In Illinois Tool Works, Inc. v. Ace Specialty Ins. Co., 2019 IL App (1st) 181945, the Illinois Appellate Court upheld the lower court’s grant of partial summary judgment to two insurance companies holding that the insurers had no duty to defend an insured in a pre-suit mediation of environmental contamination claims as said claims did not constitute a “suit” within meaning of the applicable commercial general liability (“CGL”) policy. On appeal, the court also distinguished the case from its 1997 holding in Benoy Motor Sales, Inc. v. Universal Underwriters Ins. Co., 287 Ill. App. 3d 942 (1st Dist. 1997) (“Benoy”).

In Illinois Tool Works, the underlying claims of environmental contamination began sometime in the early to mid-1980s. From 1974 to 1985, Ace Specialty Insurance Company, New Hampshire Insurance Company and Zurich American Insurance Company (collectively “the insurers”) issued a series of CGL policies to Illinois Tool Works (“ITW”), the successor of Diagraph Corporation (“Diagraph”). From 1947 to 2002, Diagraph and its subsidiaries manufactured stencils, stencil machines, ink, duplicators and related products at various manufacturing facilities within a location in south-central Illinois known as the Crab Orchard Site. In 1987, an Environmental Protection Agency (“EPA”) investigation of the Crab Orchard Site identified certain areas that allegedly posed unacceptable risks to human health and the environment, due in part to the release of hazardous substances from the manufacturing facilities located at the site. During its investigation, the EPA divided the Crab Orchard Site into six separate operable units, one of which contained a tract of land known as Site 36. The Crab Orchard Site’s former wastewater treatment plant was located in Site 36.

In 1991, the United States government, through the EPA, began developing response initiatives to remediate the various hazardous operable units within the Crab Orchard Site. The cleanup effort of Site 36 was mostly completed by 2006 and the United States government incurred costs in excess of $8.9 million. In 1997, the EPA created a seventh operable unit to address additional releases of hazardous substances that were not included in the six original units. Diagraph’s manufacturing facilities were located within this seventh unit, known as the Additional and Uncharacterized Sites Operable Unit or “AUS-OU.”

In August of 2004, ITW received a letter providing notice of liability “with respect to environmental contamination at” AUS-OU. The letter was from a United States defense contractor, General Dynamics, which also had manufacturing facilities within AUS-OU. The letter identified ITW as a potentially responsible party based upon the activities of its predecessor, Diagraph. The letter specifically contended that Diagraph’s activities had resulted in the release of hazardous substances into the soil and/or groundwater at the AUS-OU. The letter invited ITW to participate in the remediation of AUS-OU and share the costs, but explained that if ITW declined to do so, GD-OTS would file a lawsuit against ITW. ITW agreed to participate in a mediation with the United States. Though a draft complaint was attached to the letter, this complaint was never filed. ITW notified the insurers of the AUS-OU mediation and also submitted its defense bills; however, the insurers did not reimburse ITW for any costs associated with the mediation or the cleanup.

Approximately nine years later, in May of 2011, the United States filed suit against multiple parties, including General Dynamics, seeking to recover the response costs incurred in cleaning up Site 36. General Dynamics filed a third-party complaint seeking contribution for the costs incurred in the remediation of Site 36 from ITW. The insurers funded ITW’s defense in the Site 36 lawsuit and on April 1, 2014, the Site 36 lawsuit concluded pursuant to a consent decree.

Following the resolution of the Site 36 lawsuit, ITW filed suit against the insurers seeking a declaration from the court that the insurers had a duty to defend and indemnify it for claims made against ITW in both the Site 36 lawsuit and the AUS-OU mediation. In moving for partial summary judgment, the insurers acknowledged their duty to defend ITW in the Site 36 lawsuit but asserted that the same duty did not apply to the AUS-OU mediation because it did not constitute a “suit” pursuant to the relevant policies. After the lower court granted the insurers’ partial summary judgment, ITW appealed. The sole issue addressed by the court on appeal was whether the insurers had a duty to defend ITW in the AUS-OU mediation.  

On appeal, the court emphasized the important distinction between a “suit” and a “claim” when determining whether an insurer has a duty to defend. The court reiterated that the term “suit” in an insurance policy is unambiguous and requires the commencement of some action in a court of law before an insurer’s duty to defend is triggered.  Notwithstanding this well-settled rule, ITW averred that the insurers’ duty was triggered because the AUS-OU mediation was a “continuation” of the Site 36 lawsuit. In support of its position, ITW directed the court to its holding in Benoy. In finding ITW’s reliance on Benoy to be misplaced, the court explained that unlike Benoy, where the administrative action sought liability for claims that had already been expressly alleged in a lawsuit, in this case, the allegations in the Site 36 lawsuit were strictly limited to ITW’s liability for the cleanup of Site 36. The court emphasized that the Site 36 lawsuit did not contain a single allegation of any type of contaminant release in AUS-OU.  As such, unlike Benoy, the court found that the AUS-OU mediation did not arise out of the same occurrence and was thus not a “continuation” of the Site 36 lawsuit. Circling back to the important distinction between a “claim” and a “suit,” the court emphasized that imposing upon the insurers a duty to defend ITW in the AUS-OU mediation merely because it involved claims related to the Site 36 lawsuit would lead to an “absurd result.” Consequently, the appellate court held that the duty to defend triggered by the Site 36 lawsuit did not extend to the AUS-OU mediation and the lower court’s judgment was affirmed.

For over twenty years, the holding in Benoy has carved out an exception to the general rule requiring the commencement of some action in a court of law before an insurer’s duty to defend is triggered. The holding in Benoy armed insureds with a basis to trigger an insurer’s defense and indemnity obligations even when no “suit” had been filed. The recent holding in Illinois Tool Works; however, seems to provide Illinois insurance companies with leverage to counter the exception carved out by Benoy. The holding in Illinois Tool Works not only reiterates that the duty to defend not implicated until a lawsuit has been filed, but it also clarifies that an insurer’s pre-suit defense and indemnity obligations are not triggered simply because the pre-suit matter involves claims similar to those asserted in a lawsuit. Rather, in order to trigger the insurer’s duty to defend, Illinois Tool Works decrees that pre-suit matter must concern matters expressly alleged in the related lawsuit.

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