Westfield Ins. Co. v. Maxim Constr. Corp.
| Decision Date | 06 April 2018 |
| Docket Number | No. 15 C 9358,15 C 9358 |
| Parties | WESTFIELD INSURANCE COMPANY, Plaintiff, v. MAXIM CONSTRUCTION CORPORATION, INC., the CITY OF CRYSTAL LAKE, ILLINOIS, ENVIROGEN TECHNOLOGIES, INC., and the LAKE COUNTY PUBLIC WATER DISTRICT, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Westfield Insurance Company filed this action in 2015, seeking a declaration that Westfield had no obligation to defend or indemnify its insured, Defendant Maxim Construction Corporation, for claims brought against Maxim by the City of Crystal Lake and by Envirogen Technologies, Inc. The claims arose out of failures in a water treatment facility manufactured by Envirogen and installed by Maxim for the City of Crystal Lake, resulting in litigation in state and federal court. In a counterclaim against Westfield, Maxim alleges that Westfield's failure to accept defense of the claims was in bad faith and resulted in entry of a default judgment against Maxim. Both sides have moved for summary judgment. For the reasons set forth here, both motions are granted in part and denied in part.
The record is substantial, and certain critical facts are disputed. Much of the history is undisputed, however; in the statement of facts that follows, the court provides citations to the record only in instances of dispute.
Westfield Insurance Company is incorporated under the laws of Ohio and has its principal place of business in Ohio. Defendant Maxim Construction Corporation is incorporated in Illinois and has its principal place of business here as well. Maxim and Westfield are parties to insurance policies in which Westfield provides liability insurance coverage for bodily injury or property damage caused by an "occurrence" within the policy period, subject to certain exceptions. The policies also require Westfield to provide its insured with a legal defense against any covered claims. The City of Crystal Lake ("City" or "Crystal Lake") is a municipality in Lake County, Illinois. In this lawsuit, filed in October 2015, Westfield seeks a declaration that it owes no duty to defend or indemnify Maxim with respect to separate actions filed by the City and Envirogen in connection with Maxim's construction and installation of an allegedly defective water treatment system.1 Envirogen was originally named as a Defendant in this case, but has agreed to be bound by any judgment the court enters and has been dismissed from the lawsuit without prejudice.
In August 2010, Maxim entered into an agreement to construct and install a water treatment system for the City of Crystal Lake. Envirogen Technologies, Inc. was the manufacturer of the water treatment system. Although the details are not clear, it appears that the installation did not go well. It also appears that Maxim did not pay Envirogen the purchase price for the water treatment system. On March 25, 2014, Envirogen sued Maxim in federal court, charging Maxim with patent infringement and with breach of the contract to pay the purchase price. See No. 14 C 2090 (hereinafter, "Envirogen litigation").2 The case was assigned to Judge James Zagel of this court. Maxim's attorney filed an appearance in that case on April 17, 2014. Almost a year later, on March 19, 2015, Envirogen filed an amendedcomplaint in which it dropped its patent infringement claims, leaving only breach of contract claims for the unpaid purchase price of the system.3
In June 2015, the problems with the water treatment system generated another lawsuit, this one filed by the City of Crystal Lake against Maxim and Envirogen Technologies in state court in McHenry County, on June 25 (hereinafter, "Crystal Lake litigation"). The City alleged that it had contracted with Maxim to modify one of its water treatment facilities, and that Maxim subcontracted with Envirogen for the design and manufacture of the water treatment equipment to be installed in the modified facility. Crystal Lake alleged that the Envirogen equipment did not function properly despite numerous remediation efforts and never performed to specifications, and that Crystal Lake incurred significant expense to repair, maintain, and continue operating the Envirogen equipment. Crystal Lake also alleged property damage to the water treatment facility that Maxim worked on and to its public water supply system generally: Specifically, Crystal Lake alleged that it was "forced to operate its other potable water wells at greater capacities" than consistent with good practice and environmental concerns, and that the City had suffered damage to real property including "loss of the existing WTP#1 building"; the need to "substantially reconstruct or demolish" that building; a "shortened life expectancy" for the other water supply and treatment systems as a result of excess use and strain; and depletion of water resources from other "potable water wells." (Crystal Lake Complaint, Exhibit 1 to Plaintiff Westfield's Complaint [6] at ¶ 77 (g), (i).)4 Crystal Lake's complaint included two counts: In Count I, Crystal Lake alleged that Maxim had breached the terms of its contract to build the water treatment system. Count II alleged that the City of Crystal Lake was a third-partybeneficiary of Maxim's contract with Envirogen, and claimed that Envirogen was liable to the City for breach of the subcontract.
