damages until a judgment or settlement is reached, the appellate court concluded that the cost of the voluntary cleanup did not constitute damages NICOR was “legally obligated to pay.” NICOR voluntarily undertook the cleanup efforts, and the involvement of the IEPA was non-adversarial and did not amount to a court judgment against NICOR. As a result, the insurers were not required to indemnify NICOR for its voluntary actions.
Learning Point:
A volunteer is not entitled to reimbursement of funds expended in cleaning up a facility under standard CGL policy language.
No Duty To Defend Construction Defects Action
State Farm Fire & Cas. v. Tillerson, 777 N.E.2d 986 (Ill. App. 2002)
Facts
Tillerson was insured under a contractor’s liability policy issued by State Farm. Tillerson entered into a contract with the Gauses to build an addition to their home and convert an existing carport into a garage. After the project was completed, the Gauses filed suit against Tillerson alleging that they were injured as a result of Tillerson’s breach of an express warranty of workmanship, breach of an implied warranty of habitability, and breach of an implied warranty of fitness for ordinary and particular purpose due to Tillerson building over a cistern and failing to take the necessary precautions to prevent the uneven settling of soil beneath the addition. Tillerson tendered his defense to State Farm under the CGL policy.
Analysis
The appellate court reviewed several issues including (1) whether the claims of breach of an express warranty of workmanship, breach of an implied warranty of habitability, and breach of an implied warranty of fitness for ordinary and particular purpose alleged an “occurrence” as defined under the liability policy, and (2) whether the claims alleged “property damage” as defined by the policy.
The policy applied “only to bodily injury or property damage caused by an occurrence . .” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions which result in bodily injury or property damage.” Although use of the word “occurrence” in insurance policies broadens coverage and eliminates the need to find an exact cause of damages, as long as they are neither intended nor expected by the insured, the occurrence must still be accidental.
The Gauses’ complaint alleged that Tillerson’s work was “defective in design, material[,] and workmanship.” The court held that where the defect is no more than the natural and ordinary consequences of faulty workmanship, it is not caused by an accident. The construction defects set forth in the Gauses’ complaint were the natural and ordinary consequences of improper construction techniques, failing to properly compact the soil and failing to fill or remove a cistern under the ground prior to construction.
CGL policies are intended to protect the insured from liability for injury or damage to the persons or property of others; they are not intended to pay the costs associated with repairing or replacing the insured’s defective work and products, which are purely economic losses. Finding coverage for the cost of replacing or repairing defective work would transform the policy into something akin to a performance bond.
The court further held the Gause complaint did not allege “property damage.” It merely sought the repair or the replacement of defective work or the diminishing value of the home. This represented only an economic loss, not physical injury to tangible property. While noting that the only alleged damage was to the single structure upon which Tillerson worked, the court stated “[c]overage under contractor general liability policies is for tort liability for damage to other property, not for the insured’s contractual liability for economic loss.” Consequently, State Farm had no duty to defend Tillerson.
Learning Point:
A contractor who fails to properly construct a building or whose work is inferior is not entitled to coverage under a CGL policy, which affords coverage only for property damage or bodily injury that results from the insured’s work, not repair of the work.
Workplace Gender Discrimination Excluded By Commercial Umbrella Policy
Dobbs v. State Farm Fire and Cas. Co., 773 N.E.2d 1251 (Ill. App. 2002)
Facts
Gail Hite was terminated from her employment with Southern Illinois Otolaryngology, Inc. (SIO). After her termination, she filed a complaint against SIO and another employee, Dr. Dobbs, alleging that she was fired on the basis of gender discrimination. She sought back wages and reinstatement to her job. Hite became pregnant during her SIO employment and claimed that Dr. Dobbs was the child’s father. She alleged that her employment termination was retaliatory because of her pregnancy.
Hite voluntarily dismissed her suit against Dr. Dobbs and SIO, who requested reimbursement of their defense costs from State Farm under an umbrella policy. State Farm denied coverage on the basis that there were no allegations in the complaint of bodily injury, property damage or personal injury as defined by the policy. Dr. Dobbs and SIO sued State Farm seeking to recover defense costs and monetary penalties for State Farm’s alleged bad faith denial.
Analysis
On appeal, the court found that the policy defined personal injury to include racial or religious discrimination, which did not include gender discrimination. The court held that even if gender discrimination did fall within the definition, the State Farm policy contained an endorsement which specifically stated that the policy did not apply to liability arising out of “discrimination, humiliation and mental anguish.”
Plaintiffs argued that the policy’s personal injury exclusion for discrimination liability conflicted with a sexual molestation endorsement that provided coverage for damages arising out of any actual, alleged or threatened act of sexual misconduct, resulting in an ambiguity which should be construed against State Farm and in favor of coverage. Plaintiffs argued that the term “sexual misconduct” encompassed everything but rape, fondling and molestation and thus covered pregnancy and gender discrimination. The court disagreed, holding that the connotation of the word “sexual,” when used as an adjective to the word “misconduct,” is different than when that same word is used as an adjective to the word “discrimination”: “sexual” in “sexual misconduct” refers to prurient conduct while “sexual” in “sexual discrimination” refers to a human’s gender.
Learning Point:
Gender discrimination cannot properly be considered “sexual misconduct” so as to establish coverage under a CGL policy endorsement.
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