Wisconsin Power & Light Co. v. Century Indem. Co.

• Decision Date: 25 November 1997
• Docket Number: No. 97-1522,97-1522
• Citation: 130 F.3d 787
• Parties: 28 Envtl. L. Rep. 20,364 WISCONSIN POWER & LIGHT COMPANY, Plaintiff-Appellant, v. CENTURY INDEMNITY COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 787

130 F.3d 787

28 Envtl. L. Rep. 20,364

WISCONSIN POWER & LIGHT COMPANY, Plaintiff-Appellant, v. CENTURY INDEMNITY COMPANY, et al., Defendants-Appellees.

No. 97-1522.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 5, 1997.

Decided Nov. 25, 1997.

Edward P. Henneberry (argued), Howrey & Simon, Washington, DC, Barbara J. Swan, Wisconsin Power & Light Company, Eugene O. Gehl, Coyne, Niess, Schultz, Becker & Bauer, Madison, WI, for Plaintiff-Appellant.

John M. Moore, Bell, Metzner, Gierhart & Moore, William M. Cohn, Cohn & Russell, Chicago, IL, for Century Indemnity Company.

James Martin, Skadden, Arps, Slate, Meagher & Flom (Illinois), Lawrence I. Hanson, Jenswold, Studt, Hanson, Clark & Kaufmann, Madison, WI, Timothy Reynolds, Skadden, Arps, Slate, Meagher & Flom, new York City, for General Reinsurance Corp.

Anthony P. Katauskas, James K. Horstman, Daniel Joseph Neppl, Williams & Montgomery, Chicago, IL, Ronald L. Piette (argued), Milwaukee, WI, for Home Insurance Company.

Michael Fitzpatrick, Brennan, Steihl, Basting & MacDougall, Robert S. Soderstrom, Tressler, Socerstrom, Maloney & Priess, Chicago, IL, for Allstate Insurance Company.

Craig W. Nelson, Nelson, Dries & Zimmerman, Brookfield, WI, John L. Riedl, Nancy Beattie, Luce, Forward, Hamilton & Scripps, San Diego, for Westport Insurance Corp. and St. Paul Fire & Marine Insurance Company.

Michael J. Cohen (argued), Meissner, Tierney, Fisher & Nichols, Milwaukee, WI, for Ranger Insurance Company.

Before POSNER, Chief Judge, and BAUER and ROVNER, Circuit Judges.

POSNER, Chief Judge.

Wisconsin Power & Light Company brought this diversity suit (governed, all agree, by Wisconsin common law) against several insurance companies seeking a declaration that the policies which the utility has bought from these companies cover certain environmental clean-up costs that the utility has incurred or expects to incur. The district judge granted summary judgment for the defendants on the utility's claims of coverage for the incurred costs but refused to rule on the remaining claims. One she thought nonjusticiable, and with regard to the other she decided that in the exercise of her discretion she would withhold declaratory relief.

A clause in the popular comprehensive general liability policy (CGL) indemnifies the insured for "damages because of injury to ... property" that the insured "may sustain by reason of the liability imposed upon [it] by law." The principal question presented by the appeal is whether any of Wisconsin Power & Light's clean-up costs are "damages." The Wisconsin courts interpret the word "damages" in the CGL clause narrowly to mean damages at law as distinct from costs incurred in complying with an injunction or other equitable decree, including an order by an environmental agency to clean up contaminated property. City of Edgerton v. General Casualty Co., 184 Wis.2d 750, 517 N.W.2d 463, 477-78 (1994); School District v. Wausau Ins. Cos., 170 Wis.2d 347, 488 N.W.2d 82, 89-92 (1992); Sauk County v. Employers Ins., 202 Wis.2d 433, 550 N.W.2d 439, 442 (1996). These costs, when incurred to comply with orders issued by agencies enforcing state or federal environmental statutes, are known as "response costs." The vast majority of state courts to have addressed the issue construe "damages" in the CGL to include response costs. See AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253 (1990); Hazen Paper Co. v. United States Fidelity & Guaranty Co., 407 Mass. 689, 555 N.E.2d 576 (1990); Minnesota Mining & Mfg. Co. v. Travelers Indemnity Co., 457 N.W.2d 175 (Minn.1990); C.D. Spangler Construction Co. v. Industrial Crankshaft & Engineering Co., 326 N.C. 133, 388 S.E.2d 557 (1990); Boeing Co. v. Aetna Casualty & Surety Co., 113 Wash.2d 869, 784 P.2d 507 (1990); but see Patrons Oxford Mutual Ins. Co. v. Marois, 573 A.2d 16 (Me.1990); and see generally Peter J. Kalis, Thomas M. Reiter & James R. Segerdahl, Policyholder's Guide to the Law of Insurance Coverage § 5.03, p. 5-9 (1997). But that is of no moment here, since it is Wisconsin law that governs.

