No Duty to Defend Mediation Despite Related Lawsuit

The Illinois First District Appellate Court, in an opinion written by Justice Cunningham with Justices Delort and Harris concurring, applying Illinois law, upheld the trial court’s decision which found no duty to defend a mediation regarding liability for environmental contamination despite the fact that a related lawsuit was later filed by a different party.  The appellate court found that the mediation was not a continuation of the later filed lawsuit and that the allegations in the later filed lawsuit were different from the claims at issue in the mediation even if they both related to alleged environmental contamination by the insured.

In 2001, Illinois Tool Works, Inc. (“ITW”) acquired Diagraph Corporation (“Diagraph”).  Diagraph manufactured stencils, stencil machines, ink, duplicators, and related products from 1947 to 2002 at various manufacturing facilities in a location known as the Crab Orchard Site.  After a 1987 investigation of the Crab Orchard Site, the United States Environmental Protection Agency (“EPA”) listed the Crab Orchard Site as a National Priorities List Superfund Site.  Between 1974 and 1985, Ace Specialty Insurance Company, New Hampshire Insurance Company, and Zurich American Insurance Company (collectively the “Insurers”) issued a series for general liability insurance policies to Diagraph, which are available to ITW as Diagraph’s successor.  Each policy provides a duty to defend ITW against a “suit.”

In 2004, ITW received a letter from General Dynamics Ordinance and Tactical Systems, Inc. (“General Dynamics”) providing notice of liability “with respect to environmental contamination at the Crab Orchard Superfund Site” because Diagraph’s activities at the site “resulted in the release of hazardous substances into the soil and/or groundwater.”  The letter invited ITW to participate in the remediation, but explained that if ITW declined to do so, General Dynamics would file a lawsuit.  ITW agreed to participate in the remediation and entered into mediation with United States government.  ITW notified the Insurers about the mediation and submitted defense bills, but the Insurers did not make any reimbursements to ITW.

Then in 2011, the United States government filed a separate complaint against General Dynamics and another company seeking to recover the costs incurred in cleaning up the portion of the Crab Orchard Superfund Site known as Site 36.  Site 36 was where the former wastewater treatment plant was located.  A third-party complaint was filed against ITW seeking contribution for the costs incurred in the remediation of Site 36.  The complaint alleged that even though Diagraph’s manufacturing facilities were not located at Site 36, “the activities of Diagraph resulted in the release and/or dispersal of hazardous substances in Site 36” through the wastewater treatment plant.  The Insurers funded ITW’s defense. Ultimately ITW settled the third-party complaint by agreeing to pay $166,666.67.

In 2014, ITW filed a declaratory judgment action against the Insurers seeking a declaration that the Insurers had a duty defend and indemnify it for the claims against it related to the Crab Orchard Superfund Site.  Both parties moved for summary judgment.  The Insurers argued that the mediation was not a “suit,” and therefore, there was no duty to defend.  The trial court denied ITW’s motion and granted summary judgment in favor of the Insurers.  According to the trial court, ITW had not presented any evidence demonstrating a link between the Site 36 lawsuit and the mediation.

On appeal, ITW argued that the Insurers’ duty to defend, which was triggered by the Site 36 lawsuit, extended to the mediation.  Specifically, ITW argued that the “claims of environmental damage” for both the Site 36 lawsuit and the mediation “arise out of the same alleged misconduct.”  While, ITW did not dispute the fact that the mediation was not a “suit” under the terms of the policies, it argued that the mediation was a continuation of the Site 36 lawsuit.

The appellate court disagreed with ITW.  The mediation did not seek liability for claims that had already been expressly alleged in a lawsuit and the Insurers “do not have a duty to defend against a hypothetical lawsuit that [had] not yet occurred.”  The Site 36 lawsuit strictly alleged ITW’s liability for the cleanup of only Site 36 and did not contain a single allegation of any type of contaminate release at the Diagraph facilities site at issue in the mediation.  Furthermore, the mediation sought liability for different environmental contamination that was not related to discharges into the sewer system and did not include any allegations regarding Site 36.  Therefore, the appellate court found that the Site 36 lawsuit and the mediation did not arise out of the same occurrence.  “The insurance policies here provide a duty to defend only where there is a ‘suit,’ and it has been established that the [mediation] is neither a ‘suit’ nor a continuation of the Site 36 lawsuit.”  Illinois Tool Works, Inc. v. ACE Specialty Ins. Co., 2019 IL App (1st) 181945 (Aug. 23, 2019).