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Commercial General
Liability |
Landfill Cleanup Costs |
Duty To Indemnify |
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Pro Rata Versus Excess
Coverage |
Late Notice Of Loss |
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This case involved a 47-acre
landfill located near Belvidere, Illinois that operated from February 1969 to
June 1988. The plaintiffs in the case were AAA Disposal Systems (AAA), M.I.G.
Investments (M.I.G.), and Jack and Richard Ter Maat (Ter Maats). M.I.G.
operated the landfill and AAA hauled waste to it. The Ter Maats were principal
shareholders and officers of AAA and M.I.G. During the period from October 1973
through May 1988, the plaintiffs were insured by Commercial Union Insurance
Company (CU) under three one-year primary general liability policies between
1973 and 1976, with per-occurrence liability limits of $100,000, Continental
Casualty Company (Continental) under six primary general liability policies
between 1979 and 1985, with per-occurrence liability limits of $500,000, and
American Employers' Insurance Company (American) under three excess policies
between September 1973 and October 1976, with per-occurrence liability limits
of $1 million for the first two policies and $5 million for the third.
The State of Illinois filed
a complaint against the plaintiffs in 1985 alleging that the landfill was
contaminating the waters of Illinois. In 1988 the State received an injunction
to cease all dumping operations. The plaintiffs abandoned the landfill and then
sold it to Waste Management of Wisconsin. The landfill was placed on the
Superfund national priority list in August 1990.
BFI Waste Systems of North
America and other companies, pursuant to an administrative order, conducted
"interim remedial measures" (IRMs) necessary to close the landfill.
In late 1991 they brought legal action against the plaintiffs to recover past
and future costs associated with the cleanup. The plaintiffs were held
responsible for 85% of the cost of emergency measures, IRMs, and supplemental
emergency removals, for a total of $2,349,116.95. They were also held liable
for approximately 27% of the costs not related to the IRMs, for a total of
$1,795,318.20. In 1993 the plaintiffs filed a declaratory judgment action
against the various insurers seeking a declaration that the insurers must
indemnify them under the terms of their policies.
The trial court found that
the plaintiffs did not give the insurers timely notice of an occurrence and
granted summary judgment in favor of the insurers except for the one that
provided excess coverage. Subsequently, the plaintiffs and the cleanup
companies settled with all of the insurance companies to which summary judgment
had been denied except American. It was eventually found liable for its share
of the judgment entered against the plaintiffs after exhaustion of primary
policies and any future liability. As part of this pro rata calculation, the
court did not include the years covered by insurance policies written by
companies that became insolvent. The case was appealed.
On appeal, the plaintiffs
argued the insurers were not entitled to summary judgment based on late notice
because the Ter Maats gave notice to the insurers "as soon as
practicable." The Appellate Court of Illinois, Second District, disagreed.
It was undisputed that in April 1984, Richard Ter Maat signed an inspection
report that documented contamination at the landfill. Even if he did not have
reason to believe he would become liable to the federal government, he knew
that there was an "occurrence" under the policies. Despite this, the
plaintiffs did not give notice to the insurers until 1990 or 1991. This
constituted late notice under any reasonable interpretation of the policy
provisions. In addition, because notice was so late and the plaintiffs did not
offer an excuse for it, the insurers were not required to show any prejudice
that resulted from the late notice.
The plaintiffs and cleanup
companies argued that the insurance companies could not raise the late notice
argument because they failed to timely defend the plaintiffs. However, the
plaintiffs had entered into an interim defense agreement pursuant to which they
agreed they would not "assert any estoppel or waiver against the insurers
based on an alleged failure or wrongful refusal to defend the Policyholders in
relation to the Action." Because the plaintiffs were bound by this
agreement, they could not claim the insurance companies were
"estopped" from arguing that notice was late. Accordingly, the court
affirmed the lower court's decision concerning late notice.
The cleanup companies then
argued that the trial court incorrectly required exhaustion of all primary
carriers before American, the excess carrier, was required to pay. They
reasoned that the American policies were in effect from 1973 to 1976 and that
excess coverage should be triggered after exhaustion of the primary coverage in
effect in those years only. The court disagreed. The American policies clearly
set forth their status as excess coverage and contained "other insurance"
provisions. In addition, while it was true that the excess policies listed only
certain primary policies on their declarations, nothing limited the court from
considering other valid and collectible insurance.
The court then evaluated the
lower court's calculation of American's pro rata share of liability. The
coverage provisions of the American policies provided that it would
"[I]ndemnify the insured for all sums which the Insured shall be obligated
to pay . . ." The cleanup companies argued that this language supported a
finding that American was responsible for all sums, regardless of when the
damages occurred, and that pro rata allocation was inappropriate. The cleanup
companies argued that, even if pro rata allocation were appropriate, the period
from October 1, 1985 to June 24, 1988 should be excluded from the calculation
because no other insurance coverage was available to plaintiffs during that
period, presumably because the companies became insolvent. The court found no
merit to either of these arguments. According to the court, these results would
"eviscerate the policy periods contained in the policies" and
"ignore that insurance coverage disputes are covered by contract
law." The court then held that the trial court erred by excluding the
years covered by policies written by companies that became insolvent from the
pro rata calculation.
Finally, American argued
that the trial court erred by holding that its policies covered costs for emergency
responses and IRMs and the court agreed. The American policies covered damages
directly caused by an occurrence, meaning an event or repeated exposure to
conditions from 1973 to 1976 that resulted in property damage in those same
years. The court found that the need to properly close the landfill was not
caused by an occurrence from 1973 to 1976. The IRMs were performed in the early
1990s to properly close the landfill and were performed because the plaintiffs
failed to properly close the landfill in 1988. Since the cleanup companies'
costs for the IRMs were not directly caused by an occurrence, they were not
covered under the policies. As a result, the trial court erred by including
these costs in the calculation.
The lower court's decisions
were affirmed in part and reversed in part.
AAA Disposal Systems, Inc.,
v. Aetna Casualty and Surety Company-No. 2-03-0416-Appellate Court of Illinois,
Second District-January 12, 2005-821 North Eastern Reporter 2d 1278