American Mut. Liability Ins. Co. v. Beatrice Companies, Inc., 86 C 1874.

924 F. Supp. 861

AMERICAN MUTUAL LIABILITY INSURANCE COMPANY, Plaintiff and Counter-Defendant, v. BEATRICE COMPANIES, INC., Defendant-Counterplaintiff and Third-Party Plaintiff v. TRANSPORT INSURANCE COMPANY, National Surety Corporation California Union Insurance Company, Northbrook Insurance Company, Allianz Underwriters, Inc. Arthur J. Gallagher & Co., Gallagher-Bassett Insurance Services, Inc., and Liberty Mutual Insurance Company, Third-Party Defendants.

No. 86 C 1874.

United States District Court, N.D. Illinois, Eastern Division.

April 2, 1996.

Order Granting in Part Motion to Amend April 25, 1996.

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Elizabeth M. Budzinski, Wilson, Elser, Moskowitz, Edelman & Dicker, Chicago, IL, for third-party defendant Liberty Mutual Insurance Company.

David Eugene Trainor, John Peter Maniatis, Tressler, Soderstrom, Maloney & Priess, Chicago, IL, for third-party defendant Northbrook Insurance Company.

Kevin R. Sido, Paul G. Roberts, Hinshaw & Culbertson, Chicago, IL, Robert L. Kiesler, Jeanne M. Zeiger, Kiesler & Berman, Chicago, IL, for third-party defendants Arthur J. Gallagher & Co., Gallagher-Bassett Services, Inc.

MEMORANDUM OPINION AND ORDER

ANN CLAIRE WILLIAMS, District Judge.

In this case, Beatrice Co., Inc. ("Beatrice") seeks to recover nearly seven million dollars in defense costs from various insurance companies. The defense costs were incurred in a federal action brought by citizens of the city of Woburn, Massachusetts ("Anderson action").¹ Before the court are numerous motions for summary judgment with approximately 3000 pages of supporting documentation. For the reasons that follow, the court denies Beatrice's motions for summary judgment and grants the motions of all the insurers.

Background

In May 1979, it was discovered that two wells providing drinking water for the city of Woburn, Massachusetts were contaminated with toxic solvents, including trichloroethylene, tetrachloroethylene, benzene, and chloroform. Anderson, 862 F.2d at 913. The city declared an emergency and immediately closed the wells.

On May 18, 1982, a lawsuit was filed in the United States District Court for the District of Massachusetts by Woburn residents who ingested water from the contaminated wells during the late 60's and 70's. Id. at 914. Eventually, there were 34 plaintiffs in the Anderson action, who alleged that they suffered various injuries attributable to the drinking water, including leukemia. See id. The claims sounded in negligence, nuisance and strict liability. Id. Each of the Anderson defendants owned one of the three properties identified by the EPA as possible sources for the contamination: (1) a manufacturing plant owned by W.R. Grace & Co. ("Grace"); (2) premises controlled by Unifirst Company; and (3) a 15-acre parcel of wetland that is the focus of this dispute. Id.

The 15-acre tract had been purchased by the John J. Riley Company ("Riley") in 1951. Id. at 913-14. Riley operated a tannery on nearby property and installed a production well on the 15-acre tract. Id. Effective December 28, 1978, Beatrice acquired Riley, including its real estate and environmental liabilities. Id. at 914. The complaint alleged that Riley had disposed of toxic chemicals on the 15-acre tract, thereby contaminating the well. (See generally Stip.App. Ex. 16(e).) The Anderson complaint named both Riley and Beatrice as defendants. (See Stip.App. Ex. 16(a).)

I. DEFENSE OF THE ANDERSON ACTION

Beatrice contracted three law firms to defend the Anderson action. Two of the firms represented Beatrice and Riley, respectively, at trial. A third law firm served as counsel on environmental issues. Discovery lasted four years, with a first-phase trial starting in March of 1986.² After a 78-day trial, the jury returned a verdict in favor of Beatrice, finding insufficient evidence that any of the chemicals Riley used at the tannery reached the municipal wells. Id. at 914-15. The trial judge amended the verdict pursuant to Federal Rule of Civil Procedure 49(a), made additional findings, and entered judgment for Beatrice. Id. Thereafter, the Anderson plaintiffs appealed.

While the appeal was pending, the plaintiffs learned that, back in 1983, Riley had commissioned YANKEE Environmental Engineering and Research Services, Inc. ("YEERS") to perform a hydrogeological investigation of the tannery. See Anderson, 862 F.2d at 922. In addition, the plaintiffs discovered that a follow-up of the report had been prepared in 1985 by Geotechnical Engineers, Inc. Id. at 922 n. 8. Beatrice submitted the reports to the United States Environmental Protection Agency ("USEPA") in December 1986, but had not produced them during discovery. Id. at 922.

