State v. Hydrite Chemical Co.

280 Wis.2d 647

2005 WI App 60

695 N.W.2d 816

STATE of Wisconsin, Plaintiff, v. HYDRITE CHEMICAL COMPANY a/k/a Avganic Industries, Inc., Defendant-Third-Party Plaintiff-Appellant-Cross-Respondent, v. TRAVELERS CASUALTY & SURETY COMPANY f/k/a Aetna Casualty & Surety Company, American Casualty Company of Reading, PA, Chicago Insurance Company, Continental Casualty Company, First State Insurance Company and First State Underwriters Agency of New England Reinsurance Corp. a/k/a New England Reinsurance Corp., Granite State Insurance Company, Great American Surplus Lines Ins. Co. a/k/a American Empire Surplus Lines Ins. Co., International Surplus Alliance Insurance Co. a/k/a International Insurance Co., Certain Underwriters at Lloyds of London a/k/a Certain London Insurers, Affiliated FM Insurance Company, Northbrook Excess & Surplus Insurance Company, as predecessor to Allstate Insurance Company, American Motorists Insurance Company, Home Indemnity Company and Home Insurance Company, Third-Party Defendants, UNITED STATES FIRE INSURANCE CO., Third-Party Defendant-Respondent-Cross-Appellant,¹ INTERSTATE FIRE AND CASUALTY COMPANY, Fourth-Party Plaintiff, v. MARYLAND CASUALTY COMPANY, Fourth-Party Defendant.

STATE of Wisconsin, Plaintiff, v. HYDRITE CHEMICAL COMPANY a/k/a Avganic Industries, Inc., Defendant-Third-Party Plaintiff-Appellant, v. TRAVELERS CASUALTY & SURETY COMPANY f/k/a Aetna Casualty & Surety Company, American Casualty Company of Reading, PA, Chicago Insurance Company, Continental Casualty Company, First State Insurance Company and First State Underwriters Agency of New England Reinsurance Corp. a/k/a New England Reinsurance Corp., Granite State Insurance Company, Great American Surplus Lines Ins. Co. a/k/a American Empire Surplus Lines Ins. Co., International Surplus Alliance Insurance Co. a/k/a International Insurance Co., Certain Underwriters at Lloyds of London A/K/A Certain

London Insurers, Affiliated FM Insurance Company, Northbrook Excess & Surplus Insurance Company, as predecessor to Allstate Insurance Company, American Motorists Insurance Company, Home Indemnity Company and Home Insurance Company, Third-Party Defendants, UNITED STATES FIRE INSURANCE CO., Third-Party Defendant-Respondent, INTERSTATE FIRE AND CASUALTY COMPANY, Fourth-Party Plaintiff, v. MARYLAND CASUALTY COMPANY, Fourth-Party Defendant.

Nos. 00-3344, 01-0580.

Court of Appeals of Wisconsin.

Submitted on briefs October 20, 2004.

Decided March 17, 2005.

On behalf of the appellant-cross-respondent Hydrite Chemical Co., the cause was submitted on the briefs of Raymond R. Krueger and Cynthia E. Smith of Michael Best & Friedrich LLP of Milwaukee.

On behalf of the respondents-cross-appellants American Motorist Ins. Co. and Northbrook Excess & Surplus Ins. Co., the cause was submitted on the brief of Robert Soderstrom and Michael W. Morrison of Tressler, Soderstrom, Maloney & Priess of Chicago, Illinois.

On behalf of the respondents-cross-appellants Home Indemnity Co. and Home Ins. Co., the cause was submitted on the brief of Alyssa M. Campbell and Mary A. Sliwinski of Williams Montgomery & John Ltd. of Chicago, Illinois, and Amy F. Scholl of Coyne, Niess, Schultz, Becker & Bauer of Madison.

On behalf of the respondent-cross-appellant United States Fire Ins. Co., the cause was submitted on the brief of Patrick J. Lubenow, Milwaukee, and Michael Resis and Timothy J. Fagen, Chicago, all of O'Hagen, Smith & Amundsen, LLC.

A nonparty brief was filed by State of Wisconsin Department of Justice by Peggy A. Lautenschlager, attorney general, and Philip Peterson, assistant attorney general, in support of Hydrite Chemical Co.

Before Deininger, P.J., Vergeront and Lundsten, JJ.

¶ 1. VERGERONT, J.

