Verlan, Ltd. v. John L. Armitage & Co.

Decision Date06 September 1988
Docket NumberNo. 87 C 5121.,87 C 5121.
Citation695 F. Supp. 950
CourtU.S. District Court — Northern District of Illinois
PartiesVERLAN, LTD., Plaintiff, v. JOHN L. ARMITAGE & CO., Defendant. JOHN L. ARMITAGE & CO., Counter-plaintiff, v. VERLAN, LTD., Counter-defendant.

Michael W. Rathsack, Chicago, Ill., for plaintiff.

Andrew H. Perellis, Thomas M. Giller, Mark Hester, Gessler, Flynn, Laswell, Fleischmann, Hughes & Socol, Ltd., Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

CROSS-MOTIONS FOR SUMMARY JUDGMENT

CONLON, District Judge.

Plaintiff insurer Verlan, Ltd. ("Verlan") filed this declaratory judgment action against its insured, John L. Armitage & Co. ("Armitage"). Jurisdiction is predicated on diversity. 28 U.S.C. § 1332. Verlan seeks a declaration that it is not obligated to provide coverage, either defense or indemnity, in the case of Allied Corp., et al. v. Acme Solvents Reclaiming, Inc., et al., No. 86 C 20377 (N.D.Ill. filed October 24, 1986) (the "Allied action").1 Armitage filed a counterclaim seeking a declaratory judgment that Verlan must defend and indemnify in the Allied action.2 Verlan moves for summary judgment on the complaint. Armitage moves for summary judgment on Counts I, II and IV of the complaint and on its counterclaim. For the reasons set forth below, Verlan's motion for summary judgment is granted, and Armitage's motion for summary judgment is denied.

BACKGROUND

Verlan is an insurance company. Armitage manufactures paint products at its plant in Elk Grove Village, Illinois. Between 1960 and 1972, Acme Solvents Reclaiming, Inc. ("Acme") disposed of the byproducts of Armitage's manufacturing operations at a waste-disposal site located south of Rockford, Illinois (the "site"). On June 30, 1972, the Illinois Pollution Control Board ("IPCB") closed down the site. In September, 1972, the IPCB ordered Acme to remove all drums and wastes from the facility. Allegedly, Acme never did so.

In 1979, Verlan and Armitage entered into a standard form, Comprehensive General Liability ("CGL") policy and an accompanying umbrella policy (collectively, the "policy") for the period December 31, 1979 through December 31, 1980. The policy provides that Verlan will indemnify Armitage for damages resulting from personal injury or property damage caused by an occurrence during the policy period. Further, the policy obligates Verlan to defend Armitage against any suit for damages that is potentially covered by the policy.

Between 1981 and 1983, the Environmental Protection Agency ("EPA") conducted studies at the site to determine the source and extent of contamination. In 1983, the site was placed on the EPA's "National Priorities List." In 1983 and 1984, the EPA notified generators of the waste of their potential liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. § 9601 et seq. and sought to compel them to remediate the contamination. A group of companies attempted to remedy the damage at the site and subsequently brought suit against Armitage, among others, for contribution to the costs of the remedial action.3See Allied Corp., et al. v. Acme Solvents Reclaiming, Inc., et al., No. 86 C 20377 (N.D.Ill. filed October 24, 1986).

This case raises the controversial issue of liability for the enormous government-mandated clean-up costs associated with hazardous waste. Armitage claims that Verlan must defend and indemnify it in the Allied action pursuant to the "all risk" CGL policy that Verlan issued. Verlan maintains that it is not obligated either to defend or indemnify Armitage under the policy for the costs of the remedial action. Verlan's duty to provide coverage presents a question of law that is properly resolved by the parties' cross-motions for summary judgment. Fed.R.Civ.P. 56(c).

DISCUSSION
Choice of Law

In diversity actions, the court applies the substantive law of the forum state, including its rules governing choice of law. International Administrators, Inc. v. Life Insurance Co. of North America, 753 F.2d 1373, 1376-77 (7th Cir.1985). This case arises in connection with coverage under an insurance policy. In construing an agreement, Illinois courts either honor the parties' choice of law as expressed in the agreement or apply the law of the forum that has the most significant contacts with the transaction and parties. Illinois Tool Works v. Sierracin Corp., 134 Ill.App.3d 63, 89 Ill.Dec. 40, 479 N.E.2d 1046 (1st Dist.1985). Conflicts rules are applied only when a difference in law makes a difference to the outcome; when there is no disagreement among the contact states, which include the forum state, the court applies the law of the forum state. International Administrators, supra, 753 F.2d at 1376 n. 4.

