260 F.3d 789 (7th Cir. 2001), 99-3844, Great Lakes Dredge & Dock Co. v City of Chicago
|Docket Nº:||99-3844, 99-3877 & 00-4295|
|Citation:||260 F.3d 789|
|Party Name:||Great Lakes Dredge & Dock Company, Plaintiff, Counterdefendant-Appellee, v. City of Chicago, et al., Defendants, Counterplaintiffs-Appellees, v. Commercial Union Insurance Company, et al., Defendants-Appellants.|
|Case Date:||August 10, 2001|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued November 1, 2000
Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 94 C 2579--Joan B. Gottschall, Judge.
Before Cudahy, Coffey, and Easterbrook, Circuit Judges.
Easterbrook, Circuit Judge.
The Chicago Flood of 1992 occurred when the Chicago River sprung a leak and drained into a tunnel system connecting many buildings in the Loop. Events were set in motion in August and September 1991, when Great Lakes Dredge & Dock Co. replaced the pilings ("dolphins") protecting the Kinzie Street Bridge. Because of Great Lakes' carelessness, poor maps or other directions provided by the City, or a combination of events, Great Lakes drove dolphins into the riverbed immediately above one of the tunnels that had been built almost a century earlier to move coal and other freight without tying up the City's streets. Buildings in Chicago no longer burn coal, but the old tunnels have found new uses, such as carrying chilled water for air conditioning or hosting electric power and communications lines. Cracks in the ceiling of the tunnel, caused by the work in the River, grew as the weeks passed. Deterioration could have been stopped if the damage had been detected
during inspections and the roof shored up pending repairs, but this did not happen. On April 13, 1992, the roof caved in and the waters of the Chicago River rushed through the tunnel system, flooding basements and streets throughout downtown Chicago. Damage has been estimated at more than $300 million (and by some accounts more than $1.5 billion). Navigation on the River was halted for about a month while the tunnel was repaired. Jerome B. Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513 U.S. 527 (1995), affirming 3 F.3d 225 (7th Cir. 1993), holds that Great Lakes' request for limitation of liability under 46 U.S.C. sec.sec. 181-96 comes within the admiralty jurisdiction. Our case concerns not the amount of liability but the allocation of responsibility among Great Lakes' insurers. As part of a settlement the City of Chicago and a class of injured parties have succeeded to Great Lakes' rights under the policies, but for clarity we refer to Great Lakes as the insured.
Insurance coverage could have been simple. Great Lakes acquires insurance to match its fiscal year, from August through July. Both the damage to the tunnel and the flood occurred during one policy year. At the beginning of August 1991 Great Lakes was the beneficiary of three relevant policies: a primary policy with a cap of $1 million and two excess policies purchased by its corporate parent Itel Corporation, and on which Great Lakes was an additional insured: a first excess policy providing $40 million in coverage, and a second excess policy providing $60 million in additional coverage. Both of these excess policies were underwritten by a consortium that for convenience we call the "London Insurers." (Details about the participants would have been relevant and likely would have led to dismissal if jurisdiction depended on diversity of citizenship, see Indiana Gas Co. v. Home Insurance Co., 141 F.3d 314 (7th Cir. 1998), but admiralty jurisdiction saved the day.) Things grew complicated when Itel sold its subsidiary to the Blackstone Dredging Partnership l.p. on October 15, 1991--after the damage to the roof of the tunnel, but before the flood. The spinoff made it impossible for Great Lakes to remain as an additional insured on Itel's policies. So as part of the transaction Itel and Blackstone arranged for Great Lakes to be deleted as an insured on the first excess policy; the London Insurers then wrote an identical $40 million policy naming Blackstone as the insured and Great Lakes as an additional insured, charging exactly the premium that had been refunded to Itel for the cancellation of the remaining term on the original policy. The $60 million second-tier excess policy was canceled, but Blackstone purchased a $10 million second-tier excess policy from Continental Insurance. Thus when the damage to the tunnel's roof occurred, Great Lakes had $100 million worth of excess coverage, all through the London Insurers; when the roof collapsed, Great Lakes had only $50 million in coverage, of which $40 million was supplied by the London Insurers and $10 million by Continental. (The parties call the policies in force when the dolphins were driven the "first-period policies" and the policies in force when the flood occurred the "second-period policies." We follow suit.)
