Petition for Writ of Certiorari — Chicago Board of Education v. Affiliated FM Insurance
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QEFICE OF THE CLERA
No.
IN THE
Supreme Court of the Gnited States
October Term, 1994
BOARD OF EDUCATION OF THE
CITY OF CHICAGO,
Petitioner,
¥.
AFFILIATED FM INSURANCE COMPANY,
Respondent.
On Petition for a Writ of Certiorari to the
United States Court of Appeals
for the Seventh Circuit
PETITION FOR WRIT OF CERTIORARI
Of Counsel:
Thomas R. Meites
MEITES, FRACKMAN,
MULDER & BURGER
135 South LaSalle Street
Suite 1425
Chicago, Illinois 60603
(312) 263-0272
Michael J. Hernandez
CHICAGO BOARD OF
EDUCATION
1819 West Pershing Road
Chicago, Illinois 60609
(312) 535-3785
Bruce J. Ennis, Jr.
Counsel of Record
Barry Levenstam
Paul M. Smith
Stephen L. Wood
JENNER & BLOCK
601 Thirteenth Street, N.W.
Suite 1200 South
Washington, D.C. 20005
(202) 639-6000
Counsel for Petitioner
QUESTION PRESENTED
Whether the Seventh Circuit’s policy of refusing to anticipate
a future development in state law, even in a situation where it iS
very likely that a state’s highest court would adopt such a new rule,
is consistent with the fundamental goals underlying the Erie
doctrine -- i.e., discouragement of forum-shopping and avoidance
of inequitable administration of the law.
iil
TABLE OF CONTENTS
Page
QRUEES TRCN FURR ook 6 kw ow a ae ww i es i
FARGS UP ARNE ok oe EEN ks iv
CRUINGS WR 5 6 Fk Ce eee ee ca l
FURESOOCEWUOS «0 5. we eet eee Pee 2
CONSTITUTIONAL AND STATUTORY
PROViseees CVG WEP os a bw lee ea 2
STATEAGRMS 2.60 é pee eee ee 2
REASONS FOR GRANTING THE WRIT ........... 6
I. There Is a Clear Conflict Among the
Circuits Concerning the Proper
Approach to Determining the Content
Of Sate ROW: sce eee ee Se 8
II. This Case Is a Graphic Illustration
of the Problems Created by the
Seventh Circuit’s Approach to
Determining State Law in Diversity
rr a Ae 1]
A. This Case Began with Clear
Fos Senes nba oS ot ee ee 1]
ill
Page
B. The Outcome in this Case Would
Have Been Very Different if
Developing Trends in State Law
I gy ss Ss se te se 13
EE a a ee 18
APPENDIX A - Seventh Circuit
OOO Le a ... la-6a
APPENDIX B - District Court
0 5, Ae ek ok oe
APPENDIX C - District Court
LE eae ae Pat eta 3 ... Ya-15Sa
APPENDIX D - Magistrate Judge's
Report and Recommendation ....... ) 16a-68a
APPENDIX E - Seventh Circuit
CE ee .. 69a
iv
TABLE OF AUTHORITIES
Page
Cases
Affiliated FM Insurance Co. v. Trane Co..,
ee Bk ky Ce ae): 6,9, 1
Afram Export Corp. v. Metallurgiki Halyps,
Ve ere Bi be Lo ae): | 9
Anderson v. Marathon Petroleum Co., 801 F.2d
See I Is op oi a ke i eT ORE 8
Becker v. Interstate Properties, 569 F.2d
1203 (3d Cir. 1977), cert. denied,
ey I ag ay aca dg a tole we eS 10
Bernhardt v. Polygraphic Co. of America,
pe ee 14
Board of Education v. A, C & S, Inc.,
S06 PNE.26 BOO Ge. WORD jc oc ce cece passim
City of Shelbyville v. Shelbyville Restorium,
Inc., 451 N.E.2d 874 (Ill. 1983) ........ 14, 15, 16
Commissioner v. Estate of Bosch, 387 U.S.
SE 6 ods Oa eee oe ae eR eS 7
Dayton v. Peck, Stow & Wilcox Co., 739 F.2d
ee Ce aa ee OS eee a 9
Erie R.R. v. Tompkins, 304 U.S. 64 (1938) ......... passim
Page
General Motors Corp. v. Doupnik, 1 F.3d 862
a. FI en OE ei ee 08 ee ees 10
Guaranty Trust Co. v. United States, 304 U.S.
CUE bo nk 6 ES OSE EC re Oe 8 ee 3
Guaranty Trust Co. v. York, 326 U.S. 99
CO 6 nk oo ge Oe ee eee ae er 14
Hanna v. Piumer, 380 U.S. 460 (1965) .......-..----- 6
Haynes v. Alfred A. Knopf, Inc., 8 F.3d 1222
Ce TI iw Go ee ee ee ees 8
Kelly v. Stratton, 552 F. Supp. 641 (N.D.
eR eS Re gs eae an do aN AR mi 4
Martel v. Stafford, 992 F.2d 1244 (1st Cir.
eo rs ee eee eRe Ns ee a 9
McKenna v. Ortho Pharmaceutical Corp., 622 F.2d
657 (3d Cir.), cert. denied, 449 U.S. 976
SORE ona cs ak ee ee ee 8 ke ee 10
Paul v. Watchtower Bible & Tract Society,
819 F.2d 875 (9th Cir.), cert. denied,
MS TO TE a 6 cee kk hace He et ee oe 10
Rhynes v. Branick Mfg. Corp.. 629 F.2d 409
Re OR dn eae a ere Ce ee 9
Roberts v. Western-Southern Life Insurance Co.,
568 F. Supp. 536 (N.D. Ill. 1983) .....-.------ 4
vi
Page
Robertson v. Allied Signal, Inc., 914 F.2d 360
els ee oe le ee eR ke A 10
Saive Regina College v. Russell, 499 U.S. 225
CE is ek oe ed ew ees on aes 6
Severs v. Country Mutual Insurance Co..,
SOG Me oe ee ED 6 ca ee wes 15, 16
Shaw v. Republic Drill Corp., 810 F.2d
SP Gs oo ae wie i Gee 8
Shields Enterprises, Inc. v. First Chicago
Corp... Fis Fae Lae CH. APOE) 6 ce ee es 8,9
State Farm Fire & Casualty Co. v. Yapejian,
Gp Tae eee Oe 6 eV es eb ee 12
Stofer v. Motor Vehicle Casualty Co., 369 N.E.2d
Ore es SE Se eee Re ee ee 3
Todd v. Societe BIC, S.A., 21 F.3d 1402
CPU Se. es ea ee cd rs a ee es 9
Torres v. Goodyear Tire & Rubber Co., 867 F.2d
weg gs ee on ee ee eee 6,9
United States Fidelity & Guaranty Co. v. Wilkin
Insulation Co., 550 N.E.2d 1032 (Ill.
App. Ct. 1989), aff'd, 578 N.E.2d 926
ee i ee a ea eee 3. 2
vii
Page
Village of Lake in the Hill: v Illinois
Emcasco Insurance _o., 506 N.E.2d 681
(Ill. App. Ct.), appeal denied, 515 N.E.2d
ti) iS aaa a ee 4,5, 12, 16
STATUTES
Oe a ak a Sn ae ee 2
Rt Pa | Ee aS Le a ae ee a 2
OTHER AUTHORITIES
19 C. Wright, A. Miller & E. Cooper, Federal
Practice and Procedure (1992 & Supp.
Ne PT eI aaa ak Gas Fie 8 ye
IN THE SUPREME COURT OF THE UNITED
STATES
October Term, 1994
BOARD OF EDUCATION OF THE
CITY OF CHICAGO,
Petitioner,
Vv .
AFFILIATED FM INSURANCE COMPANY,
Respondent.
ON PETITION FOR A WRIT OF CERTIORARI
To THE UNITED STATES COURT OF APPEALS
FoR THE SEVENTH CIRCUIT
PETITION FOR WRIT OF CERTIORARI
Petitioner the Chicago Board of Education respectfully
requests that a writ of certiorari issue to review the decision of the
United States Court of Appeals for the Seventh Circuit in this
case.:
OPINIONS BELOW
The district court's June 2, 1993, Memorandum Opinion and
Order (Pet. App. 9a-15a) rejected the magistrate judge's Report and
Recommendation dated October 5, 1992 (Pet. App. 16a to 68a), and
The parties listed in the caption were the only parties in the courts below.
2
granted plaintiff-respondent’s motion for summary judgment.
Neither the magistrate judge’s report nor the district court’s decision
is reported. The May 12, 1994, opinion of the United States Court
of Appeals for the Seventh Circuit affirming the district court’s
judgment is reported at 23 F.3d 1261 (7th Cir. 1994), and reprinted
at pages la to 6a of the Appendix to this Petition.
JURISDICTION
The United States Court of Appeals for the Seventh Circuit
issued its decision on May 12, 1994. A timely petition for
rehearing was denied on June 7, 1994 (Pet. App. 69a). The
jurisdiction of this Court is invoked under 28 U.S.C. § 1254(1).
CONSTITUTIONAL AND STATUTORY
PROVISIONS INVOLVED
28 U.S.C. § 1652. State laws as rules of decision.
The laws of the several states, except where
the Constitution or treaties of the United States or Acts
of Congress otherwise require or provide, shall be
regarded as rules of decision in civil actions in the
courts of the United States, in cases where they apply.
STATEMENT
The Chicago Board of Education ("the Board") is responsible
for the operation of the Chicago public school system, one of the
Nation’s largest. Beginning in 1972, the Board purchased a series
of insurance policies from respondent Affiliated FM Insurance
Company ("AFM") covering catastrophic property damage. For
the period 1978 through 1990, these policies covered "all risks” to
the Board’s property. Because these policies included a deductible
of $1 million, the Board never filed a claim with AFM until 1990,
when it filed the claim at issue in this litigation.
That claim arose when the Board was required by state law
to undertake an asbestos abatement program in its facilities, and
determined that this program would cost hundreds of millions of
3
dollars. In order to recoup this cost, the Board first pursued
litigation against various asbestos manufacturers. In that litigation,
the state trial court ruled that the Board’s tort claims were barred
by the applicable statute of limitations, but the Illinois Supreme
Court ultimately disagreed, ruling that the Board, as a governmental
entity, enjoyed immunity from the application of statutes of
limitations under the doctrine of nullum tempus. Board of Educ. v.
A, C&S, Inc., 546 N.E.2d 580 (Ill. 1989) ("A,C&S").* That
same year, the Illinois First District Appellate Court (which hears
cases arising in Chicago), relying in part on the A,C&S decision,
ruled that one of the manufacturers sued by the Board was entitled
to insurance coverage under that manufacturer's comprehensive
general liability policy. United States Fidelity & Guar. Co. Vv.
Wilkin Insulation Co., 550 N.E.2d 1032, 1036 (Ill. App. Ct. 1989),
aff'd, 578 N.E.2d 926 (Ill. 1991).
Soon after these rulings in A, C&S and Wilkin, the Board also
filed a claim with respondent, its own property insurer. AFM
eventually denied the claim and, that same day, filed a declaratory
judgment action in federal court, based on diversity jurisdiction,
alleging that it was not liable under Illinois law to indemnify the
Board for its loss.
In the district court, AFM moved for summary judgment,
arguing, inter alia, that the Board had not instituted suit against it
within twelve months of the loss and therefore had violated the
insurance contract. The motion was presented to a magistrate
2 *Nuilum tempus” 1s shorthand for the latin phrase “quod nullum tempus occurrit
regi,” which means “ume does not run against the sovereign.” See Guaranty Trust
Co. \. United States, 304 U.S. 126, 132 (1938). The doctrine immunizes
governmental bodies from forfeiture of claims based on statutes of limitations.
} The Illinois Insurance Code requires all fire and lightning insurance policies
to contain “sue within 12 months” provisions. See Stofer v. Motor Vehicle
Casualn Co., 369 N.E.2d 875, 876 (Ill. 1977) (quoting provision from Standard
(continued...)
i
4
judge, who recommended rejecting AFM’s limitations argument,
stating that the Board was entitled to immunity from the running of
the limitation period contained in the parties’ contract. The
magistrate judge acknowledged that "ordinarily the terms of the
contract determine the rights of the parties," Pet. App. 56a, but,
relying on the Illinois Supreme Court’s rationale in A,C&S,
concluded that the public policy concerns involved -- the very same
policy concerns in A,C&S, i.e., “the resulting health concerns
involved and the interest in the safety of the public buildings and
a large segment of this State’s population which attends the public
schools and for the children who will in the future attend these
schools” -- are "paramount to procedural concerns." Jd.+
On review, the district court rejected the magistrate judge’s
analysis of relevant Illinois Supreme Court doctrines. Pet.
App. 12a. The district court agreed with AFM’s argument that it
should distinguish A,C&S and instead apply the Illinois Second
District Appellate Court case of Village of Lake in the Hills v.
illinois Emcasco Insurance Co., 506 N.E.2d 681 (Ill. App. Ct.),
2» (...continued)
Policy that 1s required by state law and administrative code). While “all risks”
policies are only required to have this provision cover fire and lightning claims,
the policy at issue applied this provision to all claims.
* The magistrate judge recognized that the Illinois Supreme Court had
not ruled on the precise legal issue and that he was therefore required
under the Erie doctrine, Erie RR. v. Tompkins, 304 U.S. 64 (1938), to
predict how the Illinois Supreme Court would rule if the issue were
before it. See Pet. App. 55a (citing Roberts v. Western-So. Life Ins. Co.,
568 F. Supp. 536,539(N.D. Ill. 1983); Kelly: v. Stratton, 552 F. Supp. 641,
643 (N.D. Ill. 1982)). The magistrate judge rejected AFM’s argument
that the Illinois Second District Appellate Court’s decision in Village of
Lake in the Hills v. Illinois Emcasco Ins. Co., 506 N.E.2d 681 (Ill. App.
Ct.), appeal denied, 515 N.E.2d 128 (Ill. 1987), applied, finding instead
that the Illinois Supreme Court would apply the nullum tempus doctrine
as it had in A,C&S and analogous cases. Pet. App. 56a.
>
appeal denied, 515 N.E.2d 128 (lll. 1987) (decided two years
before A, C&S), to the Board’s claims against AFM. Pet. App. 13a.
Under Lake in the Hills, the district court held, the Board was
bound by AFM’s one-year contractual limitation period, and the
Board failed to file suit within the appropriate time frame. The
district court thus concluded that the Board’s claims against AFM
were barred as untimely. /d.
The court of appeals affirmed. It agreed, first of all, that
A, C&S did not provide the rule of decision. Id. at 4a-Sa. It noted
that A.C&S involved a statute of limitation, not a contractual
agreement that operated to limit claims against the insurer, and cited
Lake in the Hills for the proposition that nullum tempus immunity
does not apply to filing deadlines in contracts. Id. The court of
appeals failed to discuss any of the factors that were considered
determinative by the Illinois Supreme Court in A,C&S when that
court held that public policy required governmental immunity from
statutory filing deadlines. The court of appeals also failed to give
any reason why it believed that the Illinois Supreme Court would
conclude that the same public policy reasons that justified vitiating
time deadlines imposed by the state legislature would not also
justify vitiating time deadlines in a private contract. And the court
also overlooked Illinois Supreme Court precedent holding thai
contractual deadlines must give way to public policy in other
Situations.
Furthermore. because the court of appeals believed that Lake
in the Hills, a single intermediate appellate court case, had “settled”
Illinois law on the issue, it refused to certify the question to the
Illinois Supreme Court. /d.:
4
The Board requested the court of appeals to certufy the following question to
the Illinois Supreme Court (Pet. App. 5a):
Whether appellant Chicago Board of Education as a public entity
enforcing public rights 1s immune under the doctrine of nullum
(continued...)
ll
6
REASONS FOR GRANTING THE WRIT
This Court should review the decision below to resolve a
widening split among the circuits on the fundamental question of
how a federal court exercising diversity jurisdiction should ascertain
and apply the governing state law. In recent years, the Seventh
Circuit has become the leading exponent of the view that federal
courts called upon to apply state law should be reluctant to
“predict” how the state’s highest court would rule on a question that
has not previously been presented to it. Under this view, federal
courts should remain unreceptive to “untested legal theories brought
under the rubric of state law," Affiliated FM Ins. Co. v. Trane Co..,
831 F.2d 153, 155 (7th Cir. 1987), and, where possible, should
follow the law as set forth in decisions of inferior state courts. Jd.
This view of the manner in which a federal court should
ascertain state law is at odds with the approach traditionally
followed by other circuits, which emphasizes the long-standing
notion that a federal court sitting in diversity should endeavor to
predict the law that would be applied by the state’s highest court.
