Richards Building Supply I, LLC v. The North River Insurance Company

Filing 36

MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 11/22/2017: For the reasons stated in the accompanying Memorandum Opinion and Order, the Court grants defendant's motion for partial summary judgment 26 in part and denies it in part. Counsel should be prepared at this morning's status hearing to discuss a schedule for further proceedings. (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

RICHARD BUILDING SUPPLY I, LLC, )
)
Plaintiff,
)
)
vs.
)
)
THE NORTH RIVER INSURANCE CO., )
)
Defendant.
)

Case No. 16 C 9053

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
In September 2014, a catastrophic fire occurred at a warehouse in Connecticut in
which Richards Building Supply I, LLC leased space. The fire started in a part of the
warehouse occupied by another company but burned out of control and destroyed the
part of the building that Richards occupied. Richards suffered losses relating to its own
property stored at the site. And in January 2016, Richards received a "potentially
responsible party" (PRP) letter from the U.S. Environmental Protection Agency. The
letter stated that the EPA had determined that there had been a release of hazardous
substances at the warehouse site and that there was a threat of additional releases and
that Richards was "potentially liable" under federal law "for the cleanup of the Site." Dkt.
No. 1-5 at 1, 2. The letter stated that unless Richards or some other PRP(s) committed
to performing or financing the cleanup, EPA would do it and would seek to recover its
costs from Richards and other PRPs. Id. at 2.
Richards asked its liability insurer, North River Insurance Co., to provide a

defense and indemnification in connection with it characterized as the "action" brought
by the EPA. In its complaint, Richards alleges that North River "has denied coverage
for the fire loss clean up and more particularly the EPA PRP Letter and has failed to
defend [Richards] or file a declaratory judgment action [seeking a judgment of noncoverage]." Dkt. 1, ¶ 9. Richards has sued for damages for breach of contract due to
North River's failure to reimburse and defend the company, and for a declaratory
judgment regarding coverage under the insurance policy. Richards also seeks
damages for vexatious conduct.
North River has moved for partial summary judgment. It seeks a determination,
among other things, that "Richards' claims in connection with the PRP letter are barred
by the [insurance] policy's pollution exclusion." Def.'s Mem. in Support of Mot. for
Partial Summ. J. at 1.
The insurance policy says that North River will pay sums that Richards "becomes
legally obligated to pay as damages because of 'bodily injury' or 'property damage' to
which this insurance applies" and that North River "will have the right and duty to defend
[Richards] against any 'suit' seeking those damages." Dkt. 1-3, p. 66. The exclusion on
which North River relies in its motion says that the insurance does not apply to:
f.

Pollution
(1)
"Bodily injury" or "property damage" arising out of the actual,
alleged or threatened discharge, dispersal, seepage, migration,
release or escape of "pollutants":
(a)
At or from any premises, site or location which is or
was at any time owned or occupied by, or rented or loaned
to, any insured. However, this subparagraph does not apply
to:
(i)

"Bodily injury" if sustained within a building and
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caused by smoke, fumes, vapor or soot produced by
or originating from equipment that is used to heat,
cool or dehumidify the building, or equipment that is
used to heat water for personal use, by the building's
occupants or their guests;
(ii)
"Bodily injury" or "property damages" for which
you may be held liable, if you are a contractor . . .;
(iii)
"Bodily injury" or "property damages" arising
out of heat, smoke or fumes from a "hostile fire";
...
(2)

Any loss, cost or expense arising out of any:
(a)
Request, demand, order or statutory or regulatory
requirement that any insured or others test for, monitor,
clean up, remove, contain, treat, detoxify or neutralize, or in
any way respond to, or assess the effects of "pollutants"; or
(b)
Claim or suit by or on behalf of a governmental
authority for damages because of testing for, monitoring,
cleaning up, removing, containing, treating, detoxifying or
neutralizing, or in any way responding to, or assessing the
effects of "pollutants";
However, this paragraph does not apply to liability for
damages because of "property damage" that the insured
would have in the absence of such request, demand, order
or statutory or regulatory requirement, or such claim or "suit"
by or on behalf of a governmental authority.

