Find Legal Information

SECOND DIVISION
September 3, 2002

This dispute arises out of a declaratory judgment action filedby plaintiff-appellant, Northern Illinois Gas Company, now known as Nicor Gas (Nicor), against defendant-appellees: The Home InsuranceCompany (Home); Certain Underwriters at Lloyd's and Certain LondonMarket Insurance Companies (London); Lexington Insurance Company(Lexington); Century Indemnity Company (Century); NorthwesternNational Insurance Company (Northwestern); Stonewall InsuranceCompany (Stonewall); and Yasuda Fire and Marine Insurance Companyof Europe Limited (Yasuda)⁽¹⁾ (collectively referred to as theInsurers). Nicor filed the declaratory action seekingindemnification from the Insurers to recover the costs ofinvestigating and remediating environmental contamination at sixmanufactured gas plant (MGP) sites located in Illinois. TheInsurers filed various motions for summary judgment. The trialcourt granted some of those motions on February 10, 2000. Nicornow appeals those rulings.

Two issues are raised on review. First, whether the trialcourt erred in granting the Insurers' motions for summary judgmenton the ground that Nicor should not be indemnified for expenses itvoluntarily incurred for investigation and remediation of five MGPsites. Second, whether the trial court erred in granting theInsurers' motions for summary judgment on the ground that theenvironmental contamination at the various sites did not constitute"occurrences" under the policies at issue. We state the followingbackground facts.

Nicor seeks indemnification for the costs of investigating andremediating property damage at several MGPs located in Aurora,Belvidere, Bloomington, Lockport,⁽²⁾ Ottawa, and Streator, Illinois. The record reveals that some of these MGPs were in operation asearly as the mid 1800s. One of the by-products of the gasmanufacturing process was tar, which was either sold or stored invarious underground containment structures located on site at thethe MGPs. In the 1900s, the introduction of natural gas mademanufactured gas production obsolete. Thus, by the early 1950s,all six of the facilities in question were no longer operational.

At the time the MGPs were retired, the owners made efforts toextract some of the tar from the underground containers, but someof the tar remained in these structures. The underground tankswere then emptied of usable material and filled with buildingdebris or alternative materials to bring them to ground level.

The record reveals that in the years after the MGPs weresealed, coal tar and coal tar water mixtures were released from thestructures into the surrounding soil and groundwater. The releaseof these substances contaminated the groundwater, soil, and thesurrounding environment.

James Janssen, an official with the Illinois EnvironmentalProtection Agency (IEPA), testified that the IEPA became aware ofenvironmental pollution at MGP sites in 1983. From 1983 to thepresent, the IEPA has been involved with the immediate removal andvoluntary cleanup program at MGP sites in Illinois. Although thename of the voluntary cleanup program changed to the "pre-noticeprogram," and then to the "site remediation program" over theyears, Janssen said that these programs were one and the same. In1987, Janssen said that a meeting was held at which Illinoisutility companies were informed by the IEPA that "they may want toinvestigate" potential environmental problems at MGPs under theircontrol. He further testified that the purpose of the voluntarycleanup program was to allow the State to offer its review,comment, and ultimately concurrence on the clean up activitiesundertaken at sites where contamination was present. According toJanssen, no consent decree or court filing was required for autility to become involved with the voluntary cleanup program. He further stated that no representation was ever made to a landownerthat it was "legally obligated" to enroll a site in the voluntarycleanup program, and that the program was "non-adversarial." Inessence, Janssen explained that the property owners were coming tothe IEPA and seeking the IEPA's input into the process of handlingcontamination.

Robert O'Hara, an IEPA project manager for the siteremediation program, testified that the site remediation program isvoluntary in nature as opposed to action taken by the IEPA undersection 4(q) of the Environmental Protection Act (415 ILCS 5/4(q)(West 1998)). Action taken by the IEPA under section 4(q) involvesthe IEPA providing notice to a utility that it intends to takecertain adversarial action in the event the utility fails toadequately respond to a cleanup request. 415 ILCS 5/4(q) (West1998).

In 1992, the record demonstrates that Nicor began to enrollits sites into the IEPA's voluntary cleanup program. O'Haratestified that, to his knowledge, Nicor had enrolled all six sitesat issue into the voluntary cleanup program.

With respect to the Ottawa site, the record reveals that Nicordrafted a review and evaluation services agreement concerning reimbursement of the IEPA's oversight costs incurred in overseeingthe cleanup at the Ottawa location. Nicor asked the IEPA to signthis agreement. However, in a letter dated May 12 1997, the IEPAwrote back in response stating:

"Please be advised that the Division ofLegal Counsel has determined that the draftReview and Evaluation Services Agreement issubstantially in conflict with Title XVII ofthe Environmental Protection Act and containsmisstatements of law and fact. Specifically,*** [t]he eighth paragraph beginning 'WHEREAS'states that the Illinois EPA has requestedthat Northern Illinois Gas and CommonwealthEdison Company perform necessary andappropriate actions at the site. The IllinoisEPA has not provided notice to either NorthernIllinois Gas or to Commonwealth Edison Companyfor the conduct of any response actionsnecessary to eliminate or mitigate significantrisks to human health and the environmentpresented by the release of any hazardoussubstances at the site."

