LM Ins. Corp. v. The City of Sycamore

1

2023 IL App (2d) 220234

LM INSURANCE CORPORATION and LIBERTY INSURANCE CORPORATION, Plaintiffs and Counterdefendants- Appellees, v. THE CITY OF SYCAMORE and JENNIFER CAMPBELL and JEREMY PENNINGTON, Individually and on Behalf of All Others Similarly Situated, Defendants

(The City of Sycamore, Defendant and Counterplaintiff-Appellant).

No. 2-22-0234

Court of Appeals of Illinois, Second District

June 8, 2023

Appeal from the Circuit Court of De Kalb County. No. 21-CH-48 Honorable Bradley J. Waller, Judge, Presiding.

Attorneys for Appellant: Angela R. Elbert, Paul Walker-Bright, and Benjamin Boris, of Neal, Gerber &amp Eisenberg LLP, of Chicago, for appellant.

Attorneys for Appellee: Matthew O. Sitzer, Matthew C. Wolfe Kathleen M. Ryan, and Tara D. Kennedy, of Shook, Hardy & Bacon L.L.P., of Chicago, for appellees.

JUSTICE SCHOSTOK delivered the judgment of the court, with opinion. Justices Jorgensen and Kennedy concurred in the judgment and opinion.

OPINION

SCHOSTOK, JUSTICE

¶ 1 This case involves an insurance coverage dispute. Jennifer Campbell and Jeremy Pennington, residents of the City of Sycamore (Sycamore), filed a putative class action complaint against Sycamore alleging that Sycamore's failure to maintain its water mains had harmed Sycamore's residents by providing them with unsafe drinking water and damaging the equipment that used water in their homes. Sycamore tendered the claim to its insurers, LM Insurance Corporation and Liberty Insurance Corporation (collectively, Liberty), seeking coverage. Liberty denied coverage and filed an action for declaratory judgment, asserting that the policies it had issued to Sycamore did not provide coverage. The circuit court of De Kalb County agreed and granted Liberty judgment on the pleadings. Sycamore appeals from that order. We reverse and remand for additional proceedings.

¶ 2 I. BACKGROUND

¶ 3 Liberty issued two commercial general liability insurance policies and two umbrella policies to Sycamore for the period from December 1, 2018, to December 1, 2020. The policies provided that Liberty would pay those sums that Sycamore became legally obligated to pay as damages because of "bodily injury" or "property damage" to which the insurance applied. The policies further provided that Liberty would have the right and duty to defend Sycamore against any suit seeking those damages. The policies indicated that damages due to "pollution" were excluded from coverage.

¶ 4 On October 30, 2020, Campbell and Pennington filed a complaint in federal court for a purported class action on behalf of all people who resided in Sycamore from January 1, 2000, to October 30, 2020. The complaint alleged that Sycamore residents had suffered physical injuries and property damage due to allegedly contaminated water that Sycamore supplied. The complaint described a widespread "water problem" that had been caused by Sycamore's reckless deferred maintenance as it had "avoided replacing century-old water mains *** for decades." The complaint further alleged that the issue was not just limited to the age of the water main piping but also that the mains sat in highly corrosive soils that "react with construction materials and eat away at the iron water mains, leading them to disintegrate and crumble underground."

¶ 5 According to the complaint, during the years that Sycamore had allowed the water pipes to decay, contamination of the water supply had occurred in multiple ways threatening the health and safety of Sycamore residents. The contamination included contamination from iron, lead, and bacteria. This contaminated water was then dispersed throughout Sycamore's water system, including into the homes of Sycamore residents. The complaint asserted that Sycamore residents had informed Sycamore about problems with its contaminated water supply, but Sycamore refused to do anything about it. The complaint sought both compensatory and punitive damages.

¶ 6 Following the filing of the complaint, Sycamore tendered a claim to Liberty for coverage of the underlying action. After an investigation, Liberty denied coverage.

¶ 7 On February 18, 2021, Liberty filed a complaint for declaratory judgment, asserting that it did not owe Sycamore a defense or indemnity related to the policies that it issued to Sycamore that covered the period from December 1, 2018, to December 1, 2020. On October 28, 2021, Liberty filed an amended complaint for declaratory judgment. Liberty asserted that the policies provided coverage for only an "occurrence," which the policies defined as an "accident." Liberty argued that Sycamore's ongoing failure to maintain its water system over a period of years or decades did not constitute an "occurrence." Liberty further argued that coverage was precluded due to the policies' pollution and lead exclusions. Liberty maintained that the pollution exclusion applied because the alleged damages would not have occurred but for Sycamore's use of a polluted water source and its dispersal of that polluted water to the residents' homes. Liberty asserted that the lead exclusion applied because the claims in the plaintiffs' underlying suit arose from their exposure to lead.

