Traveler's Ins. Co. v. Eljer Mfg., Inc., No. 88407

• Citation: 757 N.E.2d 481,197 Ill.2d 278,258 Ill.Dec. 792
• Decision Date: 20 September 2001
• Docket Number: No. 88407, No. 88410.
• Parties: TRAVELER'S INSURANCE COMPANY et al. (Gibralter Casualty Company, Appellee and Cross-Appellant) v. ELJER MANUFACTURING, INC., et al., Appellants and Cross-Appellees.
• Court: Supreme Court of Illinois

757 N.E.2d 481

197 Ill.2d 278

258 Ill.Dec. 792

TRAVELER'S INSURANCE COMPANY et al. (Gibralter Casualty Company, Appellee and Cross-Appellant) v. ELJER MANUFACTURING, INC., et al., Appellants and Cross-Appellees.

Nos. 88407, 88410.

Supreme Court of Illinois.

September 20, 2001.

Luke DeGrand, of Clark & DeGrand, Chicago, Jonathan Hayden, of Heller, Ehrman, White & McAuliffe, San Francisco, California, for appellant and cross-appellee Household International, Inc.

Michael D. Freeborn and Michael T. Nova, of Freeborn & Peters, Chicago, R. Nicholas Gimbel, of Klett, Rooney, Lieber & Schorling (Jan Fink Call, Kevin J. Kotch, Kenneth J. Grunfeld and Charles B. Blakinger, of Hoyle, Morris & Kerr L.L.P., Philadelphia, Pennsylvania, of counsel), for appellants and cross-appellees United States Brass Corporation et al.

William M. Cohn, Michael J. Baughman, Brian C. Coffey, of Cohn & Baughman, Chicago, Mark D. Plevin, Amy J. Mauser, Steven P. Rice, Paul N. Alp., Sheetal B. Shah, of Crowell & Moring L.L.P., Washington, D.C., for appellees and cross-appellants Century Indemnity Co. and International Insurance Co.

Mitchell S. Goldgehn, James A. Smith, of Aronberg, Goldgehn, Davis & Garmisa, Chicago, for appellees and cross-appellants Allstate Insurance Co. et al.

Terrence E. Kiwala, of Rooks, Pitts & Poust, Chicago, and William J. Bowman, Patrick F. Hofer, of Hogan & Hartson L.L.P., Washington, D.C., for appellees and cross-appellants Hartford Accident & Indemnity Co. and First State Insurance Co.

Thomas W. Brunner, John C. Yang, Leslie A. Platt, N. Christopher Hardee, of Wiley, Rein & Fielding, Washington, D.C., for amicus curiae The Insurers' Year 2000 Roundtable. William M. Cohn, Michael J. Baughman, Chicago, for Appellees Century Indem. Co., Intern. Ins. Co.

Jay V. Krafsur, The Krafsur Law Group, Chicago, for Appellee Nat. Sur. Corp.

Robert C. Johnson, Alan M. Posner, Sonnenschein Nath & Rosenthal, Chicago, for Appellees Travelers Cas. & Sur. Co., Travelers Ins. Group.

Hallie Miller Fahey, Michael M. Marick, Meckler Bugler & Tilson, Chicago, for Appellee Zurich Intern., Ltd.

Margaret H. Warner, Gregory A. Krauss, McDermott, Will & Emery, Washington, DC, Michael Resis, O'Hagan, Smith & Amundsen, L.L.C., Chicago, for Appellee Continental Ins. Co.

Matthew J. Fink, Bollinger, Ruberry & Garvey, Chicago, for Appellee Intern. Ins. Co.

Sandra Young, Thomas B. Underwood, Purcell & Wardrope, Chicago, for Appellees Nat. Union Fire Ins. Co. of Pittsburgh, Pa., Granite State Ins. Co.Creed T. Tucker, Alan S. Zelkowitz, Landau Omahana Tucker Progar & Siebenhaar LLC, Chicago, for Appellee Fed. Ins. Co.

Justice McMORROW delivered the opinion of the court:

We are asked in this consolidated appeal to determine when indemnity coverage for "property damage" under excess comprehensive general liability insurance policies, issued between 1979 and 1990 by various insurance companies¹ (the insurers) to Eljer Manufacturing, Inc., Eljer Industries, Inc., United States Brass Corporation and Household International, Inc. (the policyholders), is triggered. The insurers filed four declaratory judgment actions in the circuit court of Cook County, seeking a declaration with respect to the insurers' obligations to indemnify the policyholders in thousands of underlying product liability claims filed by individuals alleging property damage arising out of the failure of the "Qest Qick/Sert II" (Qest) residential plumbing system. The Qest system was manufactured and sold by the policyholders, and was installed in buildings throughout the country during the policy periods. The circuit court of Cook County consolidated the insurers' declaratory judgment actions, and the parties thereafter filed cross-motions for partial summary judgment on the trigger-of-coverage issue. The circuit court granted summary judgment in favor of the insurers, and denied the cross-motion for summary judgment brought by the policyholders. The circuit court ruled, as a matter of law, that the insurers' duty to indemnify the policyholders for underlying "property damage" claims is triggered only when an actual leak in a Qest plumbing system occurs during the policy period. The circuit court explicitly rejected the argument advanced by the policyholders that "property damage" covered under the insurers' policies occurred during the policy period in which the Qest plumbing system was installed into a residence.