The record reveals that Nicor then undertook some measures tobegin remediation at the sites in question. Nicor argues that indoing so, it has incurred millions of dollars in expenses forinvestigation and cleanup at the various sites. As a result, Nicorseeks reimbursement from the Insurers for the costs incurred forthe remediation and cleanup of the sites at issue.

Nicor claims that for an extended period of time, includingbut not limited to the period 1955 to 1985, it purchased a seriesof comprehensive general liability policies from a variety ofinsurance companies. In addition to the general liabilitypolicies, certain excess and umbrella policies were purchased. These policies were issued by the Insurers, specifically Home,Lexington, and Century. There are slight variations in thelanguage of the Insurers' policies, but they are all policies thatprovide coverage in the event of an "occurrence." For instance,the applicable coverage language in the Home policies states:

"The Company hereby agrees to indemnifythe Insured for all sums which the insuredshall be obligated to pay by reason of theliability imposed upon the insured by law, orassumed by the Insured under contract oragreement, for damages, direct orconsequential, and expenses, all as more fullydefined by the term 'ultimate net loss,' onaccount of personal injuries and propertydamage caused by or growing out of eachoccurrence."

Similar language in one of the Lexington policies provides:

"Underwriters hereby agree to indemnifythe Assured for all sums which the Assuredshall be obligated to pay by reason of theliability imposed upon by law *** for damages*** on account of *** property damage causedby or growing out of each occurrence."

The policies define the term "occurrence" as follows: "Theterm 'occurrence,' wherever used herein, shall mean one happeningor series of happenings, arising out of or due to one event takingplace during the term of this policy" (or "contract" in the case ofthe Home policies). None of the policies in question was in effectduring the time the Nicor MGPs at issue were operational.

On December 20, 1995, Nicor filed a declaratory judgmentaction against the Insurers. Home (joined by Lexington andCentury) moved for summary judgment concerning policies issuedbetween 1955 and 1976 on the ground that no "occurrences" asdefined in the policies occurred during those years. The trialcourt granted the Insurers' motions for summary judgment concludingthat there was "only mere speculation that any occurrence, asdefined in the policy, took place during the policy period."

Home (joined by Lexington and Century) also moved for summaryjudgment on the ground that Nicor was not "legally obligated topay" for the investigation and remediation at the Aurora,Belvidere, Bloomington, Ottawa, and Streator sites. As notedabove, the Lockport site was not included in the summary judgmentmotions made by these insurers because Nicor had been sued by aprivate party for response costs associated with contamination atthat site. The trial court granted the summary judgment motions ofthese insurers on the grounds that the insurance contracts did notcontain a duty to indemnify Nicor's voluntary cleanup actions andthat there was no genuine issue of material fact which wouldpreclude summary judgment in favor of the movant insurers.

We first consider whether the trial court erred in grantingthe Insurers' motions for summary judgment on the basis that Nicorvoluntarily incurred expenses in investigating and cleaning theapplicable sites. The relevant policy language provides thefollowing:

"Underwriters hereby agree to indemnify theASSURED for all sums which the ASSURED shallbe obligated to pay by reason of the liabilityimposed upon the ASSURED by law, or assumed bythe ASSURED under contract or agreement, fordamages *** on account of personal injuriesand the property damage caused by or growingout of each occurrence."

The parties are in agreement that, while there are slightvariations among the policies at issue, the basic wording issubstantially the same.

Nicor claims that because it was legally obligated to pay thecosts of responding to the contamination by reason of liabilityimposed by law or alternatively based upon its agreements with theIEPA, the Insurers were obligated to indemnify it for the costsincurred under the above policy language.

As a preliminary matter, our supreme court has held:

"The construction of an insurance policyand a determination of the rights andobligations thereunder are questions of lawfor the court which are appropriate subjectsfor disposition by way of summary judgment.[Citations.] In construing an insurancepolicy, the primary function of the court isto ascertain and enforce the intentions of theparties as expressed in the agreement.[Citations.] To ascertain the intent of theparties and the meaning of the words used inthe insurance policy, the court must construethe policy as a whole, taking into account thetype of insurance for which the parties havecontracted, the risks undertaken andpurchased, the subject matter that is insuredand the purposes of the entire contract.[Citations.]" Crum & Forster, 156 Ill. 2d at391.