The primary issue on this appeal is whether the circuit court correctly determined that, based on the undisputed facts, the known loss doctrine precluded coverage for Hydrite Chemical Company under its excess liability policies for losses resulting from liability for groundwater contamination. We conclude that, when the insurance policy involved is an excess liability policy, the known loss doctrine bars coverage only when the insured knows there is a substantial probability that its liability to a third party will reach the excess layer.² Applying that standard, we conclude there are genuine issues of material fact that entitle Hydrite to a trial on its third-party complaint against its insurer, United States Fire Insurance Company (U.S. Fire). We also conclude the circuit court correctly decided there are genuine issues of material fact on U.S. Fire's defense that Hydrite did not give timely notice as required by the policies. Thus, this is not an alternative basis on which to affirm summary judgment. Accordingly, we reverse the circuit court's order dismissing Hydrite's third-party complaint against U.S. Fire and remand for further proceedings.

BACKGROUND

¶ 2. This action has a lengthy history, but we summarize only that relevant to this appeal. The State of Wisconsin sued Hydrite in 1995, alleging that there had been spills of hazardous substances at Hydrite's facility between 1978 and 1995 that had contaminated the soil and groundwater. The complaint alleged that Hydrite failed to take the actions necessary to restore the environment at its facility to the extent practicable and failed to minimize the harmful effects from the discharge in violation of Wis. Stat. § 144.76(3), now WIS. STAT. § 292.119(3).³ Hydrite, in turn, filed third-party complaints against its insurers, including U.S. Fire, seeking a declaration that the insurers were obligated to defend and indemnify it and seeking damages for breach of contract. The issues of coverage and liability were bifurcated, and the insurers moved for summary judgment that there was no coverage on a number of grounds. The circuit court granted summary judgment in favor of some insurers, including U.S. Fire, on some of those grounds. Hydrite appealed, and U.S. Fire and other insurers cross-appealed.⁴ At this point in time, the only insurer that remains a party to this appeal is U.S. Fire. The only issues we address are whether the undisputed facts entitle U.S. Fire to summary judgment under either the known loss doctrine or under the notice provision in its policies.

¶ 3. Much of the evidence relevant to this appeal is not disputed. Hydrite's facility is located in the Village of Cottage Grove, Wisconsin. Hydrite acquired the facility and surrounding land in 1970, when it purchased all the stock of North Central Chemicals, Inc. which had operated a business of repackaging bulk chemicals into smaller containers. At the time of the purchase, there were a large number of above-ground drums on the property, which North Central Chemicals had used to store used solvent chemicals. Between 1970 and 1975, Hydrite did not have any business operations at the property and left the drums where they were.

¶ 4. In 1976, Hydrite began construction of a solvent reclamation plant on the property. To prepare the site for construction, Hydrite employees moved all of the drums to another part of its property. During the moving process, Hydrite employees became aware that the contents of some of the drums had leaked onto the ground beneath. As part of the 1976 construction project, Hydrite retained Warzyn Engineering Firm to conduct an investigation of the soil subsurface and provide recommendations for site preparation and foundation design. One of the seven soil borings taken was described as "strong odor noted," and this analysis was included in the report prepared for Hydrite.

¶ 5. In conjunction with later expansions of the plant, Warzyn conducted additional soil borings for Hydrite in November 1980 and June 1982. A "chemical odor" was noted in one of four borings in 1980 and in seven of eight borings in 1982. According to Hydrite's submissions, when it received the report of the June 1982 soil borings, it reviewed the 1976 report and that was when Hydrite first suspected a problem.

¶ 6. In October 1982, Hydrite contracted with Warzyn to make a preliminary assessment of the presence of solvents in the soil and groundwater within the boundaries of Hydrite's property. Hydrite received the report in December 1982 (1982 Warzyn report). Among the conclusions were:

Volatile organics were observed in high concentrations in the groundwater monitoring wells, exceeding criteria levels established by the EPA at which human health effects are observed. Other compounds may exist which were not specifically detected by the analytical procedure used ....

The potential migration of organic compounds off the Hydrite property can be affected by a variety of factors. We would anticipate that the organics will move off-site in the same direction as groundwater flow (south to south-east).

The report also concluded that the primary concern relating to human exposure was contamination of drinking water, but from recent samplings it did not appear the Village of Cottage Grove water supply system had been affected.

¶ 7. After receipt of the 1982 Warzyn report, Hydrite personnel contacted both the Department of Natural Resources (DNR) and the Environmental Protection Agency officials to tell them of the report and arranged for further investigation by Warzyn. The Warzyn project manager testified that in early 1983 he thought remedial action would likely be required, although the type of remedial action was not known, and he told this to Hydrite's vice president of technology.

¶ 8. In July 1983, Hydrite received the report of the second phase of the investigation (1983 Warzyn report), which found groundwater contamination at least 250 feet downgradient (east) of Hydrite's facility and also found that surface water, discharging to the marsh north of the site, indicated variable concentrations of chlorinated solvents. As to the extent of vertical migration of the contamination, the report stated:

It is apparent that the

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