Illinois Third District Appellate Court Finds Coverage For Voluntary Cleanup, Rejecting Carus And Nigas
January, 2004
The Illinois Appellate Court, Third District holds that a suit is not required and that voluntary payment of environmental remediation costs is sufficient to establish an insurer’s indemnity obligation in Central Illinois Light Co. v. The Home Ins. Co., 795 N.E.2d 412 (Ill. App.).
Facts
Central Illinois Light Company (“CILCO”) sought indemnification under CGL policies issued between 1948 and 1985 by The Home Insurance Company (“Home”) and Certain London Market Insurers (“CLMI”) for environmental liabilities at three former manufactured gas plants (“MGPs”). The liabilities arose from three Illinois sites where gas was manufactured from the 1850’s to the 1930’s. One of the main by-products of these gas making processes was tar, which was generally extracted, stored and sold at the three sites. There were various tar containment structures at each site, which were generally underground and built of masonry, concrete or metal. In the mid-1900’s, MGPs began to be dismantled with the creation of natural gas pipelines. During the dismantling processes, the covers of the structures were removed and the tar was extracted and sold. Not all of the tar could be removed, however, and significant amounts of tar remained in the structures which were filled with building debris or other materials. The underground containment structures eventually leaked tar into the soil which caused soil and groundwater contamination.
When CILCO found out about the contaminated sites, it voluntarily entered into an agreement with the Illinois Environmental Protection Agency (IEPA) and spent over $5 million to investigate, remediate and mitigate environmental property damage at the MGP sites. Consequently, CILCO became subject to specific IEPA guidelines and instructions on how to proceed with the investigation and cleanup. CILCO eventually completed all cleanup work and was released from further responsibility under the Illinois Environmental Protection Act. CILCO maintained that the property damage occurred at the MGP sites during the period of defendants’ policies and filed claims under various insurance policies for indemnification of costs incurred.
CILCO’s Home and CLMI policies provided coverage for sums CILCO became liable to pay with respect to occurrences of property damage. One of the Home-issued policies was a first layer excess policy (indemnifying costs exceeding $100,000), and two were second layer excess (indemnifying 10% of costs in excess of $1 million up to $4 million). There were many CLMI policies, lower and excess layer, dating back to 1948. CILCO was able to provide policy wording for some but not all of these policies. Both insurance companies argued they were not required to indemnify CILCO for environmental cleanup expenses. They argued that the language of the policies required the insured to have a “legal obligation” to pay before the insurance company was required to indemnify the insured, and that this legal obligation had to arise from a legal proceeding such as a lawsuit. The trial court agreed, reasoning that the insurer was not legally obligated to pay because no “suit” had been filed against the insured.
Appellate Analysis
I. The Requirement of a “Suit”
CILCO contended that the trial court’s ruling was contrary to the plain language of CILCO’s indemnity-only policies, which did not require a “suit” but only a “legal obligation” to pay for “damages” for property damage. The Third District Appellate Court agreed with CILCO that the trial court erred in finding that a “suit” was required for indemnity to attach under the policies at issue. The court noted that “the plain language of the insurance policies sold to CILCO did not require that a “suit” be brought in order for the indemnity obligation to arise.” Additionally, the court pointed out that the word “suit” was nowhere to be found in any of the policies at issue. Ultimately, the court held that a “suit” is not required before Home or CLMI has an obligation to indemnify CILCO for CILCO’s environmental cleanup, voluntary or not.
II. “Legally Obligated to Pay”
CILCO further asserted that it was legally obligated to remediate the environmental contamination at the MGP sites under certain federal and state environmental laws and regulations. The insurers argued, inter alia, that under Illinois law, where the insured incurs investigation and remediation costs pursuant to a voluntary program, the insured has not been legally obligated to pay those expenses and is not entitled to coverage, citing Outboard Marine Corp. v. Liberty Mutual Insurance Co. 154 Ill. 2d 90 (1992); Lapham-Hickey Steel Corp. v. Protection Mutual Ins. Co. 166 Ill. 2d 520 (1995); Zurich Ins. Co. v. Carus, 293 Ill. App. 3d 906 (1997); and Northern Illinois Gas Co. v. The Home Insurance Co., 334 Ill. App. 3d 38 (2002).
In Carus, the insurer sought a declaration as to whether it owed its insured (“Carus”), a chemical manufacturer, reimbursement for expenses incurred during an investigation of possible soil and groundwater contamination under CGL policies similar to those in CILCO. The issue was whether the insurers were required to indemnify Carus for expenses incurred while participating in the IEPA site remediation program. The First District Appellate Court held that “the insurers had no duty to defend or indemnify the insured because the language in the policies required the environmental agencies to initiate a proceeding in a court of law in order for coverage to apply.” Carus cited Outboard Marine and Lapham-Hickey for the principle that the insurer’s duty to defend and indemnify is triggered by a suit against the insured and that in the absence of a suit, no duty exists.
In NIGAS, plaintiff bought CGL policies from various insurers. Like Carus, the NIGAS policies are similar to CILCO’s. NIGAS voluntarily investigated and cleaned up several of its contaminated MGP sites during the policy periods and then sought reimbursement from its insurers. An IEPA official testified that even though the IEPA informed utility companies that they may want to investigate potential environmental contamination problems, they were not legally obligated to enroll in any programs. The NIGAS court held that “the enrollment of MGP sites in the IEPA’s voluntary clean-up programs was not a liability imposed on the policyholder by law, as required by third-party indemnity policies that have no duty to defend.”
CILCO rejects Carus and NIGAS as wrongly decided and further states that Outboard Marine and Lapham-Hickey do not stand for the rule that where the insured incurs investigation and remediation costs pursuant to a voluntary program, the insured is not legally obligated to pay those expenses and is not entitled to coverage. The Third District instead found that the concept of “legal obligation” or “legally imposed by law” (as used in the policies at issue) is broader than the existence of a suit or a judgment and thus the trial court erred in finding that CILCO was not legally obligated to remediate the environmental contamination at the MGP sites as both CERCLA and the IEPA mandate the cleanup and remediation performed by CILCO.
Learning Point:
Under CILCO, a suit is not required in order to trigger an insurer’s duty to indemnify its insured. The insured only has to become legally obligated to pay damages for property damage. CILCO declined to follow the earlier decisions of Carus and NIGAS , which held that an insurer’s duty to defend and indemnify is only triggered by a suit, and in the absence of a suit, no duty exists. We will monitor and report on the Illinois Supreme Court’s resolution of this split of appellate authority once it issues an opinion in the CILCO appeal.
Editor’s Note:
This decision conflicts with existing appellate authority and has been accepted for review by the Illinois Supreme Court. ¨
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