Ruling Says No Duty To Defend Absent Suit
July 18, 2012
The U.S. District Court for the Northern District of Illinois recently held that an insurer had no duty to defend an insured with respect to an environmental claim where no lawsuit had been filed, despite the fact that the insurer accepted the defense of an environmental claim at another location that did not involve a formal lawsuit. Varlen Corp. v. National Union Fire insurance Company of Pittsburgh, PA. No. 09-CV-7915, 2012 WL 2191762 (N.D. Ill. June 13, 2012).
The insured, Varlen, was represented by Daniel G. Wills, Anthony D. Danhelka and Dane A. Bolinger of Swanson, Martin & Bell LLP. Margaret J. Orbon, Colleen A. Beverly and Emily N. Holmes of Clausen, Miller P.C. represented the insurer, National Union.
In 2006, Varlen was the target of a violation notice, investigation demand and cleanup program initiated by the Illinois Environmental Protection Agency with respect to a site in Rock Island, Ill., previously owned by Varlen and known as the Silvis site. Although Varlen participated in the cleanup program, the IEPA continued to threaten it with additional enforcement actions and formal lawsuits.
National Union issued a series of commercial general liability policies to Varlen for a relevant period of time in which the insurer agreed, among other things, to defend against any suit against the insured seeking damages for property damage. Some of the policies contained a definition of "suit" as a "civil proceeding in which damages because of ... property damage ... are alleged."
Varlen brought suit against National Union claiming that it was entitled to recover its defense costs incurred with respect to responding to the IEPA's threats and claims at the Silvis site. National Union subsequently filed a motion for summary judgment that it had no duty to defend. Among other facts of record were (a) Varlen's admission that no lawsuit was ever filed in court concerning the Silvis site and (b) National Union's acceptance of the defense of claims asserted by the Kansas Department of Health and Environment against Varlen relating to an industrial site in Kansas.
No Actual Suit
In an opinion by U.S. District Judge John W. Darrah, the court found that National Union had no defense obligation relating to the Silvis site. After finding that Illinois law controlled the dispute, Darrah relied principally on Lapham-Hickey Steel v. Protection Mut. Ins. 166 Ill. 2d 520, 655 N.E. 2d 842 (1995).
In that case, the Illinois Supreme Court construed the term "suit" - although not defined in the applicable policy involved in the case - as referring to a proceeding in a court of law. The court then applied its definition in the context of an environmental claim to find that in the absence of a formal proceeding in court, the insurer's defense obligation was not triggered.
Varlen contended that the current dispute was governed, not by Lapham-Hickey, but by Keystone Consolidated Industries, Inc. v. Employers Insurance Company of Wausau, 456 F. 3d 758 (7th Cir. 2006), which, according to Varlen, held that a lawsuit was not necessary to trigger a duty to defend. Darrah observed, however, that Keystone involved, not the duty to defend but the duty to indemnify, i.e., the actual cleaning up of contamination and that the case, therefore, was distinguishable.
Darrah further noted a practical rationale behind the principle of Lapham-Hickey, namely, that Illinois law typically looks to the allegations of the underlying complaint to determine the existence of the duty to defend. In the absence of a formal lawsuit in a court of law, no complaint is available from which the duty to defend may be determined.
Mend The Hold
Varlen also relied on the so-called "mend the hold" doctrine, which provides that a contract party is not permitted to change its position on the meaning of a contract in the middle of litigation over the contract. Varlen contended that National Union's agreement to defend in the Kansas case invoked application of the doctrine here.
Darrah explained that the doctrine typically applies to prevent a party from changing the initial reason for not performing a contract to a completely different reason during litigation. With respect to insurers, it may bar an insurer from denying a claim on one basis and then changing the basis for denial during litigation.
Here, however, National Union asserted a defense based on the lack of a "suit" from the outset of the litigation. The manner in which National Union handled Varlen's Kansas claim, in addition, was immaterial according to Darrah. The mend the hold doctrine therefore had no application.
Accordingly, the court granted summary judgment for National Union concerning defense costs on the Silvis site.
Key Point
Threats and allegations against an insured not involving a formal lawsuit will not typically trigger an insurer's duty to defend.