See, e.g., Torres v. Goodyear Tire & Rubber Co., 867 F.2d 1234,
1238 n.1 (9th Cir. 1989) (noting the Seventh Circuit’s quite
different approach and stating that "this circuit has not seen fit to
assume such a posture of restraint when it comes to deciding novel
questions of state law"). That traditional view is a direct reflection
of the "twin aims of the Erie doctrine," which are ‘discouragement
of forum-shopping and avoidance of inequitable administration of
the laws.’" Salve Regina College v. Russell, 499 U.S. 225, 234
(1991) (quoting Hanna v. Plumer, 380 U.S. 460, 468 (1965)). By
contrast, the Seventh Circuit’s "strong policy against expanding
State law by predicting the trends in state court decisions,”
> (...continued)
tempus from suit limitations provisions in its property insurance
policies when seeking to recover for asbestos-related property
damage.
5
19 C. Wright, A. Miller & E. Cooper, Federal Practice and
Procedure § 4507, at 25 (Supp. 1994), has the effect of "directly
encourag[ing] forum-shopping, not only between state and federal
court, but also between federal courts in the Seventh and other
Circuits." Jd. at 26.
This case provides a clear illustration of this problem. !t 1s
difficult to look at the relevant state court decisions without
predicting that, if this case had been in state court, petitioner would
have had an excellent chance of overcoming respondent's timeliness
defense, at least by the time the case reached the Illinois Supreme
Court. See pp. 14-18 infra. Respondent. however, made a
deliberate choice to file a declaratory judgment action first in
federal court, cognizant that the Illinois Supreme Court had not yet
decided the specific issue presented here -- the enforceability against
public entities of filing deadlines contained not in state statutes of
limitations (as in A,C&S) but in insurance policy provisions. The
result of this obvious forum-shopping was a decision in which the
Seventh Circuit woodenly followed the ruling of an Illinois
intermediate appellate court in a case that (1) was decided before
the Illinois Supreme Court's recent A, C&S decision, and (2) did not
itself apply the relevant factors mandated by the Illinois Supreme
Court in A,C&S and a prior case. What this ultimately means 1s
that in a case of enormous practical importance to the state’s largest
school system, the state’s own policies were not vindicated.
This Court has not addressed the issue of how federal courts
should determine state law since its decision 27 years ago in
Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).* There is
a real need for further guidance, both to bring uniformity to the
federal system and to restore adherence to the basic Erie principle
that parties should not be able to affect the law applicable to a case
¢ In Bosch, this Court indicated that “under some conditions, federal authority
may not be bound even by an intermediate state appellate court ruling.” 387 U.S
at 465. The Court did not, however, specify exactly when this would be true.
8
by choosing to go into federal court. This case would be an
excellent vehicle for resolving these important issues. Having set
forth the controlling principles, this Court could then remand this
case to permit the lower courts to apply them in discerning the
applicable state law.
I. THERE IS A CLEAR CONFLICT AMONG THE
CIRCUITS CONCERNING THE PROPER APPROACH
TO DETERMINING THE CONTENT OF STATE LAW.
The Seventh Circuit has developed and applied its approach
to determining state law in a series of cases. The most distinctive
feature of that approach is a frank recognition, in many (though not
all) of the court’s decisions, that outcomes will be different in
federal court than they would be in state court -- i.e., that federal
courts can and should refuse to apply “innovative” state law
doctrines even in cases where the highest state court probably would
be receptive to those new doctrines. See, e.g., Haynes v. Alfred
A. Knopf, Inc., 8 F.3d 1222, 1234 (7th Cir. 1993) ("The plaintiffs
are asking us to innovate boldly in the name of the Illinois courts,
and such a request is better addressed to those courts than to a
federal court.”); Shields Enters., Inc. v. First Chicago Corp., 975
F.2d 1290, 1298 (7th Cir. 1992) ("Absent clearer evidence of how
the Illinois Supreme Court would decide, we are unwilling to
‘speculate on any trends in [Illinois] law,’ . . . .") (quoting Shaw v.
Republic Drill Corp., 810 F.2d 149, 150 (7th Cir. 1987)):
Anderson v. Marathon Petroleum Co., 801 F.2d 936, 942 (7th Cir.
1986) ("[FJederal court is not the place to press innovative theories
of state law.").2
The Seventh Circuit has indicated that its “policy applies with special force to
a plaintiff in a diversity case who has chosen to litigate his state law claim in
federal court.” Shaw v. Republic Drill Corp., 810 F.2d at 150. See also
Anderson v. Marathon Petroleum Co., 801 F.2d at 942 (policy “is particularly
apropos in a case such as this where residents file suit in federal court against a
nonresident defendant”). There are also some cases in which the Seventh Circuit
(continued...)
:
eS
9
In order to avoid making predictions about what a state
supreme court would say about a novel question, the Seventh
Circuit often acts almost as if it were a state trial court -- giving
controlling significance to any decision on point from a state
intermediate appellate court. See, e.g., Shields Enters., Inc. v. First
Chicago Corp.. 975 F.2d at 1298 (refusing to "speculate" about
state law, “especially when an Illinois appellate court has expressly
rejected the action [plaintiff] seeks to bring"); Affiliated FM Ins.
Co. v. Trane Co., 831 F.2d at 155 (under Erie, "a federal court
must apply the state law as declared by the highest state court or
otherwise by the intermediate appellate court of the State")
(emphasis added).
There is a clear conflict between this approach and the
approach followed in most other circuits.* Two examples are the
Third and Ninth Circuits, where it is clearly understood that the
task of a federal court in a diversity case is to predict what the
state's highest court would say about a novel issue, rather than
2 (...continued)
at least states its willingness to predict that a highest state court would change or
extend current doctrine. See, e.g.. Todd v. Societe BIC, S.A., 21 F.3d 1402,
1411-12 (7th Cir. 1994) (en banc). More numerous, however, are the decisions
counseling against any innovations in state law regardless of the procedural
posture. See the cases cited in the text above, and Afram Export Corp. v.
Metallurgiki Halyps, S.A., 772 F.2d 1358, 1370 (7th Cir. 1985) (“Federal judges
are disinclined to make bold departures in areas of law that we have no
responsibility for developing.”). This case illustrates that policy in action.
* In Torres. supra, the Ninth Circuit cited decisions from the First and Fifth
Circuits, along with several Seventh Circuit cases, as examples of the “limited
discretion” appruach that it saw as conflicting with the Ninth Circuit's own
approach. Torres v. Goodyear Tire & Rubber Co.. 867 F.2d at 1238 n.1 (citing
Dayton v. Peck, Stow & Wilcox Co., 739 F.2d 690, 694-95 (Ist Cir. 1984), and
Rhynes v. Branick Mfg. Corp., 629 F.2d 409, 410 (Sth Cir. 1980)). See also
Martel v. Stafford. 992 F.2d 1244, 1247 (1st Cir. 1993) (plaintiffs cannot
reasonably expect federal court “to steer state law into unprecedented
configurations”); 19 C. Wright, A. Miller & E. Cooper, supra, § 4507 at 25
(Supp. 1994) (describing the Seventh Circuit's distinctive posture).
10
merely locating and foliowing any lower-court decision on point.
See, e.g., General Motors Corp. v. Doupnik, 1 F.3d 862, 865 &
n.4 (9th Cir. 1993) (where the state Supreme court "provides no
determinative case law on an issue," the federal court must use its
"best judgment to ascertain how that Court would decide such
issue"; lower-court decisions "may provide guidance as to the
direction of the State Supreme Court’s probable decisionmaking"
but are not binding); Robertson v. Allied Signal, Inc., 914 F.2d
360, 378 (3d Cir. 1990) (where the state’s highest court has not
spoken, the federal court must "predict" what it would do, after
giving "proper regard to the relevant rulings of other courts of the
State") (internal quotation marks and citations omitted); McKenna v.
Ortho Pharmaceutical Corp. , 622 F.2d 657, 662-63 (3d Cir.), cert.
denied, 449 U.S. 976 (1980) (same).
Unlike the Seventh Circuit, these circuits are attentive to the
forum-shopping problems that arise if federal courts act differently
from state courts -- i.e., if federal courts are unwilling to anticipate
new legal doctrines that a state’s highest court would be likely to
adopt. As the Ninth Circuit has put it, if federal courts limit
themselves to applying "clearly established state law" in diversity
cases, litigants will face an "inhospitable forum" for any novel
claims, and defendants in such cases “could ensure a decision in
their favor simply by removing the case to federal court.” Paul v.
Watchtower Bible & Tract Soc’y, 819 F.2d 875, 879 (9th Cir.),
cert. denied, 484 U.S. 926 (1987). See also Becker v. Interstate
Properties, 569 F.2d 1203, 1206 (3d Cir. 1977), cert. denied, 436
U.S. 906 (1978) (a diversity litigant should not "be penalized for
his choice of the federal court by being deprived of the flexibility
that a state court could reasonably be expected to show").
Similar concerns have been voiced by commentators. In the
words of Wright and Miller, if federal courts lacked the flexibility
to disregard lower state court decisions that the highest state court
likely would not follow, "the Erie doctrine simply would have
substituted one kind of forum-shopping for another.”
a nT
1]
19 C. Wright, A. Miller & E. Cooper, § 4507, at 90-91. A lawyer
with a case dependent on "an ancient or shaky state court
decision . . . would have a strong incentive to bring the suit in or
remove it to federal court, hoping that the state decision could not
be impeached under [a] mechanical application of existing state
precedents.” Id. at 91. See also id. at 26 (Supp. 1994) (discussing
the Seventh Circuit’s recent cases) ("To the extent that this [Seventh
Circuit] policy indicates an unwillingness to predict how the highest
state court actually would decide an issue, it.. . directly
encourages forum-shopping . . . ."); 1A Moore’s Federal Practice
q 0.308, at 3079-80 (1993) ("Blind adherence to a state decision,
without evaluating the decision in the lighi of other relevant data
as to what the state law is, may result in injustice and a distortion
of the state law which the federal court sets out to apply.”).
Il. THIS CASE IS A GRAPHIC ILLUSTRATION OF THE
PROBLEMS CREATED BY THE SEVENTH CIRCUIT’S
APPROACH TO DETERMINING STATE LAW IN
DIVERSITY CASES.
This case clearly demonstrates what happens when a federai
court is reluctant to anticipate how a state’s highest court actually
would handle a novel issue. The case, from its inception, was
designed to take advantage of the fact that the Seventh Circuit
applies state law more narrowly than do the state courts themselves.
Moreover, if one looks at the reasoning of the Seventh Circuit, it
becomes clear that this strategy worked: while the court of appeals
purported to be applying “settled” state law, it in fact confined itself
to a mechanical application of the single state decision that was
most on point -- in a case where there was every reason to predict
that the Illinois Supreme Court, if given the opportunity, would
have rendered a very different decision.
A. This Case Began with Clear Forum-Shopping.
To begin with, there is little doubt that the reason this case
was filed in federal court was AFM’s hope that it would be able to
take advantage of the Seventh Circuit’s distinctive approach to
12
ascertaining state law.” Faced with strong indications from the
Illinois Supreme Court and the First District Appellate Court that
the State’s public policy would not permit use of filing deadlines
to deny the citizens of Chicago access to insurance funds needed to
deal with a multi-million dollar asbestos crisis (A, C&S and Wilkin),
respondent went forum-shopping. Rather than giving the Board the
opportunity to litigate its claim, the company filed a preemptive
declaratory judgment action in federal court on the very day that
it denied the insurance claim.
Moreover, respondent did so with knowledge that the only
appellate decision dealing with the specific issue raised in this
case -- the application of a contractual filing deadline to a public
body -- was a Second District Appellate Court opinion pre-dating
A,C&S and Wilkin that enforced a contractual time deadline in a
case where a village sought compensation for minor lightning
damage to a pumping station. See Village of Lake in the Hills v.
Illinois Emcasco Ins. Co., supra“’ AFM plainly hoped that the
federal courts would simply apply this decision, rather than making
a prediction about whether the rule of Lake in the Hills would be
* Respondent was certainly aware of the Seventh Circuit's approach, having itself
tried unsuccessfully to persuade that court to predict a novel state-law rule. See
Affiliated FM Ins. Co. v. Trane Co., supra.
“Although the circuit (trial) courts in Illinois are bound by appellate court
decisions from any appellate district in the State, the decisions of one appellate
district are not binding on the other appellate districts. See, e.g., State Farm
Fire & Casualty Co. v. Yapejian, 605 N.E.2d 539, 542 (ll. 1992). Hence. had
AFM filed in the Circuit Court of Cook County, where the Chicago Board of
Education is located, appeal would have been to the First District Appellate Court,
which would not have been bound by the Second District's distinction between
Statutory and contractual limitations. Jd. Instead, that Court would have been free
to conclude that the public policy that the Illinois Supreme Court has held to
outweigh statutory time limitations also outweighs contractual ones. In any event,
the Illinois Supreme Court itself would have been the court of last resort for the
lawsuit.
13
adopted by the Illinois Supreme Court and applied to the present,
quite different dispute.
Unfortunately, the court of appeals then gave respondent
precisely the ruling it sought. As we make clear infra, the court
refused to consider the full range of factors that would have guided
the decisionmaking of the Illinois Supreme Court if this case had
been filed in state court. The court then further rewarded
respondent’s forum-shopping by refusing petitioner’s request that
it use the certification mechanism to give the Illinois Supreme Court
the chance to consider the central public policy issues. As a result,
in a case involving huge amounts of public funds, as well as the
health and safety of students and teachers, petitioner never had a
chance to plead its case either tc the Illinois Supreme Court or to
another court where the full range of state interests and concerns
would be fairly considered. Such an approach transforms diversity
jurisdiction into a strategic device for preventing vindication of state
policy.
B. The Outcome in this Case Would Have Been Very
Different if Developing Trends in State Law Had
Been Applied.
At the time this case was decided, there was, as yet, no state
appellate decision extending governmental immunity from filing
deadlines under the nullum tempus doctrine to contractual deadlines.
That extension, however, was virtually mandated by the reasoning
and policies set forth by the Illinois Supreme Court in A,C&S and
in other recent state-court decisions. That is why it is so clear that
the outcome here turned on the Seventh Circuit's professed
reluctance to predict new developments in state law. That court,
having found a single highly distinguishable prior intermediate state
court decision to rely on, did not even mention the factors that
would have controlled the outcome if this case had been presented
to the Illinois Supreme Court -- much less discuss or apply those
factors. This Court has held that the “‘nub of the policy that
underlies Erie R. Co. v. Tompkins is that for the same transaction
14
the accident of a suit by a non-resident litigant in a federal court
instead of in a State court a block away should not lead to a
substantially different result.’" Bernhardt v. Polygraphic Co. of
Am., 350 U.S. 198, 204 (1956) (quoting Guaranty Trust Co. v.
York, 326 U.S. 99, 109 (1945)). That policy was not vindicated
here.
In order to see what a dramatic difference the choice of
forum made in this case, it is necessary to review the recent Illinois
decisions applying the nullum tempus doctrine. That doctrine was
applied both in City of Shelbyville v. Shelbyville Restorium, Inc.,
451 N.E.2d 874 (Ill. 1983), and, six years later, in A,C&S, supra.
Sheibyville involved a claim that a developer had defaulted on his
legal obligation to construct streets of specified quality in a new
Subdivision. As noted above, A,C&S involved the liability of
asbestos manufacturers for the costs of removal of asbestos found
in the schools of Chicago and various other Illinois communities.
In each case, the Illinois Supreme Court reaffirmed the
principle that when important public rights are entrusted to the
government to enforce, "the public should not suffer because of the
negligence of its officers and agents in failing to promptly assert
Causes of action which belong to the public." Shelbyville, 451
N.E.2d at 876 (internal quotations and citations omitted); see
A,C&S, 546 N.E.2d at 600-01 (enunciating same policy). In
keeping with this principle, the Court held that the primary focus
of nullum tempus analysis was whether the right the government
entity sought to assert was "in fact a right belonging to the general
public, or whether it belongs only to the government or to some
small and distinct subsection of the public at large." Shelbyville,
451 N.E.2d at 877; see A,C&S, 546 N.E.2d at 601. It used three
factors to determine whether the doctrine should apply: (1) the
effects of the matter at issue on the public; (2) the government
entity's responsibility to act on behalf of the public in the area
involved; and (3) the extent to which the government entity’s
15
finances would be affected by the right at issue. A,C&S,
546 N.E.2d at 602. "
Shelbyville and A,C&S, of course, involved application of
statutes of limitation, whereas here the question is whether the
Board should be barred from enforcing its rights under insurance
policies because of a contractual requirement that suit be filed
within one year of a loss. There is, however, every reason to
believe that the Illinois Supreme Court would treat this case in the
same way. The public policy concerns that the Illinois Supreme
Court identified as underlying the nullum tempus doctrine are the
same whether the suit-filing deadline was set by statute or was
included in a contract signed by the governmenial entity at issue.
Here, for example, the impact on the public, the Board’s duty to
act, and the impact on public finances are precisely the same as in
A,C&S, since we are talking about the same “loss.” In either
situation, the public stands to suffer merely because public officials
failed to assert the public’s rights on a timely basis.
