7th Cir.: Policyholder Failure to Follow Strict Documentation Required By Warehouse Liability Policy Negates Coverage

Although Ruling for Insurer, Estopped Insurer’s Assertion of No Prior Consent to Settlement Due to Previous Denial of Coverage

The Seventh Circuit, applying Illinois law, affirmed the district court’s ruling granting summary judgment in favor of the insurer.  The Seventh Circuit denied coverage for contamination of warehoused products, by strictly enforcing policy provisions requiring proof that products were in the warehouse.

Lexington Insurance Company (“Lexington”) insured Double D Warehouse, LLC (“Double D”) under a warehouse liability insurance policy.  Double D submitted a claim to Lexington for coverage of Double D’s liability to PQ Corporation (“PQ”), one of Double D’s customers, for contamination of chemical products PQ had stored in Double D’s warehouse.  Lexington denied coverage because Double D failed to document its warehouse transactions with “signed warehouse receipt[s]”, “signed storage agreement[s]”, or “rate quotation[s]”, as required as a condition of coverage by the applicable insurance policies.  Following the denial of coverage, Double D sued Lexington in Illinois state court alleging breach of contract and sought a declaration as to its rights under the policies.  Lexington removed the action to federal court.   Having settled its own case against Double D, PQ was assigned Double D’s policy rights and replaced Double D as the plaintiff in the federal coverage action.

PQ and Lexington filed cross motions for summary judgment.  PQ argued that, even though Double D did not document its warehouse transactions in the ways specified by the insurance policies, Lexington knew Double D used bills of lading and an online tracking system.  According to PQ, the term “warehouse receipt” was ambiguous, and thus, the court should excuse strict compliance with the policy terms.  The district court disagreed with PQ and entered summary judgment in Lexington’s favor.

On appeal, PQ argued that the bills of lading and online tracking system that Double D utilized should serve the same purpose as the documentation required by the policies.  The Seventh Circuit held that Double D had failed to comply with a condition of coverage: “Yet commercially sophisticated parties agreed to unambiguous terms and conditions of insurance. We hold them to those terms.”  Thus, the Seventh Circuit ruled that the district court did not err in finding Double D failed to comply with the conditions of coverage.  The Seventh Circuit also noted that, while it was ruling in favor of Lexington and affirming the district court’s decision, it did not agree that Double D breached the policy by settling with PQ without obtaining Lexington’s consent as required by the policy.  According to the Seventh Circuit, Lexington was estopped from asserting this defense, because Lexington had denied coverage.  PQ Corp. v. Lexington Ins. Co., No. 16-3280 (7th Cir. June 27, 2017).