Maxim was not served with the Crystal Lake complaint until November 5, 2015. It was aware of the lawsuit earlier, however: Maxim tendered Crystal Lake's claim in the state court case to Westfield by way of an August 27, 2015 letter from Maxim's president, Dan Sjong, to Robert Hunt, a Westfield Claims Specialist, stating that the letter "shall serve as Maxim's formal notice and tender of defense and indemnity" in regard to Crystal Lake's lawsuit. The letter specifically requested that Westfield "accept Maxim's defense and indemnity" in connection with the Westfield policy. Sjong's letter noted the City's claims that, due to Envirogen's negligence, the City had sustained damage to property, materials, parts, equipment, and systems, "that were not furnished or installed by Maxim or Envirogen in connection with the Project and were neither part of Maxim nor Envirogen's work." Specifically, Sjong noted, the City claimed that it had been forced to shut down one of its wells and that the failed system would cause additional damage to other components of the City's potable water system and other unidentified real property. The City had also announced it might seek damages to other unidentified pumps that were not part of the project and was claiming loss of other unidentified portions of its water system, including other water treatment facilities. Sjong pointed out that the City was claiming the failure to the system might result in contamination of water from a well that was subject to an Illinois EPA order.
Envirogen appeared in the Crystal Lake case through counsel on September 8, 2015, but Maxim never filed an appearance in that case. (Westfield asserts that Maxim did file an appearance, but there is no evidence of this, and Maxim's counsel has submitted a declaration asserting that Maxim did not appear.) (
On September 22, 2015, Sjong e-mailed Mr. Hunt, asking, "Any decision on the Crystal Lake claim?" Hunt responded two days later, Hunt went on to say that Westfield's investigation was "ongoing" and that Westfield reserved its right to raise defenses to coverage.
In the meantime, Envirogen's action against Maxim remained pending before Judge Zagel. On August 17, 2015, after it was served with a summons in Crystal Lake's state court case, Envirogen had filed a second amended complaint in federal court, adding Crystal Lake as a Defendant, and seeking a declaratory judgment that Crystal Lake was not a third-party beneficiary of the Envirogen-Maxim contract. Evidently prompted by Crystal Lake's presence in the federal case mix, on August 27, 2015, Maxim for the first time tendered its defense of Envirogen's claims to Westfield, as well.
By October 16, 2015, Sjong reported, the parties in the Crystal Lake state court litigation had begun settlement negotiations. Sjong told Hunt that Westfield's "delay in responding to the tender is operating to Maxim's prejudice." Hunt responded three days later that Westfield was continuing its investigation and would not respond "before the end of this week." Again, Hunt noted that Westfield reserved its right to raise any defenses to coverage. Finally on October 22, Westfield formally denied that it had any obligation to defend or indemnify Maxim under the policies, against either the Crystal Lake state court action or the Envirogen action pending in federal court. Westfield's letter reminded Maxim that it needed to arrange for its own defense but must nevertheless continue to "comply with the terms and conditions" of the insurance policies, including "providing Westfield with a copy of any additional papers filed against Maxim in any lawsuit in connection with these matters." On the same day, Westfield filed this action seeking a declaratory judgment that it had no duty to defend or indemnify Maxim.
Crystal Lake had moved to dismiss Envirogen's complaint against it in federal court, but Judge Zagel denied the motion on November 18, 2015. Then on December 2, 2015, Crystal Lake moved its state court action to this courthouse, filing a cross-claim in the Envirogen litigation against Maxim for breach of contract and a counterclaim against...
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