In aclosely analogous context, the Illinois Supreme Court has
held that minors should not forfeit their rights under insurance
contracts merely because their parents fail to file suit on their behalf
within the time allowed under the contracts. Severs v. Country Mut.
Ins. Co., 434 N.E.2d 290, 292 (Ill. 1982). It reasoned that a
default on the part of those charged with protecting the rights of
minors should not be visited upon the minors themselves -- /.e. , that
minors “are ... entitled to special protection by the courts,
particularly to see that their rights are protected even from the
“Thus. in Sheipvville, the Court held that safe streets are an interest shared by
all members of the public, that the city had a duty to protect this interest, and that
barring a suit by the city to force the developer to repair the streets would have
a significant impact on the public fisc. 451 N.E.2d at 877-78 In A.C&S. the
Court held that asbestos in schools affected a public right, that school boards were
duty-bound to deal with the problem, and that there would be an enormous impact
on public finances if school boards were barred from suing the asbestos
manufacturers due to delay in filing the suits. 546 N.E.2d at 601-02.
16
neglect of their representative." Id. (internal quotations omitted;
emphasis added). It is difficult, in light of Severs, to imagine any
basis for allowing the public’s rights to be forfeited based on an
official’s failure to meet a contractual suit-filing deadline.
It is with these arguments in mind that one must assess the
Seventh Circuit’s assertion that "Illinois law is settled that an
insured [governmental entity] is not immune from policy provisions
requiring institution of suit within 12 months of loss." Pet. App.
5a-6a. That assertion was based almost entirely on a citation to the
decision of the Illinois Appellate Court in Lake in the Hills, which
itself gave scarcely more than cursory treatment to the question
whether the nullum tempus doctrine applies to contractual filing
deadlines. "Settled," in the lexicon of the Seventh Circuit,
simply means that the court had found a decision from a single
lower state court, a decision that it could apply and thereby avoid
thinking hard about how this case would actually be handled in the
Illinois Supreme Court.
The Seventh Circuit reached this conclusion without even
noting that the filing deadline at issue was statutorily mandated and
without even discussing the public policy factors identified as
central in the Illinois Supreme Court’s nullum tempus cases. And
it relied on Lake in the Hills even though that case treated the issue
in a single paragraph, was easily distinguishable on its facts,2 and
= The Seventh Circuit also noted in passing the fact that a number of suits
similar to the Board's were recently dismissed by a state trial judge, who rejected
an extension of the nullum tempus doctrine. Pet. App. 4a. It is noteworthy,
however, that both A,C&S and Shelbyville began with state trial court rejections
of nullum tempus immunity. See A,C&S, 546 N.E.2d at 600; Shelbyville.
451 N.E.2d at 875.
2 Lake in the Hills involved a claim totalling $35,000 — hardly an amount likely
to bankrupt a governmental entity. Moreover, there was no apparent issue of
public safety in the case, since the claim arose from_lightning damage to a
“pumping stauon.” 506 N.E.2d at 682. Lake in the Hills is thus easily
(continued...)
17
did not itself even mention, much less apply, the applicable public
policy factors.
In sum, this is a textbook case demonstrating the problems
with the Seventh Circuit’s reluctant approach to finding state law
in diversity cases. The outcome in this case was certainly affected
by -- indeed can only be explained by -- that circuit’s reluctance to
“predict” what a state supreme court would do, along with its
excessive deference to whatever decisions have been reached by
intermediate state appellate courts in arguably analogous cases.
Because this case was filed in federal court, petitioner never had the
opportunity for full and fair consideration of the range of argument
supporting, if not compelling, extension of the nullum tempus
doctrine from cases involving statutes of limitations to otherwise
identical cases involving statutorily required contractual filing
deadlines. Such an approach is not consonant with Erie, it
promotes forum-shopping, and it frustrates the implementation of
the sovereign states’ clearly expressed public policy. This problem
needs to be corrected.
= (...continued)
distinguished as a caSe where there were no significant “public rights” at stake
Here. by contrast, the health of Chicago's students and teachers in dealing with
asbestos in the school environment and the financial viability of its school system
are directly and substantially implicated.
18
CONCLUSION
The petition for a writ of certiorari should be granted.
Respectfully submitted,
Bruce J. Ennis, Jr.
Counsel of Record
Barry Levenstam
Paul M. Smith
Stephen L. Wood
JENNER & BLOCK
601 Thirteenth
Street, N.W.
Suite 1200 South
Washington, DC 20005
(202) 639-6000
Of Counsel:
Counsel for Petitioner
Thomas R. Meites
MEITES, FRACKMAN,
MULDER & BURGER
135 South LaSalle Street
Suite 1425
Chicago, Illinois 60603
(312) 263-0272
Michael J. Hernandez
CHICAGO BOARD OF
EDUCATION
1819 West Pershing Road
Chicago. Illinois 60609
(312) 535-3785
Dated: September 6, 1994
APPENDIX
APPENDIX A - Seventh Circuit
Opinion
APPENDIX B - District Court
Judgment
APPENDIX C - District Court
Opinion
APPENDIX D - Magistrate Judge's
Report and Recommendation
APPENDIX E - Seventh Circuit
Rehearing Order
16a-68a
6Y¥a
la
IN THE
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
No. 93-2786
AFFILIATED FM INSURANCE COMPANY,
Plaintiff-Appellee,
1 af
BOARD OF EDUCATION OF THE
CITY OF CHICAGO,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 90 C 6040 - George W. Lindberg, Judge.
ARGUED FEBRUARY 23, 1994--DECIDED MAY 12, 1994
Before FAIRCHILD, CUMMINGS and BAUER, Circuit
Judges.
CUMMINGS, Circuit Judge. Plaintiff Affiliated FM Insurance
Company of Rhode Island ("Affiliated") sued the Chicago Board
of Education ("Board") in a declaratory judgment action to
determine whether a claim previously filed by the Board was barred
because it did not commence suit within 12 months of a loss. The
district court, sitting in diversity, held that the Board was not
oa
2a
immune from complying with the condition of the policies requiring
commencement of suit within that period and therefore granted
Affiliated’s motion for summary judgment.
Facts
The Board claims that Affiliated should indemnify it for its
asbestos removal and maintenance costs under four insurance
policies in effect from 1978 to 1990 and providing coverage to the
Board for all risks of physical damage to insured property. The
Board’s claim covers 600 of its facilities, constructed between 1946
and 1972, that contain asbestos materials.
The policies insured the risk of direct physical loss to the
Board's properties incurred during each policy period, but they
contained contractual provisions requiring that the insured give
prompt notice of loss, and that any suit must be filed within
12 months of the occurrence of any loss. The Board did not give
notice of the alleged loss until September 4, 1990, and did not file
suit prior to Affiliated’s bringing this declaratory judgment action.
Affiliated claims that the Board was aware of asbestos hazards in
its schools as early as 1978, and had sustained many of the losses
for which it now claims compensation throughout the 1980s.
The magistrate judge held, and the district court agreed, that
the Board had knowledge of the asbestos problem by May 1989 at
the very latest, when a review!’ conducted by the Board indicated
that the cost of asbestos abatement in the Board’s schools would
exceed $500,000,000. On September 4, 1990, one and one-half
years later, the Board first gave notice to Affiliated of a claim for
coverage under the four property damage policies.
Affiliated denied the claim on October 17, 1990, due in part
to the insured’s failure to comply with the requirement in the
1’ The parties denominate the document reporting this conclusion as the AHERA
Report because it was required by the Asbestos Hazard Emergency Response Act
(15 U.S.C. § 2641 ef seq.).
aac
3a
policies that any suit had to be filed within 12 months of the loss
and also because prompt notice of loss was not given.? At the
same time, Affiliated filed this action for a declaration that the costs
incurred by the Board in removing and abating asbestos from its
facilities were not covered. The Board answered and
counterclaimed, alleging that Affiliated’s denial was made in bad
faith. Dispositive motions were referred to Magistrate Guzman in
November 1991.
The magistrate recommended that the Board’s claim that
Affiliated’s denial was made in bad faith be dismissed except for
the Board’s claim for attorney’s fees and costs and damages up to
$25,000. Subsequently Affiliated filed a motion for summary
judgment and the magistrate found that the 12-month suit limitation
provisions of the policies had been breached by the Board.
However, he recommended that the district court deny summary
judgment on the ground that the Board was immune from
limitations under Board of Education of City of Chicago v. A, C and
S, Inc., 131 Ill. 2d 428, 546 N.E.2d 580 (1989), which dealt with
a Statute of limitations rather than a contractual provision in the
policies themselves.
After objections to the magistrate’s recommendation were
made, the district court issued an opinion rejecting the Board's
claim of immunity from the contractual limitations provision and
granted Affiliated summary judgment because of the Board's failure
to file suit in the 12-month period provided under the terms of each
policy. The court did not reach the question whether the Board had
given Affiliated the requisite prompt notice of the claim.
Subsequently the district court dismissed the Board’s bad faith
claims on the ground that its summary judgment in Affiliated’s
favor was based on no coverage.
2 The four policies respectively required “immediate nouce” of loss, notice “as
soon as practicable,” and reporting the loss “promptly” (SA 6-7).
ta
Contractual limitations bar
Here no suit was instituted by May 1990 although the Board
discovered the loss at the latest by May 1989. Consequently the
Board concedes that the 12-month contractual suit limitations
provisions were breached» unless the Board was immune from its
provisions as a public entity. To avoid the limitations defense, the
Board insists that it is immune from the contractual provision under
the doctrine of nullum tempus occurrit regis ("time does not run
against the king"). However, Illinois precedent has established that
municipalities may bind themselves to suit initiation limitations by
contract. Village of Lake in the Hills v. Illinois Emcasco Ins. Co..,
153 Ill. App. 3d 815, 506 N.E.2d 681 (2d Dist. 1987), leave to
appeal denied, 116 Ill. 2d 560, 515 N.E.2d 128 (1987). The
parties inform us that this reasoning was follows by the Circuit
Court of Cook County which recently held that several Boards of
Education were not immune from contractual suit initiation
provisions. Home v. Evanston Township H.S. Dist. No. 202,
No. 92 CH 11144; Continental v. Township H.S. Dist. No. 214.
No. 93 CH 01703; Aetna v. Community Consol. School Dist.
No. 21, No. 93 CH 3200, consolidated with No. 93 CH 5642:
Community Consol. School Dist. No. 15 v. Centennial,
No. 93 CH 08069; Northfield Township H.S. Dist. No. 225 v. Ins.
Co. of North America, No. 93 CH 017143; Consol. H.S. Dist.
No. 230 v. Ins. Co. of North America, No. 93 CH 07976; Board
of Education of Township H.S. Dist. No. 211 v. International Ins.
Co., No. 93 CH 000771; Board of Education of Main Township
H.S. Dist. No. 207 v. International Ins. Co., No. 93 CH 6766.
Board of Education of City of Chicago v. A, C and S, Inc..,
131 Ill. 2d 428, 546 N.E.2d 580 (1989), is not to the contrary
because it involved a statute of limitations rather than contractual
terms, and the Illinois Supreme Court has acknowledged that public
2 See Naghten v. Maryland Casualty Co., 47 Ill. App. 2d 74, 197 N.E.2d 489
(1st Dist. 1964).
5a
entities are not immune from performing contractual obligations.
Wall v. Chicago Park Dist., 378 Ill. 81, 37 N.E.2d 752 (1941).
It has long been settled that it is appropriate for suit limitations to
be contained in insurance policies. Peoria Marine and Fire Ins.
Co. v. Whitehall, 25 Ill. 382, 392 (1861); Schoonover v. American
Family Ins. Co., 214 Ill. App. 3d 33, 572 N.E.2d 1258 (4th Dist.
1991), leave to appeal denied, 141 Ill. 2d 560, 580 N.E.2d 134;
McMahon v. Millers National Ins. Co., 131 Ill. App. 2d 339,
266 N.E.2d 714 (1st Dist. 1971); see also Koclanakis v. Merrimack
Mut. Fire Ins. Co., 899 F.2d 673, 675 (7th Cir. 1990) (following
Illinois law). The insurance contracts at issue here conditioned the
Board's right to receive recovery on its agreement to bring any suit
for benefits within 12 months. Without such a limitation, Affiliated
would obviously have demanded a higher premium and set other
conditions in the policy. Under Illinois law, the district court
properly held that the limitations clauses in the policies entitled
Affiliated to judgment.
Since the Board breached the contractual 12-month period for
bringing suit, it is unnecessary to consider whether it is also barred
for failure to give the prompt notice of loss required by the policies.
Certification to the Illinois Supreme Court
In a motion for certification, the Board has asked us to certify
the following question to the Illinois Supreme Court:
Whether appellant Chicago Board of Education as a public
entity enforcing public rights is immune under the doctrine
of nullum tempus from suit limitations provisions in its
property insurance policies when seeking to recover for
asbestos-related property damage.
However, cases cited above have convinced us that I[]linois law is
settled that an insured is not immune from policy provisions
6a
requiring institution of suit within 12 months of loss.“ Therefore
certification would be inappropriate and probably unsuccessful as
we have seen in recent instances where certification has been
denied. See, e.g., Todd v. Societe BIC, S.A., 9 F.3d 1216 (7th
Cir. 1993) (en banc) (certifying questions of state law to the IIinois
Supreme Court), 1994 WL 124023 (7th Cir. April 12, 1994) (en
banc) (deciding issues after certification was denied).
Judgment affirmed.
A true Copy:
Teste:
Clerk of the United States Court of Appeals
for the Seventh Circuit
‘While the Board also asked us to certify two questions concerning notice under
the policies, we have not decided this case on lack of notice and therefore there
is no reason to certify those questions.
Si saeeeteniesieante imme
7a
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
AFFILIATED FM INSURANCE
COMPANY,
Plaintiff,
No. 90 C 6040
V.
Hon. George W. Lindberg
BOARD OF EDUCATION OF
THE CITY OF CHICAGO,
eee ee”
Defendant.
JUDGMENT
Judgment is granted in favor of plaintiff, Affiliated FM
Insurance Company, and against defendant, Board of Education of
the City of Chicago, on the Seventh Count of plaintiff's Complaint
for Declaratory Judgment. It is hereby declared that any claim by
defendant based upon the presence of asbestos-containing materials
in its buildings or the necessity of removing or otherwise abating
the presence of asbestos-containing materials in said buildings, is
not recoverable under the Affiliated insurance policies issued to
defendant, namely Policy Nos. A4721, F6599, 16227 and EA412,
because suit on those policies is barred by the policies’ provisions
requiring defendant to bring suit within twelve months after the
inception of loss.
The remaining counts of plaintiff's Complaint for Declaratory
Judgment are dismissed as moot.
8a
Counts I and II of the defendant’s Second Amended
Counterclaim are dismissed with prejudice.
George W. Lindberg
District Judge
DATED: [July 2, 1993]
9a
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
AFFILIATED FM INSURANCE
COMPANY,
Plaintiff,
No. 90 C 6040
Vv.
Hon. George W. Lindberg
BOARD OF EDUCATION OF
THE CITY OF CHICAGO,
al
Defendant.
MEMORANDUM OPINION AND ORDER
Plaintiff, Affiliated FM Insurance Company (AFM), moved for
summary judgment against defendant, Board of Education of the
City of Chicago (the Board). FRCP 56. The Board moved
pursuant to Rule 56(f) for a continuance. FRCP 56(f). The
Magistrate Judge, on October 5, 1992, recommended that AFM’s
motion for summary judgment be denied and that the Board's
Rule 56(f) motion be granted.
On the view this court has taken of this case, further discovery
is not necessary to decide the motion for summary judgment.
Therefore. the Board's Rule 56(f) motion will be denied.
FRCP 56(f).
Both parties have objected to the Magistrate Judge’s report and
recommendation of October 5, 1992. The court has reviewed de
novo the objected to portions of that report and recommendation.
The court agrees with most of the Magistrate Judge’s report and
|
10a
recommendation. However, the court disagrees with a portion of
the report and recommendation and with the recommended decision.
The recommended decision will therefore be rejected. 28 U.S.C.
§ 636(b)(1); FRCP 72(b).
It is the recommendation with respect to Count 7 of the
complaint, the suit limitations defense, with which this court
disagrees. The report and recommendation states the facts in great
detail, which facts need not be exhaustively recited here.
Certain portions of the facts and conclusions of the report and
recommendation are worth noting, however. The report and
recommendation summarizes the relevant provisions of the
insurance policies at issue as follows:
{I]n its [the Board’s] 1978 policy, suit was to be
commenced within one year "next after inception of the
loss." The 1983 policy did not incorporate the standard
fire policy form, using instead AFM’s own Form 2293,
Special Policy Conditions. Here, the suit limitations
period begins to run "after discovery by the insured of the
occurrence which gives rise to the claim.” Further, Form
2293 provides in provision 23 that the "[t]erms of the
policy which are in conflict with the statutes of the state
wherein this Policy is at issue are hereby amended to
conform to such statute.” The 1985 policy also contained
the same Special Policy Conditions Form 2293, with its
discovery standard. The 1985 policy, however, contained
form APP-1, which had a different suit limitations
provision. This provision stated that suit is to be
commenced with[in] 12 months "after the happening of the
loss, unless a larger period of time is preserved by
applicable statute.” Finally. the 1988 policy has only the
APP-1 limitations provision.