The change in both the identity of the underwriters and the maximum coverage between the first and second periods has led to conflict. Continental contended in the district court that the first-period policies supply all of the coverage, because that is when Great Lakes weakened the tunnel's roof. The London Insurers, by contrast, contended that only the second-period policies were triggered, because they were in force when the flood occurred.
(They concede that the first- period policies cover damage to the tunnel itself, but this loss is trivial compared with the damage sustained by businesses whose basements were flooded and by the utilities that had laid cables in the tunnels.) Great Lakes contends that all excess policies were triggered and should be stacked--that the maximum indemnity is not the $50 million or $100 million Great Lakes had in force at any one time, but $150 million, the sum of all policy limits in force in either period. The district court agreed with Great Lakes, issuing a declaratory judgment that the London Insurers must pay up to $140 million and Continental up to $10 million, no matter who suffered each loss and no matter when the losses occurred. The judge added that all insurers must pay prejudgment interest and that the London Insurers must pay a penalty of almost $1 million for bad faith in delaying recognition that Chicago was an additional insured on the $1 million primary policy. See 57 F.Supp.2d 525 (N.D. Ill. 1999) (principal ruling); 1999 U.S. Dist. Lexis 13914 (Aug. 25, 1999) (order resolving remaining issues); 1999 U.S. Dist. Lexis 16296 (Sept. 28, 1999) (declaratory judgment).
Only one of the policies was written out in full, but the parties agree that its language is universally applicable. Thus all policies cover property damage caused by an "occurrence," a term defined as:
an accident or a happening or event or a continuous or repeated exposure to conditions which unintentionally results in . . . Property Damage . . . during the policy period. All such exposure to substantially the same general conditions existing at or emanating from one premises or location shall be deemed one Occurrence.
The district court concluded that both the damage to the tunnel structure and the losses from flood waters are occurrences under this definition. While this case was being litigated in the district court the parties agreed that Illinois law supplies the rule of decision; the London Insurers have changed their tune on appeal, arguing that federal law governs in an admiralty action. See Continental Casualty Co. v. Anderson Excavating & Wrecking Co., 189 F.3d 512 (7th Cir. 1999) (applying federal law to an insurance dispute in admiralty). That new line of argument has been met by a claim of forfeiture. To simplify analysis we follow the parties' original agreement, though with some sidelong glances at admiralty law. See Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 100 n.5 (1991) (courts are entitled, though not required, to apply a body of law chosen by the parties even if this is not the law the court would choose on its own).
The district judge rejected as unsupported by either the policies' language or Illinois case law the London Insurers' contention that only a person who suffers injury while the policies are in effect may resort to those policies. This was the principal ground on which the London Insurers sought to restrict coverage of the first-period policies to the cost of repairing the tunnel. Having concluded that all of the policies apply to all injuries, the district judge then stacked the coverage limits on two grounds: first, this is what Zurich Insurance Co. v. Raymark Industries, Inc., 118 Ill. 2d 23, 514 N.E.2d 150 (1987), did in an asbestosis case; second, the policies omit an anti- stacking clause found in a standard form prepared by Lloyd's of London. Both the London Insurers and Continental have appealed. Continental no longer argues that all liability must be borne by the London Insurers, but it does oppose stacking and
prejudgment interest. The London Insurers object to stacking, to the use of the first-period policies to cover flood losses, to prejudgment interest, and to the bad-faith penalty. (A third appeal, No. 00-4295, concerns the district judge's costs award. We stayed briefing on this appeal because costs must be reconsidered in light of our disposition of the merits.) We start with stacking.
1. Stacking. Great Lakes argues, and the district court held, that it can pick any policy during either period and require its insurer to bear the whole loss up to the limit of liability. If this does not cover the loss, the insured names a second policy, and so on until all have been exhausted. The strategy is known variously as "stacking" and "joint and several liability" (an unusual use of that phrase, but one entrenched in insurance decisions). See Olin Corp. v. Insurance...
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