IL Pollution (5th Dist.) – Bad Faith

$7.5M for Travelers’ failure to settle within limits and $2.7M §155 attorneys’ fees; estopped from asserting pollution exclusion

In a 2-1 opinion, the Illinois Appellate Court for the Fifth District affirmed summary judgment for the policyholder, Rogers Cartage Co., (“Rogers”) against two Travelers units and in favor of Rogers with respect to claims filed by Solutia Inc. and Pfizer Inc. in litigation over two Southern Illinois Superfund sites.  Travelers had provided Rogers with 20 general liability policies between 1960 and 1986.  The appellate court, applying Illinois law, found that Travelers had failed to adequately protect its policyholder’s interests by failing to settle within the limits of their policies.  The court held that the $7,500,000 settlement of the underlying litigation made by Rogers was reasonable and that Travelers was responsible for the same due to its failure to properly defend and settle the matter.  Finally, the appellate court affirmed a judgment of $2,670,000 in Illinois Insurance Code §155 attorneys’ fees that were awarded by the St. Clair County court based on Travelers’ “vexatious and unreasonable” conduct.

The underlying factual and legal circumstances set forth in the opinion are complex, in part, because the underlying litigation played out in different federal and state courts over nearly  two decades.  In addition, there is a related coverage litigation pending in Cook County, IL.

The majority opinion found that Travelers had breached its duty to settle based in part, on a letter sent by Travelers, during a “critical time” in the negotiations, that stated that Travelers would consider any settlement reached without its consent to be in violation of its policy provisions and would preclude any potential coverage.  In so doing, the opinion stated that Travelers had employed “coercive tactics” that put its interests over those of its policyholder and was designed to “intimidate” the policyholder and “put a stop to negotiations.” The majority opinion specifically noted that under these circumstances, Travelers’ failure to provide an adequate defense to Rogers was grounds for estoppel to apply even though Travelers was defending under a reservation of rights and had filed a declaratory judgment action seeking a determination of no coverage.

The majority opinion also agreed with the trial court determination that Travelers’ pollution exclusions did not apply to bar coverage.  In dicta, the court noted that while Travelers was barred by estoppel from relying on the exclusions, even if it was not estopped, the exclusions did not apply, in part, recognizing a distinction “between direct discharges to the environment versus placement of the material into an area the insured reasonably believes will contain the material.”  The appellate court found that “Rogers never expected pollutants to enter the environment.  Rogers took specific steps to keep the toxic and hazardous materials it hauled out of the environment by placing them in containment ponds and by using (a) sewer system where they would go to (a) facility, which was designed to specifically treat toxic materials.”

With respect to the §155 bad faith award, the opinion noted that while Travelers had provided a defense to Rogers for an extended period of time, “Travelers’ mishandling and mismanagement of settlement negotiations was so egregious that an award under §155 is warranted.”

The majority opinion was written by Justice Goldenhersh and joined by Justice Chapman.  In a brief dissent, Justice Cates opined that Travelers’ actions should be excused because the policyholder’s lawyer (chosen by Rogers) failed to advise Travelers adequately about developments in settlement litigation.  Rogers Cartage Co. v. The Travelers Indemnity Co., No. 5-16-0098 (Ill. App. Ct Apr. 5, 2018).