With respect to the date from which the suit limitations period
began to run, the report and recommendation stated:
Kt
lla
Taking the facts most favorable to the Board, it is
undisputed that the review conducted pursuant to the
AHERA and completed in May, 1989, gave the Board a
comprehensive summary of the levels of ACM’s contained
in its school buildings. This May of 1989 date is really
giving the Board the benefit of the doubt because a true
question of fact remains as {to} the Board’s knowledge
with respect to the work done at the Fenger and Price
schools. It is not clear that the abatement done at these
schools was because the buildings had dangerous levels of
contamination which exceeded regulatory guidelines. What
AFM has failed to establish is precisely when the Board
had knowledge that its buildings had asbestos which
reached dangerous levels. It is beyond doubt, however,
at the very latest the Board had to know this by May of
1989 when its AHERA report was completed.
The court agrees with this conclusion of the Magistrate Judge, as
well as with his conclusion that:
{T]he limitations period should not be tolled by the fact
that the Board was waiting for a decision in [the cases of]
Board of Education v. A, C, and S, and Wilkin. If this
legally unsupported argument was accepted by this court
any plaintiff could simply allege ignorance of his or her
legal rights against a particular defendant.
The argument is also unsupported by the language of the policies.
Thus. this court and the Magistrate Judge agree that, assuming the
applicability of the suit limitation provisions of the insurance
policies. those provisions would bar the Board from bringing sult
for the asbestos-related claims at bar.
The conciuding paragraph of the report and recommendation
on this issue states
AFM’s argument that the Board consented to this one
year period of limitations is well taken, and ordinarily the
terms of the contract determine the rights of the parties.
I believe. however, thal an exception arises in an instance
12a
such as this one, where latent injuries of the type suffered
as a result of exposure to asbestos is [sic] in question.
This conclusion is supported by the reasoning applied in
A, C, and §, where the court stated that they [sic] could
not ignore the health concerns involved and the interest in
the safety of the public buildings and a large segment of
this State’s population which attends the public schools and
for the children who will in the future attend these schools.
The court also noted the interest of the parents, faculty,
staff, and other people who use or will use the public
school system. A, C, and S, at 601. Finally, the Illinois
Supreme Courts [sic] recent decisions in Wilkin and A, C,
and S, infer that the health concern- resulting from
contaminated asbestos is paramount to procedural
concerns. Therefore, 1 am recommending that the doctrine
of municipal liability applies to the instant case and the
Board is not barred by AFM’s one year limitations period.
It is here that this court parts company with the report and
recommendation. While United States Fidelity & Guaranty
Company v. Wilkin Insulation Company, 144 Ill. 2d 64, 578 N.E.2d
926 (1991), and Board of Education v. A, C, and S, Inc., 131 Ill.
2d 428, 546 N.E.2d 580 (1989), do involve asbestos giving them
a factual similarity to this case, they do not involve the legal
question presented by the case at bar.
This court believes that the Illinois Supreme Court, if presented
with the issue at bar, would agree with the following statement of
the Illinois Appellate Court:
Plaintiff contends, however, that, as a municipality,
it is exempt from the time limit provision. Plaintiff relies
on City of Shelbyville v. Shelbyville Restorium, Inc. (1983),
96 Ill. 2d 457, 71 Ill. Dec. 720, 451 N.E.2d 874, to
support its argument. We find the case inapplicable,
however, because, contrary to plaintiffs contention,
Shelbyville did not declare a doctrine rendering
municipalities immune from limitation defenses. Rather,
13a
Shelbyville simply determined that neither the 1970 Illinois
Constitution (Ill. Const. 1970, art. XIII, sec. 4), nor any
decision of the Illinois Supreme Court i.as abolished the
common law doctrine of governmental immunity from
statues of limitation. . . . The suit limitation at issue here
is neither a statute of limitation, nor an ultra vires attempt
by a municipal officer to waive the municipality’s
immunity from the applicable statute. (Cf. S.J. Groves &
Sons, Co. v. State of Illinois (1982), 93 Ill. 2d 397, 404-
05. 67 Ill. Dec. 92, 444.N.E.2d 131 (by entering a
contract a State agrees to be bound by its terms, but such
agreement does not imply an intention to waive its
immunity from suit).) Rather, it is a contractual agreement
by which plaintiff affirmatively agreed to commence suit
on the policy within one year from the date of any covered
loss. Plaintiff's complaint affirmatively establishes that
plaintiff did not comply with that provision. We therefore
conclude that the trial court properly granted Emcasco
judgment on the pleadings and properly denied plaintiff's
motion for leave to amend.
Village of Lake in the Hills v. Illinois Emcasco Insurance Company,
153 Ill. App. 3d 815, 506 N.E.2d 681, 684 (1987). Neither the
Wilkin case nor the A, C, and S case suggests that there is an
exception to this rule for asbestos-in-school-buildings claims. Nor
does the fact that there may be regulations having the force of law
requiring certain time limit provisions in insurance policies change
this court’s conclusion that the provisions at issue are contractual
time limit provisions subject to Village of Lake in the Hills rather
than statutes of limitations subject to City of Shelbyville.
Bolstering the court’s conclusion that the contractual time limits
should be enforced is a consideration of the nature of the contracts
at issue. The contracts at issue are contracts of insurance.
Presumably, AFM’s determination to charge and the Board's
agreement to pay the premiums were in part based upon predictions
made by AFM’s actuaries as to the costs of claims which could be
expected under the policies. That risk is obviously considerably
14a
less if the Board is required to comply with the one year suit
limitations provisions of the policies than it would be if those
provisions are wholly or even partially ineffective. There would
be considerable unfairness to AFM in not enforcing the clear suit
limitation provisions of the policies at this late date; while enforcing
those provisions is wholly in line with what the Board could have
anticipated when it signed the policies containing those provisions.
Moreover, while this court cannot predict precisely the effect a rule
of law that made suit limitations provisions unenforceable against
governmental bodies in some circumstances would have, it is fair
to say that the effect would be adverse with respect to the premiums
paid by and the ability to obtain insurance of those bodies because
it would increase the risk assumed when the insurance is written.
The limited issue on which this motion is decided concerns the
application of the suit limitations provisions of the policies. The
court has not relied upon the notice of claims provisions of those
policies. Under Illinois law the two periods are in some cases
related:
Whenever any policy or contract for insurance... .
contains a provision limiting the period within which the
insured may bring suit, the running of such period is tolled
from the date proof of loss is filed, in whatever form is
required by the policy, until the date the claim is denied
in whole or in part.
Ill. Ann. Stat. ch. 73, § 755.1 (West 1992 Supp.). The Board did
not submit its proof of loss until September of 1990. Tolling the
Suit limitation period from that date to the date on which the claim
was rejected in October of 1990 is of no assistance to the Board in
this case since the suit limitation period began at the latest in May
of 1989.
ORDERED: The recommended decision contained in the
Magistrate Judge’s October 5, 1992, report and recommendation
is rejected. 28 U.S.C. § 636(b)(1); FRCP 72(b). Plaintiff
Affiliated FM Insurance Company’s motion for summary judgment
_ oe
15a
is granted. Defendant Board of Education of the City of Chicago’s
motion pursuant to Rule 56(f) is denied.
ENTER:
George W. Lindberg
District Judge
DATED: [June 2, 1993]
16a
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
AFFILIATED FM INSURANCE
COMPANY,
Plaintiff,
BOARD OF EDUCATION OF
)
)
)
)
)
V. ) No. 90 C 6040
)
)
CITY OF CHICAGO, )
)
)
Defendant.
TO: HONORABLE GEORGE W. LINDBERG, JUDGE
UNITED STATES DISTRICT COURT
HONORABLE SIR:
REPORT AND RECOMMENDATION
of Magistrate Judge Ronald A. Guzman
Pending is plaintiff Affiliated FM Insurance Company’s
("AFM") motion for summary judgment. Also pending is defendant
Board of Education of the City of Chicago’s ("Board") motion for
a continuance pursuant to Federal Rule of Civil Procedure 56(f).
BACKGROUND FACTS
On October 17, 1990 AFM, a property insurer headquartered
in Johnstown, Rhode Island, filed this diversity declaratory
judgment action against the Board. AFM is a wholly-owned
subsidiary of Allendale Mutual, a large property insurer which has
17a
a Best’s A + rating. The cornerstone of the Allendale family of
insurance companies and AFM is its unique program of rigorous
property inspections for loss prevention. Thus, AFM insisted as
a precondition to insuring the Board’s schools as well as during the
term of insurance, that the Board would agree to regular inspections
of its property by AFM or its agents.-
AFM first began insuring the Board in 1972? and since
December 1978 had continuously insured the Board under “all-
risks” policies. The policies were in the form of three-year
contracts from 1978-1981; 1981-1984; 1984-1987 and 1987-1990,
AFM policies, A4721, effective December 11, 1978 -
December 11, 1981; 6599, effective January 11, 1982 -
January 11, 1985; 16227, effective December 11, 1984 - December
1987: EA412, effective December 11, 1987 - January 1991? In
the fall of 1978, with the forthcoming expiration of the 1975 AFM
policy, the Board used bid solicitation documents which invited bids
for both named peril and all-risk coverage. “All-risk” coverage was
defined in the specifications as “all-risks of direct physical loss or
damage to the insured property from any external cause, except as
hereafter excluded.” The losses which could be excluded were:
! AFM paid directly or indirectly for those inspections and insisted that they be
reported on AFM or AFM approved forms. Yearly mspecuons of elementary
schools continued through 1982: thereafter, they were inspected every three years
AFM continued the practice of obtaining yearly inspections of all Board high
schools throughout the policy period. The inspection reports included listings of
risks and changes in conditions relevant to coverage provided at the buildings at
issue, with recommendations of what the Board needed to do to cure the problem
The first policy as well.as the renewal policy in 1975 was in “named-peril”
form. That 1s, AFM agreed only to pay for losses caused by events specifically
identified in the policy. The causes of loss in the 1972 and 1975 policies included
fire. vandalism and theft. Although the Board regularly suffered known losses
from these causes during the term of both the 1972 and 1975 policies. none
remotely approached $1.000.000 and the Board filed no claims
Amended Answer to Complaint, 410. May 1992
18a
(1) delay or loss of market ...; (2) inherent vice, natural
deterioration, wear and tear, etc.; (3) infidelity and dishonesty, etc.;
(4) extremes of temperature, dampness of atmosphere, etc.;
(5) nuclear exposures; and (6) war risks. The specifications also
required loss occurrence to be defined as “all losses arising out of
one event.” At this time, the Board included a detailed listing of
fire, vandalism, and theft losses for the preceding ten years. The
specifications provided information in some detail about school
buildings of the Board. However, the specifications made clear
that:
“appropriate investigations and inspections have been made
Or waived and that the insurance company and _ its
representatives are fully informed as to the extent and
character of the exposures, hazards, and the requirements
of the specifications."
The specifications further provided that while the Board believed
the information provided in the specifications was current and
complete "no warranty is made or implied as to the information
contained in these specifications and data." The Board’s insurance
specifications were essentially the same, excluding property
descriptions, from 1978 through 1987. AFM received copies of
these specifications. In its 1978 bid, AFM indicated its interest in
offering either named peril or all-risk coverage, with a considerably
higher premium for all-risk than for named peril. The 1978
Insurance Proposal, with a $1,000,000 deductible, quoted an annual
premium of $760,000 for all-risk, versus an annual premium of
$650,000 for named peril. The difference in cost was succinctly
explained by the Board’s broker, Charles DeBruler of A.J.
Gallagher & Co.: "“[t]he difference in named perils and all-risk
must be judged on the value placed on the additional major perils
of flood. earthquake, collapse or unknown perils not excluded."
The Board thereupon decided to take the all-risks coverage in spite
of the additional cost.
19a
The 1978 all-risk policy was to be in effect for three years,
until December 1981. The Board retained the risk for the first
$1,000,000 per occurrence and AFM’s per occurrence limit of
liability was $40,000,000 per location. The Board’s coverage was
the responsibility of AFM’s Oak Brook, Illinois regional office.
Because of the large dollar amount of the risk involved the regional
office required approval of the underwriters in AFM’s home office
in Rhode Island.
The Board had elected to take an extraordinarily high,
$1,000.000 per event deductible under the policy so the Board
could self-insure for ordinary losses while transferring the risk of
catastrophic losses to AFM. From 1972, when AFM first began
insuring the Board until the present claim, the Board filed no claims
whatsoever under the policy.
In May, 1981 AFM had learned from its periodic inspection
reports that the Board had begun abating dangerous asbestos. In
a report dated May 15, 1981 on the Mayer School, AFM’s contract
inspector noted:
"this building was tested for asbestos and was found that
the ceilings in the corridors contain asbestos fibers. As a
result, the ceilings are scheduled to be torn out this
summer and replaced.”
A similar report of the Wicker Park School, dated September 16,
1981 noted that the Board had removed asbestos ceilings. AFM
procedures required that engineering personnel bring to the
underwriter’s attention any “problems.”
AFM renewed the Board insurance in January, 1982 under
similar specifications as 1978 and with a million dollar risk
retention to the Board. AFM did not, however, include in its
renewal policy, an exclusion for loss caused by asbestos in
Particular, or more generally, for loss caused by unreasonably
dangerous products. During the three-year policy period, although
the Board suffered fire. vandalism, and other known covered
20a
property losses during the period, none exceeded $1,000,000 so no
claims were filed during 1982-1984.
AFM renewed the Board’s all-risk insurance in 1984 under
essentially the same bid specifications as 1978 and 1981. The self-
insured retention remained at $1,000,000. The total amount insured
under the 1984 policy was nearly $3 billion with the maximum per
loss occurrence $40 million per location and $92 million for the
Board’s administrative headquarters.
The blanket $40 million per location limit was revised on
December 11, 1985 to specific amounts per location. This change
was made to accommodate General Reinsurance Corporation ("Gen
Re"), the reinsurer, for all of the Board’s buildings which were
valued at over $10,000,000, excluding the Board’s administrative
center. At this time, AFM did not add any exclusion for loss
caused by asbestos. The Board continued to suffer known covered
property damage losses during the period in a number of schools,
but none exceeded $1 million so no claims were filed.
The Board's all-risk policy was renewed a final time, again for
three years, by AFM in December, 1987. Before its issuance,
AFM continued to receive inspection reports indicating that the
Board’s schools contained asbestos which it was abating. In August
1985 and November 1986 AFM learned that asbestos ceiling tile
was being removed in Kennedy High School. AFM received a
similar report in October 1986 as to Dunbar School.
The policy issued by AFM in December, 1987 contained no
asbestos exclusion or any exclusion for losses caused by
unreasonably dangerous products. The 1987 policy again was all-
risks in form, with a total insured valuation exceeding $4 billion.
The Board’s self-insured retention was reduced to $500,000 and the
limits of liability per occurrence continued to be set on a building-
by-building basis.
In August, 1986 Gen Re informed AFM of its new policy of
refusing to reinsure more than 70% of AFM’s coverage to a school
:
2la
district unless the reinsurance agreement contained a comprehensive
asbestos exclusion. In response to an inquiry from Peter Maple,
the AFM underwriter responsible for the Board’s account,
Allendale’s home office underwriting staff responded that the
exclusion proposed by Gen Re was unacceptable because it would
create "gaps" in coverage between what AFM had insured the
Board for and what AFM could reinsure with Gen Re. AFM did
not use this or any other asbestos exclusion in the policy it issued
to the Board for the period of December, 1987-December 1990.
Bans on the use of asbestos in construction, based on
widespread recognition of its dangers, pre-dated all the policies in
issue. As early as 1973, the Environmental Protection Agency
("EPA") addressed the issue of asbestos in buildings when the Clean
Air Act banned the spraying of asbestos for fireproofing and
insulation in new construction, 42 U.S.C.A. §1857 ef seq.;
40 C.F.R. §61; "National Emission Standards for Hazardous Air
Pollutants: Asbestos,” Federal Register, Vol. 39, No. 77, 1973.
In 1975, the EPA banned the use of asbestos in pipe covering
and boiler lagging. EPA Orange Book I, p.4, Ex. I. In 1978, the
EPA banned asbestos spraying in buildings for nearly all purposes.
EPA Orange Book, Part I, p.3, Ex. 1. From 1975-1979, much
material was published warning of the potential dangers of ACMs
particularly in schools. In October, 1975 the EPA prepared a
report warning about the health effects of "contamination of
building air" as a result of the past uses of ACM in buildings. The
report and study reported results from air sampling of selective
buildings, including two buildings in Chicago.* On August 18,
1978 Joseph Califano, then Secretary of HEW, wrote to the
governor of each state urging that public health and school officials
review the asbestos problem and determine "whether it is prudent
to eliminate from schools and other public buildings potential
sources of exposure to asbestos." Accompanying this letter was a
4
AFM’s Exhibit H.