Dkt. No. 1-3, pp. 68, 69.
North River's first argument is that the PRP letter is not a "suit," a term defined in
the policy as "a civil proceeding in which damages because of 'bodily injury,' 'property
damage' or 'personal and advertising injury' to which this insurance applies are alleged,"
including an arbitration proceeding or any other alternative dispute resolution
proceeding in which such damages are claimed. Id. at 81. The Illinois Supreme Court
has held that a governmental demand letter like the one at issue here is not a "suit" that
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triggers an insurer's duty to defend under a standard commercial general liability policy
like the one North River issued to Richards. See Lapham-Hickey Steel Corp. v.
Protection Mut. Ins. Co., 166 Ill. 2d 520, 532-33, 655 N.E.2d 842, 847 (1995). Rather, a
"suit" is a proceeding in a court of law (or, perhaps, an arbitration or ADR proceeding in
some instances, as indicated by the policy definition set out above). See Employers
Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127, 140, 708 N.E.2d 1122, 1130
(1999).
Richards concedes that there is no duty to defend with respect to the PRP letter,
but it argues that the duty to indemnify is different. The Court agrees. The Seventh
Circuit, applying Illinois law, has made it clear that "the duty to indemnify may arise even
in absence of a lawsuit triggering the duty to defend." Keystone Consol. Indus., Inc. v.
Employer Ins. Co. of Wausau, 456 F.3d 758, 759 (7th Cir. 2006). A liability insurance
policy "may entitle the insured to indemnification for claims that do not arise from the
resolution of a lawsuit, so long as those claims satisfy any requirements set forth in the
relevant provisions of the policy." Id. at 762. In other words, "while the duty to
indemnify may sometimes nest inside the duty to defend, that will not always be the
case." Id. (quoting Sokol & Co. v. Atl. Mut. Ins. Co., 430 F.3d 417, 421 (7th Cir. 2005)).
In this case as in Keystone, the language of the insurance policy "supports a conclusion
that [the insurer] has a duty to indemnify [the insured] that is independent of its duty to
defend." Id. Specifically, the duty to indemnify applies to damages that Richards
"becomes legally obligated to pay," whereas the duty to defend applies only to "any 'suit'

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seeking those damages." Dkt. No. 1-3, p. 66. 1
North River's second argument is that even if it might otherwise have a duty to
indemnify Richards, coverage is excluded by the pollution exclusion quoted earlier.
Coverage is not excluded by subparagraph (1) of the exclusion, or at least the Court
cannot make such a finding on a motion for summary judgment, because on the present
record Richards has a viable argument that any amounts it might ultimately become
obligated to pay will constitute property damages "arising out of heat, smoke or fumes
from a 'hostile fire,'" Dkt. No. 1-3, p. 68, which is an exception to the general exclusion
language.
North River contends, however, that coverage is excluded by subparagraph (2),
which excludes coverage for expenses or costs arising from any demand by a
regulatory agency to clean up or respond to pollutants, unless the insured would have
the liability even in the absence of the regulatory agency's demand. That last exception
to the exclusion may provide Richards with a basis for coverage, because for all the
Court knows Richards would have liability for the anticipated clean-up even without the
EPA's demand—we are primarily talking about future events, so there is no way to say
at this point. But unless that exception applies, North River is correct that any response
or clean-up costs that Richards may become obligated to pay are excluded by the policy
language: they constitute expenses arising out of a demand by a regulatory agency to
clean up, remove, or respond to the effects of pollutants. Richards' only argument to

1

Contrary to North River's contention, Health Care Industry Liability Insurance Program
v. Momence Meadows Nursing Center, Inc., 566 F.3d 689, 693 (7th Cir. 2009), in no
way undermines or detracts from the holding or analysis in Keystone. Health Care
Industry addressed a situation in which ”the duty to defend [was] broader than the duty
to indemnify," id., which was not the case in Keystone and is not the case here.
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the contrary seems to be that subparagraph (2) is ambiguous in light of subparagraph
(1), or perhaps that subparagraph (1) subsumes subparagraph (2) where a "hostile fire"
is involved. But Richards offers no support for its proposed reading of the exclusion,
and there is no basis in the text of the policy for a determination that the exclusion in
subparagraph (2) applies only where the loss is caused by something other than a
"hostile fire." This is, in the Court's view, a case in which the policy terms are plain and
unambiguous, requiring the Court to apply their plain and ordinary meaning and not to
try to conjure up an ambiguity. See, e.g., Crum & Forster Managers Corp. v. Resolution
Trust Corp., 156 Ill. 2d 384, 391, 620 N.E.2d 1073, 1078 (1993). Subparagraph (2) is
not subject to more than one reasonable interpretation as applied here.
Conclusion
For the reasons stated above, the Court grants defendant's motion for partial
summary judgment [26] in part and denies it in part. Counsel should be prepared at this
morning's status hearing to discuss a schedule for further proceedings.

Date: November 22, 2017

________________________________
MATTHEW F. KENNELLY
United States District Judge

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