Insured’s Knowledge of Potential Harm Enough to Defeat Coverage

The Seventh Circuit Court of Appeals, in an opinion written by the Honorable Judge Scudder, applying Indiana law, affirmed the decision of the lower court finding that Westfield Insurance Company (“Westfield”) did not have an obligation to defend or indemnify its insured under a general commercial liability insurance policy because the “known claims” and “expected or intended injury” exclusions applied to bar coverage. The appellate court held that the insured was aware of the circumstances that led to the injuries before the policy period began, thus the damages stemming from those injuries were excluded from coverage.

In 2000, VIM Recycling LLC (“VIM”), opened a wood recycling facility in Elkhart, Indiana. In 2009, the neighbors of the facility joined together to bring a class action lawsuit against VIM for alleged continuous property damage that had occurred since the facility opened in 2000. VIM had general commercial liability insurance from Westfield for the policy period from January 1, 2004 through January 1, 2008. Under the Westfield policies, Westfield was required to pay up to $2M of any judgment against VIM that resulted from a property damage or bodily injury claim.

The neighbors filed their first lawsuit against VIM in federal court in 2009. The district court dismissed the federal claims in the complaint on statute of limitation grounds and refused to exercise supplemental jurisdiction over the state law claims. VIM did not notify Westfield that it had been sued in federal court. The neighbors appealed the dismissal of the complaint and the Seventh Circuit reversed and remanded for further proceedings.

The neighbors filed their second lawsuit against VIM in state court in 2010. VIM notified Westfield of the state court case law claim and asked it to defend. Westfield denied the claim. Shortly after Westfield denied, it filed a declaratory judgment action against VIM and the neighbors in federal court. Westfield’s complaint went unanswered and the court entered a default judgment stating that Westfield did not have a duty to defend or indemnify in the state court action and ordered the neighbors to enter into a stipulation with Westfield stating that the insurer did not have a duty to defend or indemnify “because VIM did not provide timely notice of the lawsuit ‘or history of the environmental issues outlined therein.’”

On remand in the federal case, the district court entered a default judgment against VIM totaling $50.56M, plus the litigation costs. The neighbors moved to recover the judgment from Westfield under Rule 69 of the Federal Rules of Civil Procedure, which allows the court to garnish, or recover, a money judgement that one party owes another.

The district court refused to apply res judicata to the order entered in the state court declaratory judgment action, which stated that the Westfield policies did not apply to the neighbor’s damages. Nonetheless, the district court entered summary judgment in favor of Westfield, holding that “the policy excluded damages for expected or intended injuries, the neighbors’ damages were claims known to VIM at the time it purchased the policies, and VIM breached the policies’ notice requirement.” The neighbors and VIM appealed.

The Seventh Circuit began its analysis by noting that each Westfield policy had an exclusion for “known claims” and “expected or intended injuries.” The court explained, “[t]he extent of Westfield’s obligations can be easily resolved (as nonexistent) if VIM—specifically, VIM’s owner Kenneth Will—knew about the neighbors’ injuries before the first policy went into effect on January 1, 2004.” The question at issue was only whether VIM or Kenneth Will knew that the factory was “engaging in activities that would cause some form of harm to the neighbors’ property;” not whether VIM or Kenneth Will knew the neighbors’ complaints fit the policy specifications.

After reviewing the record, the Seventh Circuit found there was substantial evidence that VIM knew about the injuries the factory was causing before the 2004 Westfield policy went into effect, and therefore, any damages stemming from those injuries were both “known” and “expected.” For example, the record indicated that in 2000, neighborhood complaints about the VIM facility prompted an IDEM (Indiana Department of Environmental Management) inspection that found the VIM facility violated both the Indiana Administrative Code and its own Fugitive Dust Control Plan. These findings were told to Will in person and via certified mail. In 2003, IDEM performed another inspection of the VIM facility which resulted in violations of the Fugitive Dust Control Plan, VIM’s operating permit, and Indiana environmental rules. These findings were told to Will. In addition to the IDEM inspections, the record also indicated the following events happened before the Westfield insurance policy was effective: VIM paid to clean a few neighboring individual’s cars that were damaged from the dust pollution, there were two newspaper articles about the VIM dust problem, Will had met with the neighbors to discuss the dust problem, and IDEM had issued five Notice of Violation letters to VIM. The court determined that the evidence clearly indicated that VIM and Will knew about the dust problem the VIM factory caused before the Westfield policy went into effect.

Accordingly, the Seventh Circuit affirmed the district court’s decision and held that Westfield had no duty to defend because the “known claims” and “expected or intended injuries” exclusions applied to bar coverage for VIM. Greene v. Westfield Ins. Co., No. 19-2260, 2020 U.S. App. LEXIS 19820 (7th Cir. June 25, 2020).