22a
report prepared by the Mount Sinai School of Medicine calling
attention to a possible general problem nationwide, stating that
friable asbestos was found to exist in schools across the country.
One of the authors of this report, Dr. Robert Sawyer, was
subsequently employed by the Board as a consultant to assess the
asbestos hazard in Chicago schools.“ In March 1978, the EPA
published a guidance document "Hazard Abatement From Sprayed
Asbestos Containing Materials In Buildings."” In March 1979,
federal legislation mandated schools to identify facilities with
ACMs* and the EPA issued a guidance packet regarding asbestos
abatement to public school districts throughout the country entitled
“Asbestos Containing Materials in School Buildings" (Orange
Books I and II).2
As a result of both state and federal bans on the use of
asbestos, and other factors, Chicago area schools became aware of
the rising concern over health risks associated with asbestos
commencing in 1973. ACMs had been incorporated into the
Board’s buildings from 1946 to 1972. Intact and undisturbed
asbestos materials do not pose a health risk. The mere presence of
asbestos in a building does not mean that the building occupants are.
endangered. ACM which is in good condition, and is not somehow
damaged or disturbed, is not likely to release asbestos fibers into
the air.° Asbestos fiber release is a result of the inherent
characteristics of ACM, the reasonably foreseeable use of asbestos
tw
AFM’s Exhibit G.
® AFM’'s Exhibit U.
AFM’s Exhibit H.
$ AFM’‘s Exhibit R.
2 AFM's Exhibit I.
10 AFM'’s Exhibit Y.
23a
product and the normal and expected activities which occur in
schools.’ Friable ACMs have an inherent tendency to release
fibers from deterioration with age and normal usage.” Asbestos
becomes friable and may become dangerous as a result of
deterioration and wear and tear.’ The continual release of fibers
is a natural behavior of ACM in a school building because the
conditions which accelerate the process of fiber release are
especially present in such buildings. The only way to determine
whether and to what extent asbestos-containing materials are present
in a building is to physically inspect the building and have bulk
samples of suspect materials analyzed. Further, while undertaking
mechanical rehabilitations of its facilities in the 1970s, the Board
specifically installed fiberglass whenever it became necessary to
replace the existing insulation. Later, while undertaking school
inspections for friable asbestos required by the Asbestos Hazard
Emergency Response Act, 15 U.S.C. §2641(a)(1) ("AHERA"), the
Board’s inspectors noted that these conversions of the insulating
material eliminated the concern over asbestos when he wrote
"Partial Abatement 1975 New Boilers and Some Piping F.G.
Around Boilers and Bathrooms.” “Much of the pipe wrap was
changed over to F.G. in 1974 with the installation of the
boilers. "+
By the spring of 1977, the Board had contacted and met with
the Illinois Institute of Technology Research Institute ("HT/RI"),
an asbestos testing contractor, to seek bids for air sampling for
~ AFM’s Exhibit I.
= AFM’s Exhibit |
“ AFM's Exhibit J.
— AFM’s Exhibit M
24a
asbestos contamination in some of its schools.’ At this time,
IIT/RI proposed to measure the airborne concentrations of asbestos
fibers in Ignace Paderewski Elementary School, Morgan Park High
School and John Whistler Elementary School.’ Likewise, the
National Loss Control Service Corporation proposed to measure the
airborne concentrations of asbestos fibers in Dewey Elementary,
Brenneman Elementary and Kennedy High School. Thereafter, on
December 20, 1978, Board passed a resolution to test six of its
buildings and authorized expenditures to hire contractors to initiate
a pilot project to test airborne asbestos in its schools as follows:
"We authorize the performance [of] an analytical study to
determine the level of airborne asbestos fiber present in
schools where this material was used in the construction
process. This is a pilot project using representative
schools in various locations of the city of Chicago. "7
As a result of this pilot project, in March 1979 the Board was
advised that no dangerous levels of airborne fibers were found in
the three buildings analyzed. Specifically, the results were as
follows: at Dewey Elementary School no airborne fibers were
found; at Brenneman School airborne fibers were found but bulk
sample analysis showed that no asbestos was present; at the third,
Kennedy High School, airborne fibers were found and the presence
of asbestos was then confirmed by bulk sampling, but the fibers
found were measured at very low levels--less than three percent of
OSHA’s standard and under 10 percent of the stricter standard
established by the City of Philadelphia. For Kennedy High School
only, the inspectors suggested removal of any ACM ceilings in a
poor state to avoid potential fiber release. The Industrial Hygiene
<= Correspondence between the Board's Bureau of Architecture and the Illinois
Institute of Technology Research Institute. AFM’s Exhibit N. O.
* AFM'’s Exhibit N.
< AFM'’s Exhibit P.
25a
Report also recommended that the Board "remove any asbestos-
containing ceiling which is in a state of deterioration. Such a
ceiling can only release higher numbers of fibers with the passage
of time and continued neglect. . . . ideally the entire ceiling should
be removed as it can only continue to deteriorate thus increasing
asbestos concentrations." For the fiscal year 1979-1980, the
Board appropriated over one million dollars for abatement
administration and supervision.”
On June 8, 1979, the Board received a report from IIT/RI
which found in the three buildings analyzed (Whistler Elementary
School, Morgan Park High School and Paderewski Elementary
School): airborne fibers “well below the current OSHA
standard . . . and recommended NIOSH limits." Although bulk
samples of materials at two buildings--Whistler and Morgan Park--
were tested and found to contain asbestos, IIT/RI recommended
only that the Board implement a monitoring program. For fiscal
year 1979-1980, the Board appropriated over one million dollars
for abatement administration and supervision.*
In August 1980, the Board established a formal asbestos
abatement program and passed a resolution to temporarily close
three schools and shut down portions of two others until suspicious
materials in these buildings were inspected, sampled and analyzed
by a reputable laboratory and in every case were found not to
contain asbestos.’ Fifty-two other schools were placed on an
asbestos abatement management program.2 In 1980-81, the
- AFM’s Exhibus P & Q
= AFM’s Exhibit V
4
AFM’'s Exhibu V
= AFM’s Exhibits U & S
= AFM’s Exhibit S
26a
Board employed Battelle Laboratories to train administrators and
staff in asbestos abatement procedures, conducted a second phase
of sampling in schools, identified ninety schools containing asbestos
materials potentially hazardous to health, consulted with nationally
recognized asbestos abatement experts, and established a budget
classification for asbestos programs. In May, 1981 AFM learned
from its periodic inspection reports that the Board had begun
abating asbestos in the Mayer School. AFM’s contract inspector
noted: "this building was tested and was found that the ceilings in
the corridors contain asbestos fibers. As a result, the ceilings are
scheduled to be torn out this summer and replaced.” By 1981, the
Board had expended $500,000 on asbestos abatement in schools.2
In 1982-1983 the Board abated and/or removed almost a million
square feet of asbestos materials, completed abatement of eighty-two
schools, and expended $2.7 million on asbestos abatement. By
1984, the Board had expended over $9.0 million on asbestos
abatement. During the 1982-1984 policy period, the insured
never gave notice to AFM of a loss or claimed loss for "asbestos
related property damage." In 1986, a fire destroyed one of the
Board’s schools, Sherman School Branch. As a predicate to filing
a claim, the Board engaged Gallagher-Bassett, an inspection and
adjusting firm, to investigate the loss and determine whether it
exceeded the deductible. On finding the loss was at most
approximately $684,000, the Board determined that it had not
suffered a covered loss given that the deductible then was $1 million
and filed no claim.
In January 1985, the Board filed a claim in the Johns-Manville
bankruptcy proceedings to preserve its right to recovery of expenses
incurred for asbestos abatement from the Johns-Manville Property
Damage Settlement Trust. Only general claims were submitted at
AFM’s Exhibits U & S.
ed
24
= AFM’s Exhibit U.
27a
that time in the proceeding because a reorganization plan had not
as yet been submitted and approved by the Court. That claim stated
“claimant has suffered and/or will suffer asbestos-related property
damage” resulting from the presence of asbestos or asbestos
containing products.=
In December, 1986, AFM along with numerous other insurers
was sued by National Gypsum, which demanded that its insurers
pay the cost of defense and indemnify for any amounts it ultimately
had to pay in suits by asbestos purchasers such as that brought by
the Board. Stonewall Insurance Co. v. National Gypsum, 86 C.
9671 (D. Ct., S.D.N.Y.). Although the Board has been denied
discovery on this issue and the pleadings in this litigation are under
seal, it would be expected that in the course of discovery AFM and
the other insurers would have learned the identity of the school
districts asserting asbestos-related claims, including the Board.
Nonetheless, the policy issued by AFM in December, 1987
contained no asbestos exclusion or any exclusion for losses caused
by unreasonably dangerous products. The 1987 policy again was
all-risks in form, witha total insured valuation exceeding $ billion
The Board’s self insured retention was reduced to $500,000 and the
limits of liability per occurrence continued to be set on a building
by building basis.
As of October 31, 1990, the Board had spent more than
$1 million for abatement at only six of its buildings: Calumet High
School, Fenger High School, Kenwood Academy, Lathrop
Elementary, Price Elementary, and Roosevelt High School. Costs
at these buildings first exceeded $1 million during the summer of
1988, when $1 million was spent at Price Elementary School and
over $360,000 was added to amounts previously spent at Fenger
High School
Pa |
= AFM’s Exhibit T.
28a
In May of 1989 the Board completed its federally-mandated
AHERA reports, which were inventories of asbestos containing
materials at all 630 of its buildings. The Board then had the data
from all 600 buildings plus the AHERA report summarized into a
report showing estimated costs for removing all ACM in its
buildings. The May 1989 report showed that some 630 of the
Board’s buildings had dangerous asbestos, and reported that
remediation costs would exceed $1 million as to approximately
120 buildings and $500,000 as to approximately 68 additional
buildings.
In January, 1985, the Board filed a complaint in Illinois State
Court, 85 CH-00811, against several asbestos manufacturers
seeking recovery for asbestos damage caused by the manufacturers’
sale and installation of asbestos in its schools which occurred from
1946-1972. Board of Education of the City of Chicago v. A, C, and
S, Inc. On August 14, 1987, the Circuit Court of Cook County
ruled in favor of the insurers and held that the Board’s allegations
of injury were not property damage under the policy. 144 Ill. 2d
64, 578 N.E.2d 926, 928-29 (1991). On December 8, 1988, the
Illinois Supreme Court granted a petition for leave to appeal filed
by the manufacturers sued by the Board. Among other things, the
manufacturers asked the court to find that the Board’s injuries were
solely economic losses and not property damage. Board of Ed. v.
A, C, and S, Inc., 131 Ill. 2d 428, 546 N.E.2d 580, 585 (1989).
On October 25, 1989, the Illinois Supreme Court ruled for the
Board in its suit, holding that the Board’s allegations in strict
liability and negligence constituted cognizable property damage.
Board of Education, 131 Ill. 2d 482, 546 N.E.2d at 591.
In a second state court suit. this one brought by one of the
defendants named by the Board, Wilkin Insulation, against its
insurers, Wilkin had asked for a declaration that the insurers had
to pay the cost of Wilkin’s defense and indemnify for any amounts
2 AFM's Exhibit J.
29a
it was obliged to pay the Board because, in Wilkin’s view, the
Board’s allegations amounted to property damage under Wilkin’s
insurance policies. U.S.F.&G. v. Wilkin Insulation Co., 144 Ill.
2d 64, 578 N.E.2d 926, 928-29 (1991).
On December 28, 1989 the Illinois Appellate Court in the
Wilkin litigation, relying on Board of Education, reversed the trial
court and held that the Board’s allegations constituted property
damage for purposes of Wilkin’s insurance policy. 193 Ill. App.
3d 1087, 550 N.E.2d 1032. Thus, Wilkin’s insurers were obligated
to defend it in the Board’s suit. Jd. The Supreme Court granted
Wilkin’s insurers leave to appeal the appellate court’s decision and
on May 20, 1991, the Illinois Supreme Court affirmed that decision.
144 Ill.2d 64, 578 N.E.2d 926 (1991).
When the Board learned in 1988 (with regard to the Price and
Fenger schools) and in 1989 (from the AHERA surveys of its other
schools) that it had suffered property damage at many of its schools
in excess of the deductible, the Board was aware both that the
Illinois Supreme Court had granted leave to appeal in the Board's
suit against the manufacturers and that on appeal in the appellate
court was Wilkin’s appeal of the ruling for the insurers in its case.
The Board anticipated that a claim on its property policy would
almost certainly result in the cancellation of its coverage by AFM.
The Board also anticipated that prosecution of a claim would mean
substantial legal expense, since it anticipated that AFM would
vigorously resist payment.
Because the issue of whether asbestos-related losses constituted
property damage was squarely at issue in both appeals, the Board
determined to await the resolution of both its litigation in the Illinois
Supreme Court and the Wilkin litigation before determining whether
to file a claim on its policies. /d. at 47. The Supreme Court
granted Wilkin’s insurers leave to appeal the appellate court's
decision and on May 20, 1991, the Illinois Supreme Court affirmed
that decision. 144 Ill. 2d 64, 578 N.E.2d 926 (1991).
30a
In light of the development in Wilkin and Bd. of Ed. in late
1989, the Board engaged counsel to investigate whether it should
file a claim on its policies against AFM. After thorough review of
the policies and the factual underpinning of its claim, the Board
determined to make a claim, which it filed on September 4, 1990.
Less than two months later, on October 17, 1990, AFM summarily
denied the claim and instituted this action. AFM simultaneously
instituted this action seeking a declaration that the costs incurred by
the Board in removing and abating asbestos from its facilities are
not covered under any of the four property damage policies issued
by AFM to the Board. Some seven weeks later, it cancelled the
Board’s property coverage. The Board claims that AFM should
indemnify it for its asbestos removal and maintenance costs under
the four insurance policies.
DISCUSSION
A moving party is entitled to summary judgment "if the
pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, show that there is no
genuine issue of material fact and that the moving party is entitled
to a judgment as a matter of law." Fed. R. Civ. P. 56(c). "In
determining whether there are any genuine issues of material fact.
we draw all inferences in the light most favorable to the
nonmovant." Bartman v. Allis-Chalmers Corp., 799 F.2d 311, 312
(7th Cir. 1986), cert. denied, 107 S. Ct. 1304 (1987). However,
only reasonable inferences will be drawn from the facts. Spring v.
Sheboygan Area School Dist., 865 F.2d 883, 886 (7th Cir. 1989).
One of the principal purposes of summary judgment is to isolate and
dispose of factually unsupported claims or defenses, and the rule
should be interpreted in a way that allows it to accomplish this
purpose. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).
The Court’s proper inquiry is "whether there is a need for a trial,
whether, in other words, there are any genuine factual issues that
can be properly resolved only by a finder because they may
reasonably be resolved in favor of either party." Anderson v.
3la
Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). Summary
judgment is appropriate in statute of limitations cases, "since that
defense often does not involve a genuine question of material fact."
Miller v. A.H. Robins Company, Inc., 766 F.2d 1102, 1107
(7th Cir. 1985).
THE FORTUITY DOCTRINE DOES NOT
EXCLUDE THE BOARD’S LOSS
AFM bases its first argument on the principle that insurance
contracts afford coverage only for events that are contingent or
uncertain. not for losses that are already known to have taken or
be taking place. AFM claims that the policies at issue insure "all
risks of direct physical loss” occurring during each policy period,
except those risks and losses excluded. Thus, the policies cover
risks, not certainties. For a premium, AFM states, it assumed the
risk that the Board’s property could be physically damaged during
the policy period. If the prospect of damage was not dependent
upon chance, but rather, was inevitable, the basis for the insurance
was destroyed.
In particular, AFM argues that if the Board’s contention 1s
accepted, that the presence of ACMs is direct physical loss under
the policy and has caused direct physical loss under the policies,
then the damage occurred upon installation during the years from
1946 to 1972 when ACM was first incorporated into the school
buildings. In such case, there is no coverage because the damage
would already have occurred prior to the inception date of the first
AFM policy dated December 11, 1978. This policy stated that
“The Company shall not be liable for any loss occurring prior to
the inception date . . . of the policy."
AFM claims that even if the Board’s contentions that the
existing property damage was exacerbated during the AFM policy
periods through release of asbestos fibers, its claims are still barred
because (1) the loss was already in progress on the date coverage
began; and (2) any future losses were a certainty rather than a risk,
32a
on the inception date of each policy. As a result, there can be no
dispute that the alleged release or loss was not fortuitous and
therefore that the Board’s claim is not covered.
AFM cites as its authority to support its argument that courts
refuse to grant coverage under insurance policies for losses which
have already begun at the time the policy coverage began.