The policy does not contain a choice of law provision. The policy was executed at Armitage's corporate headquarters in New Jersey. It was to be performed in several states where Armitage maintains its operating facilities, including Illinois. This case implicates Verlan's coverage obligations in connection with a lawsuit filed in Illinois, involving clean-up of property located in Illinois.

Armitage believes that Illinois law should apply, to the extent that it does not conflict with New Jersey law. See Armitage's Memo. in Support of its Motion for Partial Summary Judgment at 3 n. 2. Verlan apparently concedes that Illinois law applies because it advocates the position of the Illinois courts on the relevant issues. See Verlan's Memo. in Opposition to Armitage's Motion for Partial Summary Judgment at 10-12. Because the parties agree that Illinois has the most significant contacts with the transaction and parties, Illinois law shall govern the resolution of these motions.

Cross-Motions for Summary Judgment

On January 21, 1988, Armitage moved for partial summary judgment on Counts I, II and IV of the complaint and on its counterclaim. On April 11, 1988, Verlan filed a memorandum in opposition to Armitage's motion, as well as its own motion for summary judgment on the complaint. The motions involve construction of the identical contract terms. Armitage seeks a declaration that Verlan breached its duty to defend Armitage in the Allied action and a declaration interpreting certain terms of the policy and their effect on Verlan's obligation to provide coverage. Verlan seeks a declaration that it owes no coverage obligations to Armitage, either to defend or indemnify, in connection with the Allied action.

A party is entitled to summary judgment where the pleadings, depositions, answers to interrogatories and affidavits show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Only disputes over facts that might affect the outcome of the suit under governing law will preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1985). The court must determine whether the evidence presents sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. Id. at 252, 106 S.Ct. at 2512.

Verlan's Duty to Defend

Verlan has refused to provide Armitage with a defense in the Allied action while it pursues this declaratory judgment action. Armitage maintains that Verlan must defend until coverage issues are resolved because the claims asserted against Armitage in the Allied action are potentially within the coverage of the policy.

The policy contains the following indemnification provision:

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of ... bodily injury or property damage.

Comprehensive General Liability Insurance Policy, Coverage Part, page 2 (emphasis added). In addition to indemnification, Verlan owes Armitage a duty to defend as follows:

The Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient....

Id. (emphasis added).

Under Illinois law, where an insurer owes a duty to defend, it must defend any claim that might possibly fall within the scope of the policy coverage, even if the claim is later determined to have no merit as a matter of law. Reis v. Aetna Casualty and Surety Co. of Illinois, 69 Ill.App.3d 777, 25 Ill.Dec. 824, 387 N.E.2d 700 (1st Dist.1979). If an insurer with a duty to defend believes a policy does not provide coverage, it may either secure a declaratory judgment as to its rights and obligations before or pending trial of the underlying action or defend under a reservation of rights. Id. 25 Ill.Dec. at 828, 387 N.E.2d at 704. An insurer may safely and justifiably refuse to defend only when the allegations of an underlying claim clearly show on their face that the claim is beyond policy coverage. La Rotunda v. Royal Globe Ins. Co., 87 Ill.App.3d 446, 42 Ill.Dec. 219, 224, 408 N.E.2d 928, 933 (1st Dist.1980). Therefore, if the claims in the Allied complaint are not within the scope of coverage, Verlan did not breach its duty to defend.

Coverage Under the Policy

Under the policy, Verlan agreed to indemnify Armitage for sums that it became legally obligated to pay "as damages" because of bodily injury or property damage; it further agreed to defend any suit against Armitage "seeking damages" for bodily injury or property damage. Comprehensive General Liability Insurance Policy, Coverage Part, p. 2. Verlan argues that there is no coverage because (1) the policy is limited to claims for damages and does not include claims seeking restitutional relief, and (2) remedial costs to restore real property to its uncontaminated condition do not constitute property...

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