No Duty to Defend or Indemnify Allegations of Intentional Conduct

The Illinois Appellate Court for the First District, in an opinion written by Justice Hyman with Justice Griffin concurring and Justice Walker dissenting, applying Illinois law, affirmed the decision of the trial court and found General Casualty Company of Wisconsin (“General Casualty”) had no duty to defend or indemnify Burke Engineering Corporation (“Burke”) in an underlying action that ultimately settled for $18.3 million because at the time of settlement the underlying complaint was based on facts alleging intentional conduct.  The dissent argued that there was a duty to defend and that the majority incorrectly determined whether the underlying complaint includes allegations of conduct the insurance does not cover instead of determining whether the underlying complaint precludes coverage.

Burke was sued for allegedly helping the Village of Crestwood (“Crestwood”) conceal the release of contaminated well water to the residents of Crestwood. The original complaint against Burke included claims of negligence, the negligence claims were dismissed and the only claim remaining against Burke at the time of settlement was for civil conspiracy to commit fraud. According to the underlying complaint, Burke provided water engineering and consultation services to Crestwood from 1980 to 2006. In 1985, the Illinois Environmental Protection Agency (“IEPA”) notified Crestwood that one of the wells it used to supply water to its residents was contaminated and unsafe for consumption. Burke helped Crestwood prepare a water usage report for the IEPA that claimed Crestwood provided Lake Michigan water as drinking water for its residents and only designated the well water as an “emergency backup.” In actuality, Crestwood combined the water from Lake Michigan with the contaminated well water to create the residents’ drinking water. Despite telling its residents the water was safe to drink, the water was contaminated with toxic chemicals, including known carcinogens. In 2007, the IEPA discovered that Crestwood had lied on its water usage report and regularly supplemented water from Lake Michigan with the contaminated well water in its drinking water for its residents.

Burke tendered the defense of the case brought by the residents of Crestwood to Essex Insurance Company (“Essex”), its claims-made professional liability insurer. The Essex policy had $1 million in limits, including defense costs. Essex agreed to defend Burke. Burke also tendered the case to General Casualty under the general liability policies issued to Burke during the relevant time period. General Casualty denied coverage asserting that the underlying complaint did not allege bodily injury or property damage caused by an accident.

The underlying case settled against Burke for $18.3 million. Essex paid its remaining limits of $298,422.56, leaving over $18 million outstanding. Under the settlement agreement, the residents’ remedy rested exclusively on an assignment of Burke’s rights under the General Casualty insurance policies. General Casualty sought a declaration that it did not have a duty to defend or indemnify Burke because Burke’s conduct was intentional and thus, not covered under the policy. The General Casualty policy at issue covered damages for bodily injury if the bodily injury resulted from an “occurrence” and the injury occurred during the policy period. The policy defined an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” but included a policy exclusion for injuries that were “expected or intended from the standpoint of the insured.” General Casualty argued that it did not have a duty to defend Burke because the complaint repeatedly alleged intentional conduct that did not constitute an “occurrence” under the policy.

The residents of Crestwood filed a counterclaim against General Casualty alleging that it breached its contract by denying coverage and acted in bad faith under section 155 of the Illinois Insurance Code. The trial court granted General Casualty’s motion for summary judgment on its complaint and the counterclaim finding that the residents did not allege facts that showed that Burke’s conduct was “an unforeseen occurrence” or a “sudden or unexpected event.” Rather, the factual allegations set forth intentional conduct by Burke. The residents appealed.

On appeal, the residents argued that the allegations in the underlying complaint potentially fell within the insurance policy triggering coverage because they originally alleged that Burke was negligent in breaching its fiduciary duty to inform the public about the contaminated water and even though those allegations were later dismissed, recovery was possible because they filed amended complaints preserving the negligence counts for appeal. The appellate court disagreed: “[t]hese factual allegations do not allege an unforeseen occurrence or sudden or unexpected event.” The fact that the underlying complaint also contained negligence counts was irrelevant. According to the appellate court, the court is to look at the actual factual allegations, not the label. As such, the majority found that General Casualty did not have a duty to defend or indemnify Burke. Justice Walker dissented and argued that General Casualty had a duty to defend Burke. According to Justice Walker, the majority incorrectly determined whether the underlying complaint includes allegations of conduct the insurance does not cover instead of determining whether the underlying complaint precludes coverage. General Casualty Company of Wisconsin v. Burke Engineering Corporation, 2020 IL App (1st) 191648 (Sept. 14, 2020).