Bartholomew v. Appalachian Ins. Co. , 655 F.2d 27 (1st Cir. 1981):
Summer v. Harris, 573 F.2d 869 (Sth Cir. 1978); and Appalachian
Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56 (3d Cir. 1982). To
determine whether the claimed losses were fortuitous, AFM argues
that the court must examine both the inherent qualities of asbestos
and the intended use of the structures into which it was incorporated
as well as the Board’s knowledge. Under this "loss-in-progress”
doctrine, where a loss-causing event has already begun on the date
the policy coverage begins, there is no coverage for the resulting
damage. AFM maintains that the Board’s claim is that the presence
of ACM in school buildings constitutes property damage, and that
the alleged release of fibers since installment until removal, or until
the present was caused by various events and occurrences. AFM
further argues if the release of asbestos fibers has been continual
since installation, then the damage, as well as all the events and
occurrel... 5 causing such damage, was occurring both prior to and
on the date coverage under AFM’s policy first incepted on
December 11, 1978. Any losses for which the Board now claims
coverage were indisputably "in progress" on that date.
Accordingly, coverage does not exist under either the first AFM
policy commencing December 1978 or under the three policies
following it, commencing December 1981, 1984 and 1987.
AFM argues that the inherent qualities of asbestos
combined with the intended use of the Board’s school buildings
made the damage inevitable and that the Board knew this. AFM
points to several factors to illustrate the state of the Board’s
knowledge prior to inception of the first AFM policy:
33a
(1) Discovery has revealed that the ACMs were
installed during the period from 1946-1972, prior to the
inception of the policies;
(2) The Board knew that the presence and release of
asbestos was a potential health hazard because as early as
1973 the EPA addressed the issue of asbestos in buildings
when the Toxic Substances Control Act banned the
spraying of asbestos for fireproofing and insulation in new
construction. That ban applied to the Board;
(3) In 1975, the EPA banned the use of asbestos in
pipe covering and boiler lagging and that ban applied to
the Board:
(4) In 1978, the EPA banned asbestos spraying in
buildings for nearly all purposes and that ban applied to
the Board;
(5) In March 1978, the EPA published a guidance
document "Hazard Abatement From Sprayed Asbestos
Containing Materials In Buildings." This booklet
observed, "The recognition of the potential health hazards
from exposure to asbestos fiber... has prompted the
[EPA] . . . to enact regulations for its safe handling to
protect the public, the environment and the worker... .
Asbestos in all forms is considered a serious respiratory
hazard .... Environmental contamination from [ACM]
can occur not only during construction and demolition, but
also throughout the life of the structure,”
(6) Even earlier, in 1971 and 1972 asbestos spraying
was banned by the cities of Boston, Chicago, New York
and Philadelphia, and the State of Illinois. Attorney
General's Asbestos Liability Report to the Congress,
November, 1981, p. 52; Amendment Hearings before the
Subcommittee on the Environment, August 5, 1971,
p. 127; Michael Knight, “Cities Are Acting to Regulate
34a
Spraying of Asbestos," in New York Times, June 29, 1971,
p. 61; Casey Bukro, "Illinois Votes Ruies on Asbestos
Uses," in Chicago Tribune, January 7, 1972, Sec. 1, p. 3.
The 1971 Chicago ordinance was characterized as the most
stringent, calling for up to six-month jail terms. Knight,
Op. Cit. In addition, in October 1975 the EPA prepared
a Report warning about the health effects of
"contamination of building air” as a result of the past uses
of asbestos in buildings;
(7) The report and study reported results from air
sampling of selective buildings, including two buildings in
Chicago. “Asbestos Contamination in the Air of Public
Buildings,” October 1, 1975;
(8) On August 18, 1978 Joseph Califano, then
Secretary of HEW, wrote to the governor of each state
urging that public health and school officials review the
asbestos problem and determine "whether it is prudent to
eliminate from schools and other public buildings potential
sources of exposure to asbestos." Accompanying this
letter was a report prepared by the Mount Sinai School of
Medicine calling attention to a possible general problem
nationwide, stating that friable asbestos was found to exist
in schools across the country. One of the authors of this
report, Dr. Robert Sawyer, was subsequently employed by
the Chicago Board as a consultant to assess the asbestos
hazard in Chicago schools;
(9) In November 1978, the cover article in the
American School Board Journal was "Asbestos in Schools:
Walls and Halls of Trouble," November, 1978, p. 31,
which advised school administrators “asbestos may cause
a rare incurable cancer, can be extremely dangerous and
expensive to remove and is a problem that can be solved
by astute school boards;"
35a
(10) In March 1979, the EPA issued a guidance packet
regarding asbestos abatement to public school districts
throughout the country,
(11) The Board had begun to investigate the hazards
posed by asbestos in school buildings by the summer of
1977. Significantly, as early as 1973, a Chicago area
school was closed because of suspected exposure to
asbestos contaminants. “Cancer in Youth Linked to
Asbestos.” in Chicago Tribune, March 22, 1973, p. z
(12) Similarly, while undertaking mechanical!
rehabilitations of its facilities in the 1970s, the Board
specifically installed fiberglass when it became necessary
to replace the existing insulation. Later, while undertaking
school inspections for friable asbestos required by
AHERA, inspectors noted that these conversions of the
insulating materials eliminated the concern over asbestos.
For example, in the AHERA for Lincoln Elementary
School, the inspector noted, “Partial Abatement 1975 New
Boilers and Some Piping F.G. Around Boilers and
Bathrooms.” Likewise, the AHERA for Vanderpool
School notes, "Much of the pipe wrap was changed over
to F.G. in 1974 with installations of the boilers."
(13) Beginning in the summer of 1977 the Board began
contacting asbestos testing firms to begin testing schools
for the presence of dangerous levels of airborne asbestos
contamination. In the summer of 1977, the Board met
staff of the Illinois Institute of Technology. Research
Institute ("IIT/RI"), one such contractor, to discuss testing
of schools. On July 27, 1977. the Board wrote to IIT/RI:
“The Bureau of Architecture of the Chicago Board of
Education has identified schools, as listed in the paragraphs
below, to be investigated to determine if, in fact, those
ceilings or fireproofing of the structural steel emit asbestos
fibers in the air and create an adverse effect or harmful
36a
condition to the occupants of the school building.” On
June 28, IIT/RI personnel met with Board employees to
discuss sampling and analysis of airborne asbestos
concentrations. On August 15, 1977, IIT/RI wrote to the
Board summarizing the June 28 meeting which included
a tour of affected locations;
(14) On December 4, 1978, IIT/RI submitted a
proposal to measure airborne asbestos concentrations in
three Chicago schools, in response to the Board’s request
of November 22, 1978. Thereafter, on December 20,
1978, the Board passed a resolution to determine the level
of airborne asbestos fiber present in schools where this
material was used in the construction process. This is a
pilot project using representative schools in various
locations of the City of Chicago;
(15) As a result of this pilot project, in March 1979 the
Board was advised that a potential health hazard indeed
existed. In an Industrial Hygiene Report prepared by the
National Loss Control Service Corporation at the Board’s
request, it was recommended that the Board "remove any
asbestos-containing ceiling which is in a state of
deterioration. Such a ceiling can only release higher
numbers of fibers with the passage of time and continued
neglect. . . . ideally the entire ceiling should be removed
as it can only continue to deteriorate thus increasing
asbestos concentrations; "
(16) In its Answers to Interrogatories, the Board
concedes that it "began doing bulk sample testing in 1979."
Board employees took samples of asbestos containing
materials which confirmed that friable asbestos was indeed
present in these facilities. In 1979, "federal legislation
mandated school systems to identify the facilities with
asbestos containing material.” The Board began a costly
and time consuming asbestos removal and abatement
37a
program and, in their own words, “established a program
that exceeded federal legislation; ”
(17) In 1980, the Board passed the following
resolutions: (a) it closed three schools, and parts of two
others. for asbestos abatement activity; (b) il placed 52
other schools in an Asbestos Abatement Management
Program; (c) it adopted a separate budget classification for
asbestos abatement and management expenses, and (d) it
retained private contractors to train Board personnel in
inspection and abatement procedures, and
(18) In a brief submitted to the Supreme Court of
Illinois by the Board on April 27, 1989, at pp. 18, 19, the
Board admits that breakdown and release of asbestos fibers
in inevitable, indeed, is not fortuitous.
AFM argues in light of these numerous facts, that the Board
was aware of the inevitability of the losses it now claims before the
first contract of insurance took effect.
In response the Board denies that it had knowledge of any
losses in excess of the deductible prior to the inception of the
policies. The Board contends that AFM’s argument turns on 4
factual determination of what the Board knew when it purchased the
policies. Further, the Board argues that, at this juncture, this court
must accept the Board’s version of the facts and deny summary
judgment.
In support of this response, the Board points out that the origin
of the fortuity doctrine marks an attempt by underwriters to avoid
insuring a loss that in hindsight was objectively certain to occur
whether or not ii could be known in advance. The Board argues
that the modern trend in Illinois has rejected this position, and
instead has limited the doctrine to situations where not only is the
loss certain to occur, but also that the insured in fact knew before
the policy was purchased that the loss would or had occurred.
———————————
38a
In the alternative, the Board argues that even if all three of
AFM’s factual assertions (a) that it had ACM in its buildings,
(b) that it knew that the asbestos in its buildings constituted, in its
words, "a potential health hazard,” and (c) that asbestos is released
through natural deterioration and through the intended and normal
use of the school buildings, AFM’s argument is fallacious in at least
two respects. First, even if all three of these facts were true, the
losses here would still be fortuitous. Even if the Board knew before
December 1978 that it had asbestos in its buildings and that this
constituted a potential health hazard, that is like saying that an
owner of a wooden building knows that it might catch fire.
Coverage is not excluded simply because the insured is aware of
the possibility of loss. Indeed, that is the reason that he or she
purchases insurance. Rather, fortuity is lacking only when the
parties know that the loss either has or during the policy term will
occur, a state of knowledge that AFM does not even allege the
Board has. Second, the Board in fact before the 1978 policy was
issued did not know that its asbestos in place was even potentially
dangerous.
As to the applicability of this fortuitous doctrine, the start of
our discussion focuses first on Illinois law and the case of Harbor
House Condo Assn. v. Mass. Bay Ins. Co., 703 F. Supp. 1313
(N.D. Ill. 1988), aff'd, 915 F.2d 316 (7th Cir. 1990). In Harbor
House, a condominium association sought to recover under a
Massachusetts Bay all-risk casualty policy the replacement costs of
a perimeter heating system which allegedly suffered damage as a
result of freezing. On the insurer’s motion for summary judgment,
the court held that the condominium association was not entitled to
recover under the policy, as it had not shown that damage to the
entire system was caused by freezing and failed to establish the
extent of damage to the entire system.
The court in addressing the issue of coverage and the fortuity
doctrine noted as follows:
39a
Coverage under an “all risk" insurance policy extends only
to a loss caused by a fortuitous event. Mazttis v. State
Farm Fire & Casualty Co., 118 Ill. App. 3d 612, 621,
73 Ill. Dec. 907, 914, 454 N.E.2d 1156, 1163 (Sth Dist.
1983). The insured must prove both that a loss occurred
and the loss was a result of a fortuitous event. Texas
Eastern Transmission v. Marine Office-Appleton & Cox
Corp., 579 F.2d 561, 564 (10th Cir. 1978). In order to
withstand a defendant’s motion for summary judgment, the
plaintiff must present sufficient evidence as to each of
these two elements to permit a reasonable jury to return a
verdict in the plaintiff's favor. See Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23, 106 S. Ct. 2548, 2553,
91 L. Ed. 2d 265 (1986).
Although it is not clear that the pipes sustained any
- further damage, defendant does not dispute the existence
of any such further damage for purposes of this motion.
A dispute does exist, however, with respect to the cause
of that damage. Unlike a plaintiff who asserts a loss under
a "specific risk” policy, a plaintiff claiming darnage under
an “all risk” policy need not prove the exact cause of
damage. Morrison Grain Co., 632 F.2d 424, 430
(Sth Cir. 1980): However, the plaintiff must establish that
the loss occurred as a result of a fortuitous event.
Morrison Grain, 632 F.2d at 430-31; Texas Eastern
Transmission v. Marine Office-Appleton & Cox Corp.,
579 F.2d 561, 564 (10th Cir. 1978); Standard Structural
Steel Co. v. Bethlehem Steel Corp., 597 F. Supp. 164, 193
(D. Conn. 1984).
Harbor House 2i 1316-17
A fortuitous event was defined in a footnote as “an event which
so far as the parties to the contract are aware, is dependent on
chance. It may be beyond the power of any human being to bring
the event to pass; it may be within the control of third persons, it
may even be a past event provided that the fact is unknown to the
ee
40a
parties." Mattis v. State Farm & Casualty Co., 118 Ill. App. 3d
612, 623, 73 Ill. Dec. 907, 915, 454 N.E.2d 1156, 1164 (Sth Dist.
1983) (quoting Restatement of Contracts, § 291 Comment a
(1932)). Damage due to causes such as known pre-existing
problems would not be fortuitous. Jd.
The Board claims that the modern trend in Illinois and
elsewhere has rejected the position that known risks are excluded
from insurance coverage and instead has limited the doctrine to
Situations where not only is the loss certain to occur, but also that
the insured in fact knew before the policy was purchased that the
loss would-or had occurred. See, e. g., Mattis v. State Farm Fire
& Cas. Co., 118 Ill. App. 3d 612, 454 N.E.2d 1156 (Sth Dist.
1983); Standard Structural Steel v. Bethlehem Steel Co., 597 F.
Supp. 164 (D. Conn. 1984). This modern approach, the Board
claims, is an adoption of the Restatement of Contracts definition of
fortuity which was cited in Harbor House.
Harbor House, although instructive as to the concept of this
doctrine, is of little help as to the dimensions of this doctrine,
especially with regard to a latent type of injury such as asbestos.
Neither party cites Illinois law, as to such, so we must now turn to
persuasive authority outside of Illinois. The dimensions of this
known risk doctrine, however, were extensively discussed in Ciry
of Johnstown, New York v. Bankers Standard Insurance Company,
877 F.2d 1146 (2d Cir. 1989). Like the present case, the City of
Johnstown involved a coverage dispute. There, in the underlying
CERCLA suit, the State of New York had sued the City for the
costs of cleaning up certain wastes that seeped from a city landfill
into surrounding grounds. Evidence had emerged, from the
previous fifteen years, indicating that certain wastes leaking from
the landfill may have polluted those groundwaters. 877 F.2d at
1147. In light of this evidence, in the declaratory judgment action
bought by the City seeking coverage, the insurers had argued first
that the policies specifically excluded losses or damages "expected"
or "intended" by the City. The insurers argued that, in light of the
4la
earlier warnings of contamination, the alleged environmental
damage that underlay the CERCLA suit was certainly expected by
the City, and thus not covered by the insurer’s policies. Second,
the City knew of the contamination before the contamination was
a "known risk,” and that thus the policies did not cover any liability
resulting from that contamination.
The Second Circuit denied the insurer’s motion for summary
judgment and rejected this "known risk” doctrine. The court, after
noting that the insurers had essentially merged the two arguments
at the district court level, discussed both doctrines in detail.
Observing that no New York cases discussed the doctrine of known
risk, the court stated as follows:
We do not agree that the cases offered by appellees stand
for the proposition that knowledge of a risk makes that risk
uninsurable. As we perceive it, some of the cases cited
stand for the principle that insurance cannot be purchased
for damage deliberately done before the inception of
insurance, see Bartholomew v. Appalachian Ins. Co., 655
F.2d 27, 28-29 (ist Cir. 1981), or for damage that has
been fraudulently concealed from the insurer prior to the
purchase of the insurance policy, see Arley v. United Pac.
Ins. Co., 379 F.2d 183, 187-88 (9th Cir. 1967), cert.
denied, 390 U.S. 950, 88 S. Ct. 1039, 19 L. Ed. 2d 1140
(1968). Other cases cited stand for the proposition--
inapposite here--that property cannot be insured if it 1s
rapidly being destroyed, e.g., as in a flood, see, e.g.,
Mason Drug Co. v. Harris, 597 F.2d 886, 887-88 (Sth
Cir. 1979), or for the proposition that insurance will not
normally cover damages that are, as a result of legal or
administrative proceedings, already apparent at the
inception of insurance, see, e.g., Appalachian Ins. Co. v
Liberty Mut. Ins. Co., 676 F.2d 56, 62-63 (3d Cir. 1982),
Town of Gloucester v. Maryland Casualty Co., 668 F.
Supp. 394, 402 & n.2 (D.N.J. 1987); United States v.
42a
Maryland Casualty Co., 653 F. Supp. 152, 181 (W.D.
Mo. 1988). Finally, other cases cited deal with doctrine
regarding damages that are “expected” or "intended" by
the insured, see, e.g., New Castle County v. Hartford
Accid. & Indem. Co., 685 F. Supp. 1321, 1329-30 (D.
Del. 1988) a topic that was more fully discussed above.