In Illinois, the general rule "is that an insurer's duty todefend and its duty to indemnify are separate and distinct, withthe duty to defend being broader than the duty to indemnify." Douglas v. Allied American Insurance, 312 Ill. App. 3d 535, 538-39,727 N.E.2d 376 (2000). Here, the question is whether the Insurerswere obligated to indemnify Nicor for remediation expenses underthe policies.

This court recently held:

" '[T]he question of whether the insurer has aduty to indemnify the insured for a particularliability is only ripe for consideration ifthe insured has already incurred liability inthe underlying claim against it.' [Citation.] In other words, the duty to indemnify ariseswhen the insured becomes 'legally obligated'to pay damages in the underlying action thatgives rise to a claim under the policy. Onedoes not become legally obligated until ajudgment or settlement is reached between theparties. [Citation.]" (Emphasis omitted.)Guillen v. Potomac Insurance Co. of Illinois,323 Ill. App. 3d 121, 131-32, 751 N.E.2d 104(2001).

Nicor suggests that Zurich Insurance Co. v. Carus Corp., 293Ill. App. 3d 906, 910, 689 N.E.2d 130 (1997), decided by thiscourt, is not dispositive of the indemnification issue because thepolicies in Carus involved the duty to defend whereas the policiesin this case are only indemnification policies. In Carus, theplaintiff-insurer sought a declaratory judgment action against thedefendant-insured, Carus Corporation -- a chemical manufacturer,under general liability policies issued to Carus by severalinsurers. The plaintiff sought a declaration as to whether theinsurers owed Carus reimbursement for expenses incurred during aninvestigation of possible contamination in the soil andgroundwater.

The policies in Carus stated the following:

" ' The Company will pay on behalf of theinsured all sums which the insured shallbecome legally obligated to pay as damagesbecause of:

Coverage A. bodily injury

Coverage B. property damage to which thisinsurance applies, caused by an occurrence,and the company shall have the right and dutyto defend any suits against the insuredseeking damages ***. ' " Carus, 293 Ill. App.3d at 907.

In 1991, the IEPA and the United States EnvironmentalProtection Agency (USEPA) made an assessment of the Carus chemicalfacility. Carus notified its insurers of the results of a sitescreening inspection (SSI) in 1992. In order to avoid being placedon the USEPA's national priorities list, Carus petitioned the IEPAto proceed under the site remediation program. In 1993, Carus wasnotified that the IEPA intended to conduct an SSI on certainproperty adjacent to the Carus chemical facility. Several ofCarus' insurers were notified of this investigation and they deniedcoverage. In 1994, the IEPA notified Carus that hazardoussubstances had been found on the property.

In 1995, the plaintiff filed a declaratory judgment actionseeking a determination that it had no duty to defend or toindemnify Carus in the absence of a lawsuit. All parties filedmotions for summary judgment and the trial court granted theinsurers' motions and denied Carus' motion. The issue in Carus, asdefined by the court on appeal, was whether the insurers were"required to indemnify Carus for expenses incurred whileparticipating in the IEPA's site remediation program." Carus, 293Ill. App. 3d at 908.

Relying on the supreme court decisions in Outboard MarineCorp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 607 N.E.2d1204 (1992), and Lapham-Hickey Steel Corp. v. Protection MutualInsurance Co., 166 Ill. 2d 520, 655 N.E.2d 842 (1995), this courtfound that the insurers had no duty to defend or to indemnify Caruson the ground that the language in the policies required theenvironmental agencies to initiate a proceeding in a court of lawin order for there to be coverage. Carus, 293 Ill. App. 3d at 910. Specifically, the court held:

"The rule coming out of Outboard Marine andLapham-Hickey is clear: an insurer's duty todefend and indemnify is triggered by a suitagainst the insured, and in the absence of alawsuit, no such duty exists. Since no suitwas brought against Carus, the insurers had noduty to defend or indemnify." Carus, 293 Ill.App. 3d at 910.

In Lapham-Hickey, the supreme court concluded that the word"suit" within an all risks liability policy, required an action ina court of law and did not apply to "allegations, accusations orclaims which have not been embodied within the context of acomplaint." Lapham-Hickey, 166 Ill. 2d at 532.

Nicor claims that the reasoning of Carus cannot controlindemnity-only policies like the ones in the instant case becausesuch an interpretation would render the policies "illusory" and noobligations would be imposed on the insurers. We disagree, asdiscussed in detail below, because the issue is whether coverageunder the instant policies was properly triggered by the voluntaryefforts of remediation initiated by Nicor.