The appellate court reversed the circuit court's grant of summary judgment as to those insurance policies governed by New York law and issued prior to 1982, holding that the policy language did not require a leak to trigger coverage. With respect to those policies governed by Illinois law and issued after 1981, the appellate court determined that the circuit court correctly denied the policyholders' motion for summary judgment. However, the appellate court also found that the circuit court erred in granting summary judgment to the insurers with respect to the post-1981 policies. The appellate court concluded that the circuit court incorrectly held that "property damage" occurs, and coverage is therefore triggered, only at the time that a Qest system develops a leak. 307 Ill. App.3d 872, 241 Ill.Dec. 178, 718 N.E.2d 1032. We granted the policyholders' petitions for leave to appeal (177 Ill.2d R. 315(a)), and consolidated these cases. For the reasons that follow, we affirm in part, reverse in part, and remand this cause to the circuit court for further proceedings.

BACKGROUND

Certain relevant facts giving rise to these consolidated actions are not in dispute. Between 1979 and 1990, United States Brass Corporation (U.S. Brass) manufactured and sold the components comprising a polybutylene plumbing system known as "Qest Qick/Sert II" (Qest). This plastic, hot/cold pressure residential plumbing system was sold to plumbing contractors who installed the system at construction sites, usually behind walls, or between floors and ceilings. Qest systems were installed in site-built homes, apartment buildings, and condominiums across the country until December 31, 1986. At that time, U.S. Brass ceased warranting the Qest system for use in site-built structures. However, U.S. Brass continued to manufacture and market the Qest system for mobile homes and prefabricated housing through 1990. It is estimated that between 500,000 and 750,000 housing units in the United States contain the Qest plumbing system. U.S. Brass is currently a wholly owned subsidiary of Eljer Manufacturing, Inc., which, in turn, is wholly owned by Eljer Industries, Inc. For a period of time relevant to this matter, U.S. Brass was a wholly owned subsidiary of Household International, Inc. As stated, these four corporate entities are the policyholders in the matter at bar.

According to an affidavit filed in the circuit court by Catherine E. Bracken, general counsel for U.S. Brass and senior counsel of Eljer Industries, Inc., as a result of certain alleged defects in the Qest plumbing system, product liability claims with respect to the Qest systems were first filed against U.S. Brass and its parent corporations in the early 1980s. These claims generally alleged that defects in the Qest system caused the system to leak, and sought recovery based upon theories of negligence, breach of warranty, strict tort liability, and, in some cases, fraud or misrepresentation. According to Bracken's affidavit, by the end of 1993, approximately 61,300 claims had been filed against U.S. Brass and its parent companies as a result of Qest system failures. Based upon the number of claims at that time, U.S. Brass estimated that approximately 4.6% of the Qest systems installed between 1979 and 1990 had experienced failures. Bracken averred that U.S. Brass and Eljer had made no subsequent estimates with respect to the projected failure rate of the Qest systems.

In her affidavit, Bracken further stated that several jury verdicts, in various jurisdictions across the county, have been entered against U.S. Brass and its parent corporations as a result of the Qest claims, "and thousands of other claims have been settled."² Kurt Nelson, outside counsel for U.S. Brass, stated in an affidavit submitted to the circuit court that almost all litigated claims involved residences which had experienced leaks in the Qest system. Nelson averred that these claims generally sought recovery for water damage to the housing structure, fixtures and personal property. In addition, damages were sought for expenses incurred in removing the Qest system from behind walls, floors and ceilings, and for diminution in the value of the building resulting from the presence of allegedly defective plumbing. According to Nelson, a minority of claims involved buildings that had not yet experienced leaks, but in which the homeowners, as a preventive measure, had removed the Qest systems. These claims sought recovery for the cost of replacing the Qest system as well as the diminution in value of the residences.

During the early 1990s, the four insurance coverage suits at issue in the appeal at bar were filed in the circuit court of Cook County. In May 1994, while these declaratory judgment actions were pending, U.S. Brass filed for bankruptcy protection in the United States Bankruptcy Court for the Eastern District of Texas.³ Upon U.S. Brass' bankruptcy filing, proceedings in these Cook County coverage actions were automatically stayed. In June 1994, U.S. Brass filed in the United States Bankruptcy Court for the Northern District of Illinois a motion to transfer venue of these four coverage suits to the federal Bankruptcy Court for the Eastern District of Texas. However, the federal bankruptcy court for the Northern District of Illinois abstained from exercising jurisdiction and ordered these matters remanded to the circuit court of Cook County. The order of the bankruptcy court was affirmed by the United States District Court for the Northern District of...