CILCO Decision - Expenditures In Response To Strict Liability Regulations Constitute “Damages” Under Excess Liability Policies
December, 2004
In Central Ill. Light Co. v. The Home Ins. Co., 2004 Ill. LEXIS 2033 (Dec. 2, 2004) ("CILCO"), the Illinois Supreme Court found that the term “damages” as used in excess liability policies included expenditures by a manufacturing gas plant facility in response to an Illinois EPA (“IEPA”) claim for the purpose of remedying damage to property. Moreover, the court found that the policyholder was legally obligated to make these expenditures because statutes impose strict liability for the claimed harm and because it would have been futile for the policyholder to deny its liability.
A. Background
The policyholder owns several properties in Illinois that formerly housed manufacturing gas plants (“MGPs”). Gas was manufactured at these facilities from the 1850s through the 1930s using a process that created coal tar as a byproduct. In a meeting with the IEPA, the policyholder was informed that it was strictly liable, under state and federal law, for environmental contamination at the MGP sites. Moreover, the IEPA informed the policyholder that although the IEPA could bring suit to compel investigation and remediation of the sites, the policyholder could act voluntarily under the supervision of the government agency. The policyholder’s subsequent expenditures to investigate and remediate the contamination at the MGP sites were not the result of a judgment following adjudication of liability or settlement reached after the initiation of an enforcement action. Rather, the policyholder entered into a voluntary agreement with the IEPA. Under this agreement, IEPA guidelines and instructions governed the cleanup work.
The policyholder sought indemnification from its excess insurers for its expenditures related to investigation and remediation of the sites. Certain of the excess policies at issue stated that the insurers would “indemnify [the insured] for any and all sums which the insured shall by law become liable to pay and shall pay or by final judgment be adjudged to pay, or which by agreement between the Insureds and the Underwriters, or the representatives shall be paid to any person, firm . . . as damages . . . to property.”
Later policies contained different language. These policies required the insurers to indemnify the policyholder “for all sums which the assured shall be obligated to pay by reason of liability: (a) imposed upon the Assured by law, or (b) assumed under contract or agreement with the Named Assured for damages on account of: (i) Bodily Injury [or] (ii) Property Damage caused by or arising out of each occurrence happening within the United States of America.”
The ultimate net loss definition also changed in the policies over time. The earlier policies defined it as “the sums for which the Insured is liable in settlement of an occurrence.” The later policies defined the term as “the total sum which the Assured . . . becomes obligated to pay by reason of bodily injuries or property damage claims, either through adjudication or compromise, excluding all expenses and costs.”
B. Procedural History
The circuit court granted summary judgment to the insurer finding that it had no duty to indemnity the policyholder based upon Zurich Ins. Co. v. Carus Corp., 293 Ill. App. 3d 906 (1997). In Carus, the court found that because there was no suit brought against the policyholder, the carriers had no duty to defend. Moreover, the Carus court found that because there was no duty to defend, there was no duty to indemnify. In addition, the court found that no duty to indemnify was created by the “legally obligated to pay” language because “no document the policyholder ever received in this matter asserted such an obligation,” and the policyholder “initiated its involvement in the program voluntarily by petitioning the IEPA.”
The appellate court reversed, distinguishing Carus by noting that this case does not involve general liability policies and the policies here do not contain the term “suit.” The Supreme Court affirmed.
C. A Lawsuit Is Not Required To Trigger A Duty To Indemnity
The insurer argued that under certain of the policies, the language “liable to pay as damages” connotes the need for suit and, further, suggests that a court judgment is necessary. The Supreme Court rejected this argument, finding that if a court judgment is necessary to trigger a duty to indemnify under the “becoming liable to pay” term then the “final judgment” term is mere surplusage. Thus, the Court found that a court judgment imposing damages is sufficient to trigger the duty to indemnify, but, under the plain language of the policy, it is not necessary.
Indemnification is provided if the insured is obligated to pay damages for reasonable liability either imposed by law or assumed under contract or agreement. The Court concluded that the policy language, standing alone, does not require the insured to have been served as the defendant or the respondent in an adversarial proceeding before the duty to indemnify arises. In reaching this conclusion, the Court distinguished the facts of this case from previous decisions in which the duty to defend and the duty to indemnify were at issue. See, Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill. 2d 90 (1992). For example, the Supreme Court found that the fact that the term “damages” in the Outboard Marine case was construed to include both legal and equitable remedies imposed by a final judgment does not necessarily mean that the same term, contained in a policy that does not expressly require a “suit,” does not refer to “the money required to be expended in order to right a wrong” in the absence of a lawsuit. The Court concluded that the language of the policies does not expressly require that the insured’s liability for damages be fixed by the resolution of a lawsuit, either by settlement or judgment. The Court noted that in the liability insurance industry, when an insured admits liability for an injury, funds are routinely paid to injured parties in settlement of claims without the necessity for a lawsuit. The funds paid to resolve such claims are generally understood to be “damages” in the usual and ordinary sense of the word.
D. Policyholder Was Legally Obligated To Pay Investigation And Remediation Costs
The insurer characterized the policyholder’s expenditures as purely voluntary and thus asserted that the policyholder was not acting under a legal obligation. The Supreme Court disagreed, finding that mandatory environmental regulations imposing strict liability on any owner or operator who cannot prove that another entity is “solely” responsible for the contamination impose a legal obligation of compliance. However, the Court did agree that a policyholder should not be able to act entirely unilaterally to undertake environmental cleanup and then obtain indemnification on the basis that they were legally obligated to do so. If no third party asserts a right to the damages, the payment is merely gratuitous.
The Court noted that the mere existence of regulations and the insured’s decision to voluntarily undertake environmental cleanup is not sufficient to invoke an insurer’s duty to indemnify. At a minimum, the insured must be acting in response to a claim. Here, the Court found that the policyholder was confronted with a claim in the form of an assertion by the IEPA that the agency intended to enforce the strict liability provision against owners or operators of former MGP sites. The IEPA threatened litigation against the policyholder, which the Court found sufficient to satisfy the requirement of a claim.
E. Expenditures For Remedial Purposes Constitute “Damages”
The insurer asserted that construing the term “damages” apart from the terms referring to a legal obligation to pay was in error. The Court agreed that the mere fact that a policyholder is legally obligated to make payments does not mean that they are paid “as damages.” Damages are distinguished from other sorts of payments by their remedial purpose. The Court highlighted that the statute made the policyholder strictly liable for “all costs of removal or remedial action.” The policy limited indemnification to “damages on account of” bodily injury or property damage. Thus, the Court concluded that not all damages that the policyholder became legally obligated to pay were covered by the policy.
Learning Points:
In this decision, the Illinois Supreme Court determined that a lawsuit is not necessary to trigger a duty to indemnify. Moreover, a policyholder can be found legally obligated to pay in the absence of a lawsuit when a policyholder is remediating pursuant to environmental regulations that impose strict liability.
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