As pointed out above, Nicor contends that the holding in Carusis not dispositive because the policies therein contained languagethat the insurers had a duty to defend "any suits against theinsured seeking damages ***." Carus, 293 Ill. App. 3d at 907. Thus, Nicor suggests that Carus was limited to policy languagerequiring that a "suit" be brought against the insured before theinsurer had a duty to indemnify. Nicor points out that theindemnity-only policies in this case contain no language requiringthat a suit be brought against the insured before the insurer canhave any duty to indemnify. However, a reading of Carus revealsthat the court also based its holding on the fact that Carus neverbecame "legally obligated to pay" its investigation and remediationcosts. Carus, 293 Ill. App. 3d at 910.

We also disagree with Nicor that the Carus court's reliance onthe "obligated to pay" language was merely dicta because the courtclearly stated that no document Carus ever received from anenvironmental agency triggered the obligation. Carus, 293 Ill.App. 3d at 910. The policy in the instant case reveals similarlanguage, "Underwriters hereby agree to indemnify the ASSURED forall sums which the ASSURED shall be obligated to pay by reason ofthe liability imposed upon the ASSURED by law, or assumed by theASSURED under contract or agreement, for damages." Thus, we findCarus to be controlling because it did not only rely on the "suit"language, but also considered the "obligated to pay" language,which is similar to the policy language at issue in this case.

We have also examined the foreign authority relied upon byNicor in which courts have interpreted the duty to indemnify as itrelates to similar policy language and find it unpersuasive.

In Upjohn Co. v. New Hampshire Insurance Co., 178 Mich. App.706, 716-17, 444 N.W.2d 813, 817 (1989), Upjohn, a pharmaceuticalcompany, sued its liability or excess liability carriers claimingcoverage under those policies for its environmental contaminationof the groundwater. The Court of Appeals of Michigan interpretedpolicy language that was nearly identical to the policy language atissue in the instant case. In Upjohn, one policy provided that theinsured would be indemnified, "for all sums which the Insured shallbe obligated to pay by reason of liability imposed on the Insuredby law, or liability assumed under contract or agreement; for alldamages *** on account of *** property damage." Upjohn, 178 Mich.App. at 717, 444 N.W.2d at 818. In another policy, the languageprovided: "The company will pay on behalf of the insured all sumswhich the insured shall become legally obligated to pay as damagesbecause of *** property damage to which this insurance applies***." Upjohn, 178 Mich. App. at 718, 444 N.W.2d at 818.

The reviewing court observed that the governmental agenciescould have ordered Upjohn to act and had they done so, Upjohn wouldhave been legally obligated to pay the cleanup costs. Upjohn, 178Mich. App. at 719-20, 444 N.W.2d at 819. Therefore, the courtdetermined that Upjohn's voluntary cleanup efforts were compensableunder the policies. Upjohn, 178 Mich. App. at 719, 444 N.W.2d at819. The court further found that remedial action should beencouraged prior to an order to do so because of the government andcitizens' interest in the natural resources. Upjohn, 178 Mich.App. at 719-20, 444 N.W.2d at 819.

Upjohn is unpersuasive for two reasons. First, the decisionwas reversed by the Supreme Court of Michigan in Upjohn Co. v. NewHampshire Insurance Co., 461 N.W.2d 486 (Mich. 1990). Although thereversal was on other grounds, we decline to rely on thisauthority. Second, in Upjohn, the Court of Appeals of Michigandetermined that because an environmental agency "could have"ordered a cleanup, Upjohn "would have" been legally obligated topay cleanup costs. We not only find this rationale faulty, but inthis case, the unrefuted testimony of James Janssen alsoestablished that no representation was ever made to Nicor that itwas legally obligated to enroll its sites in the voluntary cleanupprogram or that the program was adversarial. As a result, Nicorwas not legally obligated to pay for the cleanup costs pursuant toan instruction by the IEPA or any other governmental agency. Because Janssen's testimony affirmatively established that noliability was imposed upon Nicor by law, we conclude that coveragewas not triggered under the instant policies.

In Bausch & Lomb, Inc. v. Utica Mutual Insurance Co., 330 Md.758, 779-80, 625 A.2d 1021, 1031-32 (1993), Bausch & Lomb, amanufacturer of health care and optical products, sought coverageunder several commercial general liability policies forcontamination that occurred at a manufacturing site in Maryland. The language in the policies was similar to the policies in thiscase. The language in the standard Bausch & Lomb policiesprovided:

"The company [Utica] will pay on behalf of theinsured all sums which the insured shallbecome legally obligated to pay as damagesbecause of ... property damage to which thisinsurance applies caused by an occurrence, andthe company shall have the right and duty todefend any suit against the insured seekingdamages on account of such property damage."Bausch & Lomb, 330 Md. at 764, 625 A.2d at1024.

Also, the reviewing court in Bausch & Lomb recognized that theComprehensive Environmental Response, Compensation, and LiabilityAct of 1980 (CERCLA)(42 U.S.C.