PQ Corp. v. Lexington Ins. Co.

860 F.3d 1026

PQ CORPORATION, Plaintiff-Appellant,

v.LEXINGTON INSURANCE COMPANY, Defendant-Appellee.

No. 16-3280

United States Court of Appeals, Seventh Circuit.

Argued February 14, 2017

Decided June 27, 2017

Joseph L. Pellis, II, Attorney, Pellis Law Group, LLP, Lisle, IL, for Plaintiff–Appellant.

Peter E. Kanaris, Cheryl L. Mondi, Attorneys, Fisher Kanaris, P.C., Chicago, IL, for Defendants–Appellees.

Before Rovner, Williams, and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

This appeal presents a dispute over warehouse liability insurance. Defendant Lexington Insurance Company denied a claim by its insured, Double D Warehouse, LLC, for coverage of Double D's liability to customers for contamination of warehoused products. One basis for denial was that Double D failed to document its warehousing transactions with warehouse receipts, storage agreements, or rate quotations, as required by the applicable insurance policies. Litigation ensued. Plaintiff PQ Corporation was a customer of Double D whose products were damaged while warehoused there. PQ is now the assignee of Double D's policy rights, having settled its own case against Double D by stepping into Double D's shoes to try to collect on Lexington's insurance policies. PQ argued in essence that even though Double D had not documented its warehousing transaction in one of the ways specified in the insurance policies, there were pragmatic reasons to excuse strict compliance with those terms. The district court, however, granted summary judgment in favor of Lexington, enforcing the documentation requirement in the policy.

We affirm. PQ has a point when it says that the documentation Double D actually had (bills of lading and an online tracking system) should serve much the same purpose as the documentation required by the policies (especially warehouse receipts). Yet commercially sophisticated parties agreed to unambiguous terms and conditions of insurance. We hold them to those terms. To do otherwise would disrupt the risk allocations that are part and parcel of any contract, but particularly a commercial liability insurance contract. PQ has offered no persuasive reason to depart from the plain language of the policies.

I. Factual and Procedural Background

Double D is an Illinois limited liability company that operates a warehouse facility in Peru, Illinois. Double D maintained liability insurance coverage with defendant Lexington, a Delaware corporation. For approximately ten years, plaintiff PQ, a Pennsylvania corporation, stored two chemical products at Double D's warehouse: a magnesium sulfate compound commonly known as Epsom salts, and a sodium meta-silicate sold under the trademark METSO BEADS^®. In 2011, PQ began receiving complaints from its own customers about product discoloration. PQ investigated and eventually concluded that the likely culprit was vapors from phenol formaldehyde resin that Double D also stored in its warehouse. The vapors apparently reacted with PQ's highly alkaline products. PQ notified Double D that it intended to hold Double D responsible for any claims made by its customers. Double D then alerted Lexington to the potential claim.

Two annual warehouse legal liability insurance policies are at issue: one effective from June 29, 2010 to June 29, 2011, and the other from June 29, 2011, to June 29, 2012. Both policies provided that Lexington would pay all sums for which Double D became legally obligated "for direct physical ‘loss' or damage to personal property of others because of [its] liability as a warehouse operator," subject to several terms and conditions.

The most important condition for our purposes appeared in sections I.1 ("Insuring Agreement") and II.4 ("Property Not Covered"). It said that Lexington would pay for damages only to the extent that Double D produced a warehouse receipt or storage agreement signed by its customer or a rate quotation that it had presented to its customer before storing the property. Another relevant condition appeared in section X.1.F ("Loss Adjustment"), forbidding Double D from assuming any obligation or admitting any liability without Lexington's consent. A third condition, the "Pollution and Contamination Exclusion," barred coverage for any loss caused by the release of pollution, defined broadly as irritants or contaminants "which after ... release can cause or threaten damage to human health ... or cause[ ] or threaten[ ] damage ... to property insured hereunder."

In late 2011, an independent adjuster hired by Lexington informed Double D that he was investigating PQ's claim. The adjuster also contacted counsel for PQ, requesting details and supporting documents. The following June, PQ sent the adjuster a claim letter with documentation. Seven months later, Lexington denied coverage for PQ's claim, citing the Insuring Agreement and Property Not Covered section, as well as the Pollution and Contamination Exclusion. Lexington explained that "neither Double D nor PQ ha[d] provided Lexington with proof of a signed warehouse receipt, storage agreement or rate quotation." Lexington also said that because PQ had reported damage to its products caused by chemical vapors, the Pollution and Contamination Exclusion barred any coverage. Lexington reiterated its denial of coverage in an April 2013 letter. Both denial letters included a vague invitation: "Should you have any other information you feel may be applicable or relevant to this matter, please immediately forward it to [Lexington]. Please be advised that Lexington will review any additional information submitted under a full reservation of rights under the Policy and at law...."