¶ 8 On November 12, 2021, Sycamore filed its answer, affirmative defenses, and counterclaims. In count I of its counterclaims, Sycamore alleged that Liberty had breached its contract by failing to accept coverage or defend Sycamore in connection with the underlying lawsuit. In count II, Sycamore asked the court to declare that Liberty had a duty to defend Sycamore against the underlying complaint.

¶ 9 On December 13, 2021, Liberty filed a motion for judgment on the pleadings. On January 25, 2022, Sycamore filed a motion for judgment on the pleadings as to count II of its counterclaims, seeking a declaration that Liberty had a duty to defend the underlying lawsuit.

¶ 10 On April 12, 2022, the trial court denied Liberty's motion for judgment on the pleadings and granted Sycamore's motion for judgment on the pleadings as to count II of its counterclaims. Liberty filed a motion to reconsider.

¶ 11 On June 10, 2022, upon reconsideration, the trial court found that the allegations in the underlying complaint alleged an "occurrence" that triggered Liberty's duty to defend Sycamore. However, the trial court found that the "Total Pollution Exclusion" and the "Pollution" exclusion in the commercial general liability (CGL) and the umbrella policies, and the lead exclusion in the CGL policies, applied. As such, the trial court held that Liberty had no duty to defend Sycamore and entered judgment in Liberty's favor. Sycamore thereafter filed a timely notice of appeal.

¶ 12 II. ANALYSIS

¶ 13 On appeal, Sycamore argues that the trial court erred in interpreting insurance contract between Liberty and Sycamore and determining that Liberty did not owe a duty to defend and indemnify it regarding the underlying complaint. Sycamore contends that the pollution and lead exclusions in Liberty's policies do not negate Liberty's duty to defend it in the underlying lawsuit. Sycamore argues that the pollution exclusion applies only to "traditional environmental pollution," which it insists is not what the underlying complaint is alleging.

¶ 14 At the outset, we note that an insurer's duty to defend is determined by comparing the allegations in the underlying complaint to the relevant provisions of the insurance policy. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 107-08 (1992). If the facts alleged in the complaint fall within, or potentially within, the language of the policy, the insurer's duty to defend arises. Id. at 108. Because an insurance policy is a contract, the rules applicable to contract interpretation govern the interpretation of an insurance policy. Nicor, Inc. v. Associated Electric &Gas Insurance Services Ltd., 223 Ill.2d 407, 416 (2006). Our primary function is to ascertain and give effect to the intention of the parties, as expressed in the policy language. Founders Insurance Co. v. Munoz, 237 Ill.2d 424, 433 (2010). If the language is unambiguous, the provision will be applied as written, unless it contravenes public policy. Id. The rule that policy provisions limiting an insurer's liability will be construed liberally in favor of coverage applies only where the provision is ambiguous. Id.

¶ 15 Judgment on the pleadings is proper only when the pleadings disclose no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Gillen v. State Farm Mutual Automobile Insurance Co., 215 Ill.2d 381, 385 (2005). When ruling on a motion for judgment on the pleadings, the court considers only those facts apparent from the face of the pleadings, matters subject to judicial notice, and judicial admissions in the record. Id. We review de novo the court's order granting or denying a motion for judgment on the pleadings. St. Paul Fire &Marine Insurance Co. v. City of Waukegan, 2017 IL App (2d) 160381, ¶ 25.

¶ 16 The "total pollution exclusion" at issue states that the policies do not apply to" 'bodily injury' or 'property damage' which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at any time." Our supreme court first addressed the scope of this exclusion in American States Insurance Co. v. Koloms, 177 Ill.2d 473, 476 (1997). In Koloms, carbon monoxide was released from a faulty furnace located in a two-story commercial building, saturating the air inside the building. Id. As a result, those on the premises became ill and filed suit. Id. The insurer of the building denied the insured's tendered defense, arguing that, because carbon monoxide was a pollutant,...