Factual questions exist as to exhaustion of all primary coverage, notice and applicability of pollution exclusions

An Illinois federal court, applying Illinois law, denied an insurer’s motion for summary judgment and found that there were multiple issues of material fact which precluded granting the motion.  In its motion for summary judgment, the insurer argued: (1) the insured did not prove that primary coverage was exhausted, and thus, the excess policy was not triggered; (2) the insured provided late notice; and (3) the policy’s pollution exclusion applied because the insured failed to prove any exceptions.

Velsicol Chemical, LLC (“Velsicol”) was insured by International Insurance Company (“International”) under an excess policy from January 1, 1983 to January 1, 1986.  Westchester Fire Insurance Company (“Westchester”) assumed all of the rights and obligations of International under the policy.  Under the terms of the excess policy, Westchester was not responsible for claims until the underlying primary coverage was exhausted.

Velsicol was sued in multiple environmental cleanup actions and personal injury suits related to its manufacture, sale and distribution of toxic chemicals.  During the relevant time period, Velsicol had two underlying primary comprehensive general liability insurance policies, one for the period of January 1, 1983 through January 1, 1985 and one for the period of January 1, 1985 through January 1, 1986.  Both primary policies had $1,000,000 per occurrence limits.  Velsicol sued Westchester for defense and indemnity under the excess policy.  Westchester filed a motion for summary judgment seeking a declaration that the various environmental cleanup and personal injury claims were not covered by the excess policy.

First, Westchester argued that the claims did not trigger the excess policy, because Velsicol had not shown that the primary coverage was exhausted.  Under Illinois law, “a policyholder or primary insurer must show that all triggered primary policies are exhausted before any excess insurance policies can be required to respond to the claim.”  The court found that Velsicol had introduced evidence, including a report created on behalf of Westchester by an environmental claims specialist, which indicated that Velsicol had incurred more than $95 million in total costs in connection with sites for which it had made insurance claims. Therefore, the court held that Velsicol had demonstrated that there was an issue of fact pertaining to whether all primary policies had been exhausted.

Next, Westchester argued that Velsicol’s notice of the claims was untimely.  Under Illinois law, “[a]n excess policy generally requires notice of an occurrence or suit when it appears likely that the excess policy will be implicated.” Illinois courts are to consider “when a reasonable person would have believed it reasonably likely that the claim would implicate the excess insurance.”  According to the court, because the parties disputed whether or not primary coverage had been exhausted at all, “let alone at what point claims were reasonably likely to involve the excess policy,” the issue of timely notice was a genuinely disputed fact.

Lastly, Westchester argued that Velsicol failed to meet its burden of proving an exception to the pollution exclusion.  The excess policy “does not apply if the discharge, discharge dispersal, release or escape is sudden and accidental” nor does it apply to “Products Hazard.” Velsicol argued that the “Products Hazard” exception to the pollution exclusion applied.  One of the sites at issue was a chemical formulator, to which Velsicol supplied products that the site processed and packaged. Under Illinois law, products hazard “specifically covers injuries caused by accidents resulting from goods sold if the accident occurs after the possession of the goods has been relinquished to others, and if the accident occurs away from the premises in question.”   The court found that the facts with regard to “Products Hazard” were at best ambiguous and thus, coverage was to be resolved in favor of the insured. Velsicol also argued, and the court agreed, that the pollution exclusion was ambiguous with respect to its application to claims arising from permitted uses.  Lastly, Westchester argued that the pollution occurred in the ordinary operation of Velsicol’s business, and thus, was not sudden or accidental. The court found that if Velsicol’s spills or releases “were routine and ordinary parts of the business” then “they cannot be labeled unexpected.” The court again found this to be an issue of disputed material fact. Therefore, the court denied Westchester’s motion for summary judgment. Velsicol Chem., LLC v. Westchester Fire Ins. Co., as successor in interest to Int’l Ins. Co., No. 15-CV-2534 (N.D. Ill. Sept. 7, 2017).