The plaintiffs moved for a new trial on the grounds of newly discovered evidence or, in the alternative, that the reports had been improperly withheld during discovery under circumstances that constituted fraud or misrepresentation. Id. at 922-23. The district court ruled in Beatrice's favor, but the plaintiffs appealed. Id. The appeal on this issue was consolidated with the appeal from the adverse verdict. Id. at 915.

The court of appeals concluded that there was clear and convincing evidence Beatrice had engaged in misconduct. Id. at 927. However, it could not determine on the record before it whether the reports were sufficiently valuable to merit a finding of substantial interference. Id. at 922-32. As such, the appellate court remanded the case to the district court for further proceedings. Id. at 932.

On remand, the district court conducted an evidentiary hearing lasting seventeen days. The judge found that Beatrice's attorneys knew about the hydrogeology report before trial and that their failure to produce it constituted a lapse in judgment. Anderson, 127 F.R.D. at 2-3. With respect to the Riley attorneys, the court concluded that there had been deliberate misconduct. Id. at 5-6. Nevertheless, the district court held that Beatrice and Riley overcame the presumption that the misconduct would have affected the result at trial. Id. at 7-9; Anderson, 129 F.R.D. at 401-03. The appellate court affirmed, Anderson, 900 F.2d at 391-93, and the Supreme Court denied certiorari. Anderson, 498 U.S. 891, 111 S.Ct. 233.

By the time the last appeal was completed in the Anderson action, the total fees and expenses of the lawyers, engineers and experts retained by Beatrice totalled seven million dollars. The proceedings regarding misconduct, alone, cost approximately 2.8 million dollars. (National Surety's Mem. at 43.) In this case, Beatrice seeks to recover its defense costs from various insurance companies that covered Beatrice and Riley.³

II. THE INSURERS

Riley was insured by Liberty Mutual Insurance Company ("Liberty Mutual"), American Mutual, and National Surety Corporation ("National Surety") successively from 1972 to 1979. (Beatrice's 12(m) Stmt. ¶¶ 49, 53, 55.) When Beatrice acquired Riley at the end of 1978, American Mutual and National Surety added Beatrice to their policies as a named insured. (Beatrice's 12(m) Stmt. ¶ 53.)

Beatrice also had its own insurance program in place. Transport Insurance Company ("Transport") provided primary insurance coverage from 1963 to 1987. (Beatrice's 12(m) Stmt. ¶ 18.) In addition, Beatrice carried excess insurance policies between 1977 and 1984. (Beatrice's 12(m) Stmt. ¶¶ 31, 39, 44.) The excess insurers were California Union Insurance Company ("CalUnion"), Northbrook Excess and Surplus Insurance Company ("Northbrook"), and Allianz Underwriters, Incorporated ("Allianz"). (Beatrice's 12(m) Stmt. ¶¶ 31, 39, 44.) The court outlines the pertinent details of the policies below.

A. Liberty Mutual (Riley Insurer)

Liberty Mutual issued a comprehensive general liability policy to Riley covering the period from May 2, 1972 through May 2, 1973. (Stip.App.Ex. 13.)⁴ Liberty Mutual's policy provided coverage in the amount of $500,000 per occurrence. (Stip.App.Ex. 13 at 1.) Under the policy, Liberty Mutual agreed to indemnify Riley for third-party liabilities and had a "right and duty to defend any suit" covered thereunder. (Stip.App.Ex. 14 at 1.) The policy contained the following instruction:

(b) If claim is made or suit brought against the insured, the insured shall immediately forward to the company every demand, notice, summons or other process received by him or his representative.

(c) The insured shall cooperate with the company and, upon the company's request, assist in making settlements, in the conduct of suits and in enforcing any right of contribution or indemnity against any person or organization who may be liable to the insured because of bodily injury or property damage with respect to which insurance is afforded under this policy; and the insured shall attend hearings and trials and assist in securing and giving evidence and obtaining the attendance of witnesses. The insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense other than for first aid to others at the time of the accident.

(Stip.App.Ex. 14 at 4.) The Liberty Mutual policy also contained a standard provision commonly referred to as a "pollution exclusion," which removed from coverage:

bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental.

(Stip.App.Ex. 13 at 4.)

B. American Mutual (Riley Insurer)

American Mutual, which provided Riley with comprehensive coverage from May 2, 1973 to February 28, 1979, is in liquidation and the proceeding is stayed as to this insurer. (Beatrice's 12(m) Stmt. ¶ 56.)

C. National Surety (Riley Insurer)

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