There are two sites, one at Beaver Dam and the other at Beloit. Decades ago the utility, which had manufactured gas at those sites, sold them to Kraft Foods and to the City of Beloit, respectively. It turns out that the utility's manufacturing operations had caused contamination of soil and groundwater. The utility has incurred investigative costs at both sites to determine the extent of the contamination. It has also been sued by the City of Beloit, though the suit has not yet moved beyond the earliest stage; it has agreed to pay Kraft $1.65 million; and it fears future claims by Kraft. All these incurred and expected expenses it contends are "damages." The district judge limited her ruling on coverage to the investigative costs and the $1.65 million, that is, to the costs that have already been incurred, which she held are response costs and therefore not covered; and we begin our analysis there.

The question whether the insurance policies cover the investigative costs is identical for the two sites. The district judge thought it clear that the utility had incurred these costs not because of any claims against it by the current owners of the properties in question, the City of Beloit and Kraft Foods, but because as the polluter the utility was legally responsible, along with the current owners, for cleaning up the sites. True, when it incurred the investigative costs it had not yet been ordered to clean up the sites, but seeing the handwriting on the wall it had begun trying to figure out what it would have to do in order to clean them up. And in formulating its plans for cleaning up it had consulted the Wisconsin Department of Natural Resources, the agency that would be ordering it, if necessary, to clean up the two sites. The absence of clean-up orders bears on the issue of coverage only insofar as it might seem to undermine the judge's belief that the utility was acting under the compulsion of environmental law, which prescribes equitable relief, rather than in response to a claim under tort or contract law for damages. Were there no claim for damages the absence of an order to clean up a polluted site would not help the utility's argument that it has insurance coverage. The world of expense does not divide neatly into damages on the one hand and costs incurred to comply with an order by a public agency on the other hand. Costs incurred in anticipation of an order would be neither class of expense, and as only damages are covered by the insurance policy the incurring of such costs would not bring the insured within the scope of the policy.

The complicating factor is that the current owners of the sites are also legally responsible for the pollution, along with the utility, and they might have claims for indemnification by or contribution from the utility, especially since the latter was the actual polluter and the former are merely the innocent purchasers of the polluted property. We know from General Casualty Co. v. Hills, 209 Wis.2d 167, 561 N.W.2d 718 (1997), that these claims for indemnification or contribution would be deemed claims for damages within the meaning of the CGL. See also Robert E. Lee & Associates, Inc. v. Peters, 206 Wis.2d 508, 557 N.W.2d 457, 462 (1996); Sauk County v. Employers Ins., supra, 550 N.W.2d at 442-43; cf. Patrons Oxford Mutual Ins. Co. v. Marois, supra, 573 A.2d at 18-19. Yet even if the investigation was conducted in anticipation of suits by the property owners, Wisconsin Power & Light might lose. A cost incurred in preparation for a lawsuit is not a form of damages, J.R. Cousin Industries, Inc. v. Menard, Inc., 127 F.3d 580, 582-83 (7th Cir. 1997); Bazzini v. Garrant, 116 Misc.2d 119, 455 N.Y.S.2d 77, 79 (1982), unless it is the cost of a measure reasonably designed to mitigate damages. (This proposition is supported by Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 738 (Minn.1997); we have found no cases directly on point.) But that is not argued here. There is also no suggestion that the insurance companies violated their duty to defend, as distinct from the duty to indemnify, by failing to pick up the tab for the investigation. Ordinarily the costs of investigation are borne by the insurance company once it is notified of the claim against its insured. But if the insurer refused to conduct the necessary investigation the insured could do so and charge the expense back to the insurance company, Cooley v. Mid-Century Ins. Co., 52 Mich.App. 612, 218 N.W.2d 103 (1974), since it would be conferring a benefit on the insurer, just as it would be doing if it mitigated its damages for which the insurer would otherwise be liable. These exceptions to one side, damages are what you pay to the other side, not what you pay to a lawyer or consultant for assistance in your tussle with the other side, unless the payment benefits the insurance company by reducing its potential liability for the costs either of defense or of indemnification.

Another way of looking at the investigative costs, however, is that they are not defense costs at all--that is, costs incurred to ward off or reduce a legal sanction, like the environmental investigation costs in Domtar, Inc. v. Niagara Fire Ins. Co., supra, 563 N.W.2d at 737-38, and American Bumper & Mfg. Co. v. Hartford Fire Ins. Co., 452 Mich. 440, 550 N.W.2d 475, 485 (1996)--but merely the first stage of the utility's cleaning up of the sites, in the same way that soil borings might be the first stage of a construction project. But this characterization, while entirely plausible in the circumstances of this case, could support the utility's insurance claim only if the investigations had been conducted in anticipation of claims for damages, and they were not. A claim for damages must be distinguished from a demand for compliance with a legal duty. The fact that someone reminds...