Great Lakes Dredge & Dock Company, Counterdefendant-Appellee v. City of Chicago, Counterplaintiffs-Appellees v. Commercial Union Insurance Company

Citations: 260 F.3d 789; 2001 A.M.C. 2877; 2001 U.S. App. LEXIS 18069Docket: 99-3777, 99-3844, 99-3877 and 00-4295

Court: Court of Appeals for the Seventh Circuit; August 10, 2001; Federal Appellate Court

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The case involves Great Lakes Dredge & Dock Company (Great Lakes) and the City of Chicago, alongside various insurance companies, in the aftermath of the Chicago Flood of 1992. The flood resulted from Great Lakes' negligent work in replacing pilings at the Kinzie Street Bridge, which led to damage in an underground tunnel system originally built for freight transport. This work caused cracks in the tunnel's ceiling, which went undetected until a catastrophic collapse occurred on April 13, 1992, allowing the Chicago River to flood downtown, resulting in damages estimated between $300 million and $1.5 billion. The incident halted navigation on the river for a month due to necessary repairs.

The legal proceedings stem from a request by Great Lakes for limitation of liability under admiralty jurisdiction, as established in Jerome B. Grubart, Inc. v. Great Lakes Dredge & Dock Co. The focus of the current case is not on the liability amount but on the distribution of responsibility among Great Lakes' insurers. Following a settlement, the City of Chicago and affected parties have assumed Great Lakes' rights under the insurance policies, although Great Lakes is still referred to as the insured for clarity.

Great Lakes held three insurance policies during its fiscal year from August 1991 to July 1992: a primary policy with a $1 million limit and two excess policies from Itel Corporation, which provided $40 million and $60 million in coverage, respectively. The excess policies were underwritten by the "London Insurers." After Itel sold Great Lakes to Blackstone Dredging Partnership L.P. on October 15, 1991, Great Lakes was removed as an additional insured on Itel's first excess policy, which was then replaced with an identical policy naming Blackstone as the insured. The second excess policy was canceled, and Blackstone obtained a new $10 million second-tier excess policy from Continental Insurance. 

Following the roof damage to a tunnel and subsequent flooding, there was a dispute over which policies applied: Continental argued the first-period policies should cover all damages due to the roof weakening, while the London Insurers asserted that only the second-period policies were applicable since the flood occurred during that time. Great Lakes claimed that all excess policies should be stacked for a total coverage of $150 million. The district court sided with Great Lakes, ruling that the London Insurers owed up to $140 million and Continental owed $10 million, regardless of when losses occurred. Additionally, the court ordered the insurers to pay prejudgment interest and assessed a penalty against the London Insurers for bad faith concerning Chicago's status as an additional insured on the primary policy.

Only one policy was fully articulated, but all parties agree its terms apply universally. All policies address property damage resulting from an "occurrence," characterized as an accident or continuous exposure to conditions causing unintended damage within the policy period, with exposure from a single location treated as one occurrence. The district court identified both the tunnel damage and flood losses as occurrences. While the parties initially accepted Illinois law as governing, the London Insurers later contended that federal law should apply due to the admiralty nature of the case, a shift met with a forfeiture claim. The court chose to adhere to the original agreement with consideration of admiralty law principles.

The district judge dismissed the London Insurers' argument that coverage was restricted to individuals injured while the policies were active, asserting that all policies cover all injuries. Consequently, the judge permitted the stacking of coverage limits based on precedents from Illinois case law and the absence of an anti-stacking clause in the policies. Both the London Insurers and Continental appealed; Continental abandoned its claim for total liability against the London Insurers but opposed stacking and prejudgment interest. The London Insurers objected to stacking, the application of first-period policies to flood losses, prejudgment interest, and a bad-faith penalty. A separate appeal regarding costs is on hold pending the outcome of the merits analysis. The focus now shifts to the issue of stacking.