We recognize that, as a basic rule, recovery cannot be
had on property that the insured knew was already
destroyed at the inception of insurance. See Hanover Fire
Ins. Co. v. Morse Dry Dock & Repair Co., 152 Misc. 111,
116, 272 N.Y.S. 792, 799-800 (Sup. Ct. N.Y. County
1934), aff'd, 244 A.D. 780, 280 N.Y.S. 795 (1st Dep’t
1935). aff'd, 270 N.Y. 86, 200 N.E 589 (1936). We also
recognize as a basic rule, recovery is similarly barred if
the insured fraudulently concealed from or misrepresented
a material fact to the insurer at the time the policy was
issued, and that this would include situations where the
insured concealed that the damages for which recovery is
sought had occurred prior to the inception of the policy.
Jonari Management Corp. v. St. Paul Fire & Marine Ins.
Co., 58 N.Y. 2d 408, 416-17, 448 N.E.2d 427, 431, 461
N.Y.S. 2d 760, 764 (1983); N.Y. Ins. Law 3105
(McKinney 1985).
However, the instant case is not one where any such
fraudulent misrepresentation or concealment has been
charged. On their motion for summary judgment, the
insurers did not attempt to avoid coverage on the ground
that the policies, by their own terms, were void because
the City had fraudulently misrepresented or concealed a
material fact at the inception of the contract of insurance.
Instead, the insurers argued that the damages alleged in the
CERCLA action were a "known risk,” and that hence the
City was entitled to no coverage. However, appellees have
failed to cite support in New York law for this broader
proposition that a risk, once “known,” is uninsurable; nor
have we found any such case law.
—
-
43a
877 F.2d 1146, 1155.
The court, after noting the absence of supporting New York
law, found no support for the proposition that a risk, once
“known,” is uninsurable. Jd. As in Johnstown, AFM has failed
to cite Illinois law which stands for the proposition that a risk, once
“known,” is uninsurable.
In U.S. Fire Ins. Co. v. CNA Ins. Companies, 213 Ill. App. 3d
568. 572 N.E.2d 1124 (ist Dist. 1991), at the time of the inception
of two policies, a manufacturer knew that its product, Maleface--
sold in sheets and cut into component parts for kitchen cabinets
was defective and would deteriorate in time. Jd. at 1129-30.
Nevertheless, the court found, under Wisconsin law, that the exact
extent of the property damage was too speculative for the insured
to have intended or expected such damage. Id. at 1130. More than
mere foreseeability, the court said, is required. Jd. The inability
of the manufacturer to control the progressive deterioration of its
product when placed in cabinets enabled the court to distinguish
Appalachian Ins. Co. and Bartholomew. More than that, in U.S.
Fire Ins. Co., the manufacturer knew it had manufactured a
defective product.
Viewing the record in a light most favorable to the Board, |
find that the undisputed facts reveal that a genuine issue of material
fact remains as to the Board’s knowledge of loss. AFM argues that
various government pronouncements, by the 1970s and 1980s had
made the danger of asbestos in building materials clear and as a
result of such the Board was on notice with regard to the potential
hazards of asbestos in its schools. Nevertheless, the EPA
documents did not immediately require removal or abatement of
asbestos-containing materials in the schools. In fact, Congress in
1986 found "As a result of the lack of regulatory guidance from the
Environmental Protection Agency, some schools have not
undertaken response action while many others have undertaken
expensive projects without knowing their action is necessary,
adequate or safe." See 15 U.S.C. § 2641(a)(1).
44a
Nor does the fact that fiberglass was used to replace the
existing insulation at Lincoln Elementary School, or that beginning
in the summer of 1977 the Board began contacting asbestos testing
firms to begin testing its schools, or the Board’s December 20,
1978 resolution to initiate a pilot project to test airborne fibers
present in the schools change this conclusion. As the Board points
out in the affidavit of James Harney, the Board, by December of
1978, had not conducted an inventory or otherwise taken steps to
identify buildings with asbestos. Indeed, given the age of many of
the Board’s buildings, the state of the Board’s records, and the
sheer number of facilities, this proved to be a daunting task, which
was not completed until May, 1989.2 Rather, in March, 1979,
as a result of the pilot program to test six buildings for the presence
of airborne asbestos fibers, the Board received its first report
regarding the levels of asbestos in its buildings. The report
advised that no dangerous levels of airborne fibers were found in
any of the three buildings analyzed.= On June 8, 1979, the Board
received a second report. The report found no airborne fibers
at two of the three buildings inspected and airborne fibers "well
below the current OSHA standards . . . and recommended NIOSH
limits" at the third school.’ Finally, the argument that the Board
raised in its brief submitted to the Illinois Supreme Court in Board
of Education of the City of Chicago v. A, C, and S, Inc., and the
fact that the Board had spent over 9.0 million dollars for abatement
by December 1984 does not serve as an admission of knowledge
on the Board’s part. To be sure, the Board had knowledge of the
Affidavit of Daniel J. Kohnen, par. 3.
'3
28 ~=AFM's Ex. Q.
2 Id.
© Ex. 16.
45a
risk asbestos presented but this knowledge was speculative. How
could the Board know which buildings would require abatement or
the amounts of liability to be imposed until it received the results
of its testing program? The Board has also shown that AFM knew
of the danger that asbestos presented in the Board’s buildings, yet
issued policies without any asbestos exclusion. This shows that
AFM had almost as much knowledge as the Board had. The court
in U.S. Fire Ins. Co. v. CNA, Ins. Companies, 213 Ill. App. 3d
568, 572 N.E.2d at 1131 (1st Dist. 1991), considered the insurer’s
knowledge of problems that insured had with its product in finding
coverage. 572 N.E.2d at 1131. The court stated as follows: “If
the insurer wished to exclude the risk of further liability it should
have acted to specifically exclude it, rather than simply relying on
a court’s construction of the term ‘expected.’” /d. In the present
case, AFM should have acted to exclude coverage for asbestos
related claims. Therefore, | agree with the Board that this argument
of fortuity turns on a question of fact as to when the Board first had
knowledge that the asbestos reached contamination levels prohibited
by law. Thus, a genuine issue of fact remains as to the Board's
knowledge at the inception of coverage.
AFM’S ONE YEAR STATUTE OF LIMITATIONS
COULD BAR THE BOARD’S CLAIM IF THE
DOCTRINE OF MUNICIPAL IMMUNITY
IS FOUND NOT TO APPLY
Next, AFM contends that AFM is entitled to summary
judgment because the Board breached AFM’s policy requirements
by failing to give immediate written notice of loss, and failing to
file suit within twelve months after the inception of the loss. AFM
maintains that the Board’s failure to give any notice of the claim for
Over twelve years after it was aware of the facts which constitute
the claim mandates that coverage be denied under U.S. Fid. &
Guar. Co. v. Maren Engineering Corp., 82 Ill. App. 3d 894, 898,
403 N.E.2d 508, 511 (1st Dist. 1980). This notice requirement
AFM contends is a condition precedent to recovery. AFM claims
46a
that the Board’s duty to give notice arose on the first day of the first
policy period in December 1978.
AFM also argues that Illinois courts have consistently adopted
the position that the applicable limitations period commences at the
inception of loss, not the date of discovery of the covered loss and
not when the insured appreciates the significance of a loss as a
potential claim. AFM claims that "It is the occurrence of some. .
cognizable event rather than knowledge of its legal significance that
Starts the running of the statute of limitations." McGee v.
Weinberg, 97 Cal. App. 3d 798, 804, 159 Cal. Rptr. 86, 90 (1979).
Therefore, AFM argues it is as irrelevant to the one-year
commencement of suit provision, as it is to the accrual of a cause
of action "that the defendant is ignorant of his legal remedy or the
legal theories underlying his cause of action." Gutierrez v. Mofid,
39 Cal. 3d 892, 218 Cal. Rptr. 313, 316, 705 P.2d 886, 890 (1985)
(en banc) rehearing denied; Lawrence v. Western Mut. Ins. Co..
204 Cal. App. 3d 565, 574, 251 Cal. Rptr. 319, 323 (1988).
If the ascertainment of alleged damage marks the inception of
the loss in this case, such inception was, at the very latest, in 1980-
1981 when the Board "established a formal asbestos abatement
program” through Board action in August 1980, funded that
program, and "identified 90 schools containing asbestos materials
potentially hazardous to health." Hence, the latest date that the
Board’s duty to give notice and file suit was triggered in 1982-1983
when it abated and removed almost a million square feet of asbestos
materials, completed abatement of 82 schools, and expended $2.7
million on asbestos abatement. Instead, the Board waited eleven
years after it established its asbestos abatement program to comply
with AFM’s requirements.
In response, the Board states that if any limitation provision
was applicable here, it was complied with. The Board claims that
as soon as it had knowledge under Illinois law it gave notice to the
Board via its claim letter of September 4, 1990. The Board
counters that as a public body the Board enjoys Illinois municipality
47a
immunity and is exempt from AFM’s limitations provisions. The
Board also argues that the limitations provisions at issue here are
far from uniform thus raising a question of ambiguity and a
disputed question of material fact.
The Board points out that in its 1978 policy, suit was to be
commenced within one year "next after inception of the loss." The
1983 policy did not incorporate the standard fire policy form, using
instead AFM’s own Form 2293, Special Poiicy Conditions. Here,
the suit limitations period begins to run "after discovery by the
insured of the occurrence which gives rise to the claim." Further,
Form 2293 provides in provision 23 that the "[t}cims of the policy
which are in conflict with the statutes of the state wherein this
Policy is at issue are hereby amended to conform to such statute.”
The 1985 policy also contained the same Special Policy Conditions
Form 2293, with its discovery standard. The 1985 policy,
however, contained Form APP-1, which had a different suit
limitations - provision. This provision stated that suit is to be
commenced with 12 months "after the happening of the loss, unless
a larger period of time is preserved by applicable statute.” Finally,
the 1988 policy has only the APP-1 limitations provision.
The Board argues that it did not discover it had a covered claim.
until December 1989 and it filed its claim nine months later, in
September 1990. The Board states that AFM’s argument that
Illinois has not adopted a discovery standard for the suit filing
requirement is both incorrect and irrelevant.
In any event, the Board argues that it is immune from AFM’s
limitations bar because in Board of Education v. A, C, and S,
131 Ill. 2d 428, 546 N.E.2d 580 (1989) the Illinois Supreme Court
ruled that with respect to its efforts to recoup the costs of the
asbestos abatement activities the Board and the 33 other schoo!
district plaintiffs were immune from the contractual limitations.
Finally, the Board argues that AFM’s 1981, 1984 and 1987
policies acknowledge, that their limitation provisions are valid only
48a
so far as not inconsistent with Illinois law. Here, Illinois’ usual 10-
year limitation period for suit on a contract, Ill. Rev. Stat., ch. 110,
q 13-26 (1984), has been superseded by the Illinois Insurance Code
and its delegation to the Illinois Director of Insurance the authority
to set terms of insurance policies, including limitations. Ill. Rev.
Stat., ch. 73, §¢ 1013. However, Illinois courts have recognized
that these agency-set limitations provisions do not affect general
immunities provisions from limitations statutes. For example, the
two-year suit limitations provision in standard auto policies is held
tolled by the Illinois statutory provision immunizing minors and
others under disability from suit limitations.
In reply, AFM argues that each policy gave the Board
12 months to institute suit. Whether the 12 months runs from the
"inception of the loss" (Policy No. A4721), "discovery by the
insured of the occurrence which gives rise to the claim" (Policy
No. F6599), or "the happening of the loss" (Policy Nos. 16227,
EA412), it was breached, barring the Board’s claim as a matter of
law. AFM points out that the Board concedes it discovered the loss
by May, 1988. Bd.’s Facts No. 39, 46, Bd.’s Brf. 7,8, 19. AFM
also argues that Illinois law could not be more clear that the
occurrence of a loss, rather than discovery, triggers the
commencement of the limitations period. Sager Glove
Corporation v. Aetna Ins. Co., 317 F.2d 439, 441 (7th Cir. 1963).
AFM similarly argues that Illinois law is equally clear that the
"loss," not appreciation of a “covered claim," triggers the
limitations period. Naghten v. Maryland Casualty Co. , 47 Ill. App.
2d 74, 197 N.E.2d 489 (1st Dist. 1964). Taking the most liberal
interpretation of the "loss," and even granting the Board a discovery
standard, this suit is barred by the 12-month suit limitations period,
since the 12 months began to run at the latest in May 1988, when
the Board claims it first learned of costs above the deductible at two
schools, and expired in May 1989, well before it ever asserted a
claim against AFM. Any suit is barred under the 1978, 1981 and
1984 policies. Quite simply, any occurrence would have to take
49a
place during those policy periods. The necessary implication of the
Board’s argument that reaching the deductible triggers the
occurrence, notice and suit limitations provisions, is that the Board
had no claims under the 1978, 1981 and 1984 policies since there
was no occurrence until May, 1988. The latest date for a covered
“occurrence” on those policies would be the last day of coverage
under each. As a matter of law, suit would have to be filed within
one year from the terminations of the policies to comply with the
limitations provisions.
AFM argues that the Board's argument that it first discovered
a "covered claim" in December 1989 after the Wilkin decision is
legally unfounded under Naghten as well as factually unsupported,
since the Board took the position in 1985 that the- presence of
ACMs constituted property damage and that the costs of
remediation would be substantial. Similarly, in 1985 the Board
filed a claim with the Johns-Manville Trust as a property damage
claimant. Even if the Board was waiting for an Illinois appellate
court to endorse its legal theory, that occurred in June 1988, when
an appellate decision in the Board’s favor was issued, in the A, ‘,
and S case.
Finally, AFM argues that the Board is not immune from
AFM’s contractual limitations provisions. The Board's analogy to
common-law municipal immunity from statutes of limitations 1s
erroneous, it is urged, because here AFM seeks to enforce
contractual provisions to which the Board voluntarily assented.
This second argument requires resolution of when the Board's
cause of action accrued and whether the Board’s notice to AFM was
reasonable. If the facts reveal that the statute of limitations did in
fact lapse we must determine whether the Board is exempt from this
contractual bar under the doctrine of municipal immunity.
The general rule in Illinois for triggering of the statute of
limitations is that it "begins to run when facts exist which authorize
bringing of an action.” Kozasa v. Guardian Electric Mfg. Co.,
50a
99 Ill. App. 3d 669, 673, 425 N.E.2d 1137, 1141 (1st Dist. 1981)
(quoting Meeker v. Summers, 70 Ill. App. 3d 528, 529, 388 N.E.2d
920, 921 (Sth Dist. 1979)). However, in asbestos cases, courts
usually apply a more lenient rule for the triggering of the statute of
limitations -- "the discovery rule." Under this rule, the statute of
limitations accrues when a plaintiff knew or should have known of
his injury and its cause. See Knox College v. Celotex Corporation,
88 Ill. 2d 407, 415, 430 N.E.2d 976, 979 (1982); and Nolan v.
Johns-Manville Asbestos, 85 Ill. 2d 161, 167, 421 N.E.2d 864, 867
(1981). Thus, we must first determine when the Board knew or
should have reasonably known of its injury and its cause. To
resolve this issue we must have some idea as to what constitutes a
sufficient cause of action.
In Illinois there are two key cases which establish what
constitutes a sufficient cause of action for an asbestos property
damage action. In Board of Education of City of Chicago v. A, C,
and S, Inc., 131 Ill. 2d 428, 445, 546 N.E.2d 580, 590 (1989), the
complaint alleged that friable asbestos existed in the plaintiff's
buildings and asbestos had been released throughout the schools.
The court stated that since it was ruling on a motion to dismiss for
which it would take as true the facts alleged in the complaints -- it
“did not have to determine whether the amounts of friable asbestos
in the buildings were harmful. What the court did hold is that
“asbestos fibers may contaminate a building sufficiently to allege
damage to property.” 546 N.E.2d at 588. This statement suggests
that there may be situations in which a plaintiff does not sufficiently
aliege damage to his property even though he knows asbestos is
present. The court noted that "(t]he dangerousness which creates
a risk of harm is insufficient standing alone to award damages in
either strict products liability or negligence.” Jd. at 587.
Furthermore, the court pointed out that in nonoccupational settings
(1.e., places where asbestos is not manufactured, but where there
is asbestos in the building), low-level asbestos exposure was not
necessarily indicative of a tort cause of action. /d.
Sla
A second Illinois case, United States Fidelity & Guaranty
Company v. Wilkin Insulation Company, 144 Ill. 2d 64, 578 N.E.2d
926 (1991), makes it clear that the statute of limitations period
would not have started accruing until asbestos fibers which posed
a serious health hazard had become known. The court reiterated
what it had held earlier in Board of Education, "[t)his court has
already found that asbestos fiber contamination constitutes physical
injury to tangible property, i.e., the buildings and their contents."
The facts of that case specified that the buildings and their contents
(e.g., carpets, upholstery, drapery, etc.) were contaminated with
asbestos fibers which posed a serious health hazard to the
occupants. In the present case there was only a presence of
asbestos in the warehouse in 1980, not an asbestos contamination
of the building and its contents.