Following Lexington's denial of coverage, Double D sued Lexington in an Illinois state court alleging breach of contract and seeking a declaration as to its rights under the policies. Lexington removed the action to federal court. (Diversity of citizenship is complete with both Double D and PQ as plaintiffs and Lexington as defendant, and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332(a).) Shortly after the removal, PQ sued Double D in state court. PQ and Double D settled. The key term of the settlement was that Double D agreed to a consent judgment under which it assumed "one hundred percent ... of the fault for PQ's damages" and assigned its rights against Lexington to PQ in exchange for PQ's promise not to collect on any judgment from Double D. PQ then replaced Double D as plaintiff in the federal action. PQ later filed a Second Amended Complaint adding a claim for attorney fees and costs under Section 155 of the Illinois Insurance Code, 215 Ill. Comp. Stat. 5/155.

PQ and Lexington eventually filed cross-motions for summary judgment. At summary judgment, PQ did not argue that Double D complied with the literal terms of the documentation condition appearing in the Insuring Agreement and Property Not Covered section. Nor could it: the parties agree that Double D did not use warehouse receipts or contracts in its dealings with PQ, nor did it supply PQ with rate quotations that would satisfy the policies. PQ argued instead that Lexington knew Double D used bills of lading and an online tracking system as a substitute for warehouse receipts. PQ argued that the term "warehouse receipt" is ambiguous and that the district court should consider extrinsic evidence tending to show that Lexington was aware of how Double D ran its business.

The district court disagreed, explaining that (1) bills of lading are not warehouse receipts, (2) PQ never signed any "receipt" generated by the online tracking system, and (3) Lexington's knowledge of Double D's business practices was "irrelevant to whether Double D in fact satisfied its contractual obligations—Double D either met those obligations or it did not (and in this case it did not)." PQ Corp. v. Lexington Ins. Co. , No. 13 CV 3482, 2016 WL 4063149, at *5–6 (N.D. Ill. July 29, 2016). The district court then considered whether Lexington waived strict enforcement of the documentation condition. The court rejected that possibility as well, finding no evidence that Lexington acted inconsistently with an intent to enforce the condition. Id. at *7. The court could have ended its analysis there. However, it went on to hold in the alternative that Double D had violated its duty under the Loss Adjustment section to obtain consent from Lexington before admitting liability to PQ. Id. at *9. The court also rejected PQ's claim under Section 155 of the Illinois Insurance Code. Id. The district court entered final judgment in Lexington's favor.¹

II. Analysis

A. Standard and Scope of Review

We review de novo the district court's grant of summary judgment to Lexington. In doing so, we apply the same standard that the district court applied, construing all facts and drawing all reasonable inferences in favor of PQ. Indianapolis Airport Authority v. Travelers Property Casualty Co. , 849 F.3d 355, 361 (7th Cir. 2017).

The parties agree that Illinois substantive law applies. In Illinois, "the general rules governing the interpretation of ... contracts also govern the interpretation of insurance policies. ‘If the policy language is unambiguous, the policy will be applied as written, unless it contravenes public policy.’ " Nationwide Agribusiness Ins. Co. v. Dugan , 810 F.3d 446, 450 (7th Cir. 2015), quoting Hobbs v. Hartford Ins. Co. of the Midwest , 214 Ill.2d 11, 291 Ill.Dec. 269, 823 N.E.2d 561, 564 (2005). "Courts will not strain to find ambiguity in an insurance policy where none exists." McKinney v. Allstate Ins. Co. , 188 Ill.2d 493, 243 Ill.Dec. 56, 722 N.E.2d 1125, 1127 (1999). "Although policy terms that limit an insurer's liability will be liberally construed in favor of coverage, this rule of construction only comes into play when the policy is ambiguous." Hobbs , 291 Ill.Dec. 269, 823 N.E.2d at 564.

B. Duty to Obtain Consent

The central dispute in this appeal concerns the meaning of the documentation condition to coverage in the...