Great Lakes asserts that it can select any insurance policy from relevant periods to cover a loss, potentially requiring its insurer to cover the entire amount up to the policy limit. This approach, known as "stacking" or "joint and several liability," has been established in prior case law. However, a recent court ruling indicates that stacking is not suitable for a single tort that spans multiple policy periods. The example given highlights that if an incident occurs while a policy is active, the responsibility rests solely with that policy, irrespective of subsequent changes in corporate structure or ongoing losses.

The district court relied on Illinois law, referencing Zurich Insurance, which allows for coverage under multiple policies during the inhalation and manifestation of an occupational disease, suggesting that Illinois may endorse joint and several liability. However, this interpretation is limited to specific policy language, and subsequent Illinois appellate decisions indicate no requirement for joint and several liability outside the language of the policies themselves.

The analysis suggests that should the Illinois Supreme Court face the issue directly, it may align with broader interpretations from multiple jurisdictions that prioritize policy language over stacking. Should maritime law apply instead of state law, stacking would similarly be deemed inappropriate unless specifically allowed by the policies.

Great Lakes asserts that it does not depend on language from the London Insurers' or Continental policies, arguing that the absence of explicit anti-stacking clauses implies the cumulation of policy limits is covered by the premium. However, the reasoning that missing language indicates a specific meaning is challenged, as contractual language often contains multiple negations to prevent misinterpretation. 

The premium for the $40 million policy remained unchanged when Blackstone took over from Itel, suggesting that if the division of the original policy into two on October 15, 1991, effectively increased the policy limit to $80 million for the 1991-92 fiscal year, an additional premium would typically be expected. Great Lakes maintained a maximum coverage of $101 million, which was reduced to $51 million post-spinoff. If stacking were permitted, coverage would have jumped from $101 million on October 14 to $151 million on October 16, despite the reduced premium, which is deemed implausible. 

The transactions indicate a singular limit for the 1991-92 policy year, despite the creation of two policies due to corporate reorganization. The policies state that all exposure from similar conditions at one location is considered "one Occurrence," meaning the total loss from the tunnel collapse qualifies as one occurrence, necessitating a determination of the applicable policy period.

The $1 million policy and a $40 million first-excess policy were active throughout the year, and it is established that Continental's $10 million second-excess policy is triggered by the collapse, requiring it to indemnify Great Lakes for losses between $41 million and $51 million. However, Continental is not liable for losses until the underlying limits are exhausted, contradicting the district court's interpretation that coverage is available from the first dollar of loss. The applicability of the London Insurers' $60 million first-period, second-excess policy is uncertain. Although Chicago incurred a loss from tunnel damage while the first-period policies were active, it is unlikely that repair costs exceeded $41 million, meaning the second-excess policy is not triggered unless all underlying policies are exhausted. Illinois law mandates that an occurrence policy is only triggered by losses occurring within its coverage period. The policy defines "property damage" as an event resulting in physical injury to tangible property during the policy period, and no business losses in the Loop occurred until April 1992. Great Lakes cites cases like Zurich Insurance, which suggest that policies active during wrongful acts can be triggered by later-harm manifestations. However, the applicability of this principle under Illinois law is uncertain, particularly following the Supreme Court of Illinois' decision in Travelers Insurance Co. v. Eljer Manufacturing, which asserts that coverage is not triggered until harm from defects manifests. Unlike Zurich Insurance, this case involves distinct injuries: the City suffered damage during the first period, while businesses were harmed during the second period, indicating that no "occurrence" triggering coverage occurred until the collapse in April 1992.

The loss from the tunnel damage was preventable through inspection and repair, distinguishing it from irreversible conditions like asbestosis. The City had the opportunity to avoid total loss by taking precautions after a foot of water and cracks were found in February 1992, during the second period of insurance coverage. Consequently, the flood occurrence is attributed to this second period, and the London Insurers' $60 million second-excess policy has not been activated.

Regarding prejudgment interest, the district court held the London Insurers and Continental jointly liable for over $2 million due to a delay in funding an $11 million settlement. However, this ruling requires revision: Continental is not jointly liable and is not responsible for funding the settlement until the $41 million underlying limits are exhausted. The London Insurers' $40 million first-excess policy was triggered, and they acknowledged delays in indemnity.

While both the district court and parties approached prejudgment interest under admiralty law, there was inconsistency in applying Illinois law for other issues. Prejudgment interest is recognized as part of full compensation in admiralty law and is unaffected by equitable considerations or disputes over liability. Therefore, the award for the delay in funding the settlement is justified. 

However, part of the award for delay in disbursing the first-excess policy limits, following the assignment of rights to Chicago and the injured parties, raises questions about the obligation to pay, as an underlying loss must still be established. The district court's decision seems influenced by joint liability assumptions, necessitating a reevaluation of interest calculations to ensure they do not double count compensation tied to the time value of money. Consequently, the case is remanded for reassessment of prejudgment interest, limited to the $40 million first-excess policy and excluding any amounts related to Continental.

The primary $1 million insurance policy included a separate limit of $1 million for legal expenses related to claims against the insured, Great Lakes. The London Insurers paid the full policy limit for indemnity and utilized the entire $1 million for legal defense costs. However, the district court mandated the London Insurers to pay an additional $500,000 for indemnity and nearly $495,000 for defense expenses, citing bad-faith for failing to recognize Chicago as an additional insured under the policy, which it was entitled to by contract. The London Insurers acknowledged their duty to defend and indemnify Great Lakes but delayed in recognizing Chicago's entitlement, resulting in Chicago receiving no benefits from the policy.

The London Insurers argued on appeal that the two-year delay in addressing Chicago's claims was due to bureaucratic errors and miscommunication, asserting that negligence does not equate to "bad faith" under Illinois law. However, the district court found it challenging to attribute the issue solely to paperwork. The London Insurers did not pay the policy limits until April 1995, despite recognizing Chicago as an additional insured prior to that. Relevant case law indicated that paying one insured while another remains unpaid does not constitute bad faith, but Illinois law defines "bad faith" as objectively unreasonable conduct causing harm to an insured, aligning it more closely with negligence rather than a specific intent to harm. Illinois courts have adopted a confusing definition that lacks a requirement for intent in determining bad faith.

Appellate review of bad-faith findings is deferential, and the court finds no clear error or abuse of discretion by the district court. The London Insurers challenge the district court’s assurance regarding the indemnity and legal expenses awarded to Chicago, questioning the certainty of the $500,000 indemnity and $495,000 in legal fees. The court acknowledges the difficulty in reconstructing alternate scenarios but affirms the district judge's reasonable split-the-limits approach, noting the claims against Chicago exceed $500,000. However, the court vacates the addition of $345,287 in prejudgment interest to the legal expenses due to uncertainty regarding the separation of interest from loss. The ruling requires revisions to several aspects of the district court's decision and mandates reconsideration of the prejudgment-interest dispute. The judgment regarding primary policy penalties is affirmed, but the overall judgment and award of costs are vacated, with the case remanded for further proceedings. Judge CUDAHY concurs in part, dissenting in part, agreeing that the $40 million excess policies should not be stacked. He argues that the reasoning should not rely on alleged Illinois case law trends, as the circumstances surrounding the duplicate policies justify an anti-stacking result based on their unchanged premium post-sale.

Illinois law governs the issues at hand, particularly regarding the stacking of insurance coverage. The authoritative case is Zurich Ins. Co. v. Raymark Indus. Inc., which firmly established that joint and several liability is the default rule in Illinois, rejecting the pro rata, time-on-the-risk allocation previously outlined in a Sixth Circuit asbestos case. The majority opinion attempts to narrow the Zurich decision to its specific circumstances, suggesting that the Illinois Supreme Court would likely endorse anti-stacking based on reasoning from other jurisdictions. However, this view is countered by the interpretation that intermediate appellate courts in Illinois have not dismissed the principle of stacking when policy language allows for it. Notably, cases such as Outboard Marine Corp. and Missouri Pacific Railroad Co. involved "single continuous occurrences," where damages were continuously caused, thus warranting a pro rata allocation based on the policy period. The appellate courts emphasized that each policy should respond to damages occurring during its coverage period, reinforcing joint and several liability in situations where policy language does not explicitly preclude stacking.

The language in previous cases distinguishes them from Zurich's "triple trigger" approach, which activates insurance policies at the time of asbestos exposure, when asbestosis appears, and during subsequent manifestations of illness. The current case involves progressive damage, notably from the 1991 tunnel damage, which immediately affects the tunnel and subsequently damages the flooded premises. Unlike Missouri Pacific and Outboard Marine, which do not deal with a single trigger for later damage, this case supports holding the initial policy responsible for all damages incurred, even if additional policies may be triggered over time.

On the issue of whether the $60 million first-period second excess policy covers flood damage, the interpretation of policy language diverges from the majority's conclusion. The majority argues that the policy is not triggered unless the claimant's loss occurs during the policy period, which contradicts a reasonable interpretation of the language. The policy defines "property damage" broadly, covering physical injury to tangible property and loss of use, while the temporal limitation applies only to the definition of "occurrence." Therefore, the policy covers damages arising from any occurrence, regardless of when the damage occurs. The majority's reliance on lower court cases is inconsistent with the Illinois Supreme Court's ruling in Zurich, indicating a misinterpretation of applicable case law.

Illinois appellate court clarified the distinction in coverage under a general liability policy compared to an "occurrence" policy. Coverage under a general liability policy is triggered by the occurrence of damage, rather than the wrongful conduct itself. In contrast, "occurrence" policies cover negligent acts during the policy period regardless of when the injury is realized. The court noted that the Pekin court may have misunderstood these distinctions, as the language of the policies in question differs significantly. The appellate court emphasized adherence to the Illinois Supreme Court's ruling in Zurich, which allows for coverage when there is a delay between the wrongful act and the harm's manifestation. Additionally, the case of Travelers Ins. Co. v. Eljer Mfg. Inc. was highlighted, where the installation of a defective product was deemed injury to tangible property, aligning with Zurich's principles. The majority argued against applying Zurich and Eljer to this case, suggesting the damages pertained to different incidents. However, the court found this distinction unpersuasive, asserting that the damages from the 1991 tunnel incident and the 1992 flood were part of a continuous series of events stemming from a single occurrence. The court concluded that the timing of damage manifestation should not alter coverage applicability.

The majority opinion references Illinois case law to assert that an occurrence policy is only triggered if loss to the claimant occurred during the policy period, but these cases are not applicable to the current context. Specifically, cases like Pekin and Seegers Grain define property damage under completed operations coverage as only including damage occurring during the policy period. The Great American case emphasizes that an "accident" is not recognized until the injury is evident. However, these precedents are from lower courts and do not undermine Zurich's policy language, which lacks any stipulation regarding damage occurring "to the claimant" during the policy period. A reading of the policy suggesting that damage to the ultimate claimant is unnecessary is reasonable and supported by the language providing coverage for property damage "caused by or arising out of" occurrences. 

The court also dismisses a similar argument made in Travelers Ins. Co. v. Penda Corp., where it was ruled that ownership of the damaged property does not affect coverage determinations. The differing properties damaged in different years are deemed irrelevant, and in cases of ambiguous policy language, it is construed in favor of the insured. The dissent argues that to hold otherwise would allow insurers to evade liability for damages occurring during the policy period, which is unacceptable, particularly when the flood damage directly resulted from an event that transpired while the policy was active. 

The majority's assertion that the flood loss was preventable due to observed tunnel cracks is challenged, as failure to repair does not act as an independent intervening cause for the collapse. The dissent concludes that the first-period excess policy should respond to the flood damage, contrary to the majority's ruling, based on the policy language and applicable Illinois law.