In Kansas City v. W.R. Grace & Co., 778 S.W.2d 264 (Mo.
Ct. App. 1989), appeal after remand 1992 WL 212510. Gen Fed
Library (Mo. Ct. App.), the court reversed the trial court's grant
of summary judgment to the defendant on the issue of the statute
of limitations and found that a genuine issue of material fact existed
as to when the statute of limitations began to run on the city’s
negligence and strict liability claims against manufacturers of the
building product containing asbestos. Neither the plaintiff's
knowledge of an OSHA report reflecting that the concentration of
asbestos fibers did not exceed the limits permissible under federal
guidelines nor a report establishing that asbestos was present caused
an accrual of Kansas City’s cause of action.
Finally, the Tenth Circuit Court of Appeals has recently held
that the presence of asbestos and release of asbestos within the
range considered safe by OSHA does not give a building owner a
tort cause of action against a manulacturer Adams-Arapaho School
District No. 28-J v. United States Gypsum Company, 959 F.2d 868.
874 (10th Cir. 1992). In this case the School District presented no
evidence of surface contamination and admitted it did not remove
asbestos-containing materials which were in good condition. The
52a
defendant was granted a directed verdict because plaintiff provided
insufficient evidence of physical injury to send its strict liability and
negligence claims to the jury. The key triggering event, therefore,
is when the parties became reasonably aware that the asbestos had
reached a level of contamination.
Taking the facts most favorable to the Board, it is undisputed
that the review conducted pursuant to AHERA and completed in
May, 1989, gave the Board a comprehensive summary of the levels
of ACMs contained in its school buildings. This May of 1989 date
is really giving the Board the benefit of the doubt because a true
question of fact remains as the Board’s knowledge with respect to
the work done at the Fenger and Price schools. It is not clear that
the abatement done at these schools was because the buildings had
dangerous levels of contamination which exceeded regulatory
guidelines. What AFM has failed to establish is precisely when the
Board had knowledge that its buildings had asbestos which reached
dangerous levels. It is beyond doubt, however, at the very latest
that the Board had to know this by May of 1989 when its AHERA
report was completed. Thus, the limitations period for filing suit
could have elapsed in June of 1990 if a jury were to find that the
Board was unreasonable in waiting until September of 1990 to even
submit its claim letter. I agree with AFM, however, that the
limitations period should not be tolled by the fact that the Board
was waiting for a decision in Board of Education v. A, C, and S,
and Wilkin. If this legally unsupported argument was accepted by
this court any plaintiff could simply allege ignorance of his or her
legal rights against a particular defendant. Thus, a genuine issue
of fact remains as to whether the Board gave AFM reasonable
notice and violated the limitations provisions of the contracts.
As to this issue of immunity, | am recommending that the
Board be found immune from AFM’s contractua! limitation.
Traditionally, AFM has argued, municipalities do not enjoy
immunity when they contractually agree to be bound by a specific
limitations period. As the court stated in City of Chicago v.
53a
United States Fire Insurance Co., 124 Ill. App. 2d 340, 344,
260 N.E.2d 276, 278 (1st Dist. 1970):
"We do not find any principles of law in these decisions
which hold that a city is not bound by its legitimate
contracts which are freely and properly made and which
do not violate public policy. If cities are not to be bound
by such contracts for reasons of public policy, such
decisions must be made by the people acting through their
state legislature and not through the courts. Presumably,
municipalities could be prohibited from entering into
insurance contracts which require them to give notice of
accidents or lawsuits and it could be established as a
condition of doing insurance business with municipalities
that such clauses not be used. Such, however, is not the
law of this state and was not the law at the time the
insurance contract in question was entered into. The
principle that a municipality must comply with its
contractual obligations has repeatedly been asserted by the
highest court of this State and must here again be
recognized and affirmed.” In Wally. Chicago Park
District. 378 Ul. 81, 37 N.E.2d 752, our Supreme Court
said at page 93, 37 N.E.2d at page 758: “Neither these
authorities, nor those from other jurisdictions relied upon
by defendant, purport to hold that a governmental body is
under no obligation to perform its contracts. On the
contrary, the rule is well established that a municipal
corporation, so far as the performance of its contracts is
concerned, and unless its charter clearly provides to the
contrary, must abide by its contractual obligations.
Chalstran v. Board of Education, 244 Ill. 470,91 N.E.2d
712: City of Quincy v. Bull, 106 Ill. 337."
However. in The Ciry of Shelbyville v. Shelbyville Restorium,
inc.. 96 Ill. 2d 457, 451 N.E.2d 874, 876 (1983), the Illinois
Supreme Court recognized that the doctrine of sovereign immunity
is supported by the policy judgment that the public should not suffer
as a result of the negligence of its officers and agents in failing to
54a
promptly assert causes of actions which belong to the public.
96 Ill. 2d at 461, 451 N.E.2d 874. The purpose of the doctrines,
of government immunity and sovereign immunity, as we understand
them, is different: the former is designed to preserve public rights
when the government is slow to assert them on the public’s behalf,
while the latter is used to promote the autonomy of public bodies
as entities by insulating them from liability for their actions. Jd.
More recently, in Zhe Board of Education of City of Chicago v.
A, C, and §, Inc., 131 Ill. 2d 428, 429, 546 N.E.2d 580, 599
(1989), numerous schoo! districts had brought suit against various
suppliers of asbestos containing materials under the theories of strict
liability, negligent misrepresentation, fraudulent misrepresentation
and the Illinois Consumer Fraud Act. The court determined that
the Board of Education was not barred from pursuing its cause of
action because the right the Board of Education was attempting to
assert, liability against the suppliers of asbestos materials, was a
right belonging to the general public. The court in analyzing the
effect of Ill. Rev. Stat. 1987,ch. 110, par. 13-214, concluded that
the fact that section 13-213 excepts regulatory agencies acting
pursuant to statute cannot be construed to mean that all
governmental bodies are expressly included with the limitations set
forth in section 13-213 for products liability actions. The court
stated as follows:
"In the absence of a more specific manifestation of
legislative intent, we refuse to read the statute so as to
remove the common law immunity of these government
entities. We cannot ignore the resulting health concerns
involved, and at trial the plaintiffs will have an opportunity
to establish that the levels of asbestos in plaintiff's
buildings can cause personal injury. The complaint also
alleges that a costly program is underway to repair,
replace, and maintain the ACMs. This complaint has
alleged, therefore, an interest in the safety of the public
buildings and in the safety of a large segment of this
State’s population which attends the public schools and for
55a
the children who will in the future attend these schools.
There is also the interest of the parents, faculty, staff, and
other people who use or will use our public school system.
Moreover, unlike ‘any other property owner,’ these
buildings are owned by the government, maintained with
tax revenue, and used for mandatory classroom attendance
as well as for other public functions.”
546 N.E.2d at 601.
The court found that there was support for this conclusion that
a public right is involved within the Asbestos Abatement Act which
specifically states that "abatement, in view of the fact that the State
of Illinois has compulsory attendance laws for children of school
age and these children must be educated in the schools is of special
concern to the General Assembly,” Ill]. Rev. Stat. 1985, ch. 122,
par. 1402(d). Jd. The court then went on to conclude that the
districts did not have an implied private cause of action under the
Asbestos Abatement Act but were entitled to common-law immunity
from the statutes of limitations defense on remaining claims.
As AFM has argued, however, Shelbyville and A, C, and S,
both dealt with statute of limitations prescribed by Illinois statute
rather than the contractual provisions that the parties had agreed
would both control. AFM claims that Village of Lake in the Hills v.
Illinois Emcasco Insurance Company, 153 Ill. App. 3d 815,
506 N.E.2d 681 (2d Dist. 1987), is to be followed because here,
as in Village of the Lake, contractual terms to which the parties
agreed govern the limitation put on bringing suit. Thus, this court
is faced with an issue upon which the Illinois Supreme Court has
not yet ruled. Certainly, there have been rulings with respect to
contracts that municipalities have entered into, but none appear to
have addressed an asbestos situation. We are therefore put in the
position of predicting how the Illinois Supreme Court would rule
on this issue. Roberts v. Western-Southern Life Insurance Co..
568 F. Supp. 536(N.D. Ill. 1983), Kelly v. Stratton, 552 F. Supp.
641. 643 (N.D. Ill. 1982).
56a
AFM’s argument that the Board consented to this one year
period of limitations is well taken, and ordinarily the terms of the
contract determine the rights of the parties. I believe, however, that
an exception arises in an instance such as this one, where latent
injuries of the type suffered as a result of exposure to asbestos is
in question. This conclusion is supported by the reasoning applied
in A, C, and S, where the court stated that they could not ignore
the resulting health concerns involved and the interest in the safety
of the public buildings and a large segment of this State’s population
which attends the public schools and for the children who will in
the future attend these schools. The court also noted the interest
of the parents, faculty, staff, and other people who use or will use
the public school system. A, C, and S, at 601. Finally, the Illinois
Supreme Courts recent decisions in Wilkin and A, C, and S, infer
that the health concern resulting from contaminated asbestos is
paramount to procedural concerns. Therefore, I am recommending
that the doctrine of municipal immunity applies to the instant case
and the Board is not barred by AFM’s one year limitations period.
A GENUINE ISSUE OF FACT REMAINS
AS TO THE EFFECT OF AFM’S EXCLUSIONS
AFM’s third argument contends that the exclusions of
contamination, deterioration, wear and tear, inherent vice, and
faulty or defective materials, design or workmanship preclude
recovery under AFM’s policies. In response the Board raises four
arguments. First, the Board claims that the Gen Re incident shows
that AFM itself did not think its exclusions barred asbestos-related
property damage. Second, the Board contends that even accepting
AFM’s claim that the exclusions it relies on are actually in the
policy, there is coverage here under the multiple causation doctrine
since a contributing cause of the loss is not excluded. Third, the
Board argues that the debris removal clause is unaffected by the
exclusions and in any event covers the loss. Finally, the Board
claims that the exclusions are irrelevant.
57a
This report and recommendation will not address the merits of
AFM’s argument as to the effect of any of AFM’s policy exclusion
provisions. For purposes of this motion, I agree with the Board’s
argument that the Gen Re incident raises an issue of material fact
as to the coverage granted to the Board and the exclusions therein.
In the case at bar extrinsic evidence has been introduced bearing
upon the intention of the parties and the meaning or the terms of
the policy. The rules governing the interpretation of insurance
policies require the court to effectuate the intent of the parties.
State Farm Mutual Insurance Company v. Schmitt, 94 Ill. App. 3d
1062. 1063, 419 N.E.2d 601, 603 (Ist Dist. 1981). Where the
terms of a policy are clear and unambiguous, its plain meaning will
be given effect. Zipf v. Allstate Insurance Company, 54 Ill. App.
3d 103, 106, 369 N.E.2d 252, 255 (1st Dist. 1977). Where,
however, a provision in an insurance policy is subject to more than
one reasonable interpretation, it is ambiguous and should be
construed in favor of the insured. Kirk v. Financial Security Life
Company, 75 Ill. 2d 367, 371, 389 N.E.2d 144, 145 (1978).
Ambiguous provisions in which an insurer seeks to limit its liability
are construed most strongly against the insurer with the insurer
having the obligation to show that the claims fall clearly within the
exclusion. 419 N.E.2d at 602. Thus, exclusionary provisions are
applied only where the terms are clear, definite, and explicit. Jd.
There are basically two reasons underlying the rules set forth
above (1) the insured’s intent in purchasing an insurance policy is
to obtain coverage and therefore any ambiguity jeopardizing such
coverage should be consistent with the insured’s intent, id. , and
(2) the insurer is the drafter of the policy and could have drafted
the ambiguous provision clearly and specifically. Reis v. Aetna
Casualty & Surety Company, 69 lil. App. 34777, 788, 387 N.E.2d
700. 708 (1st Dist. 1978). The construction of an insurance policy
is generally a matter of law for the court, although in a case of
ambiguity where words or terms are to be construed by extrinsic
58a
evidence, the question is one for the fact-finder. Kraemer Bros.
Inc. v. U.S. Fire Ins. Co., 278 N.W.2d 857, 860 (1979).
As the Board has argued, in August of 1986 the principal
reinsurer of the Board’s policy was General Reinsurance
Corporation. On August 6, 1986, Peter Maple, the AFM
underwriter responsible for the Board’s business, had lunch with
John Frost, Assistant Vice President of Gen Re. At that lunch,
Frost informed Maple that it would no longer be able to reinsure
AFM’s coverage of the Board unless the reinsurance contract
between AFM and Gen Re was amended to exclude from Gen Re’s
reinsurance exposure loss or expenses incurred by the Board for
(1) asbestos material removal, (2) increased costs of debris removal
and repair occasioned by laws regulating asbestos materials, and
(3) removal or modification of Board buildings because of
governmental directives that because of asbestos material the
buildings could no longer be used. Gen Re, according to Frost,
insisted on the asbestos exclusion in its reinsurance agreement
unless all the buildings under the policy were built after 1972 (when
according to Gen Re sprayed-on asbestos was banned by the EPA),
the insured school district verifies there is no asbestos in its
buildings, or AFM retains at least 30% of the risk. Maple testified
in his deposition that he sought advice from the home office of Gen
Re. In response he received a memorandum dated September 12,
1986 from Ron Bonneau of Allendale’s central underwriting staff.
Bonneau stated that ii was the "corporate position" that Gen Re
should not be allowed to so limit its reinsurance obligations. As
his reason, he noted that “we cannot allow gaps between the
insurance we provide in our policy and the reinsurance ceded under
this policy."
The Board asserts that the Gen Re argument, as well as the fact
that AFM received several reports indicating that asbestos was
contained in some of the buildings but repeatedly failed to add the
asbestos exclusion when renewing the Board’s policy, raised an
ambiguity as to the coverage sold to the Board. Given these
59a
disputed material facts I agree with the Board that summary
judgment as to the effect of AFM’s exclusions cannot be decided
at this time. If the district court concludes that AFM’s motion for
summary judgment should be denied on the grounds of fortuity,
notice and limitations then the Board’s 56(f) motion as to the policy
history behind the drafting of the policies should be granted. |
agree with the Board that the drafting history of the policies will
help determine whether AFM itself recognized that the various
policy clauses were confusing. The Board should be entitled to this
limited discovery before a ruling on the effect of the exclusions is
ordered.
As to AFM’s debris removal argument, I agree with AFM that
asbestos does not fit within the definition of debris. ~ I therefore
recommend that the district court adopt the plain, ordinary meaning
of debris rather than to strain to find the term ambiguous so as to
justify a liberal construction in favor of the Board. Further, the fact
that AFM amended this provision in October of 1987 fails to raise
a genuine issue of fact as to its meaning. The text of the provisions
are straight-forward, unambiguous and not subject to more than one
reading as the Board argues. All debris provisions required that the
loss be covered by the policy and insured against. Thus, whether
= Policy A4721(December 11,1978-January 11,1982)provided "This
policy also covers expenses of debris removal remaining after any loss
hereby insured against.” Policy F6599 (January 11, 1982 - January 11,
1985) provided “Thispolicy also covers expenses incurred in the removal
of debris of the property covered hereunder occasioned by loss caused
by any of the perils insured against in this policy.” Policy 16227
(December 11, 1984 - 1987) provided “This policy covers the insured’s
expenses incurred in the removal of all debris of the property of the
Insured hereunder which may be occasioned by loss or damage directly
caused by any of the perils insured against in this policy.” Policy EA412
(December 11,1987-1990)provided that “thispolicy covers the insured ’s
expenses incurred in the removal of all debris of the property of the
Insured hereunder which may be occasioned by loss or damage directly
caused by any of the perils insured against in this policy.”
60a
the removal of asbestos in its schools falls under this debris
provision will be determined by whether it is a covered loss.
THE MULTIPLE CAUSATION DOCTRINE IS NOT
APPLICABLE TO THE CASE AT BAR
The Board further maintains that there is coverage under the
multiple causation doctrine. The Board submits that under Illinois
law and the terms of AFM’s policies, damage caused by an
excluded cause is covered by the policy if there is a concurrent or
contributing cause which is not excluded. As stated in Mattis v.
State Farm Fire & Cas. Co., 118 lil. App. 3d 612, 619, 454
N.E.2d 1156, 1161 (Sth Dist. 1983),
Where a policy expressly insures against loss caused by
one risk but excluded loss caused by another risk, coverage
is extended to a loss caused by the insured risk even
though the excluded risk is a contributory cause.
In Mattis , damage to the insured’s home was caused by inadequate
or improper design or construction, earth movement, and cracking
and bulging of the wall. All but the first of these causes was
explicitly excluded by the policy. Nonetheless, the Illinois court
found there to be coverage because the non-excluded inadequate or
improper design was an approximate and contributing cause of the
loss. Mattis, 454 N.E.2d at 1161.
The net effect of the doctrine, the Board maintains is that the
Ilinois Supreme Court held that the Board’s alleged injuries caused
by defendants’ wrongful conduct in manufacturing and selling these
unreasonably dangerous products constituted property damage,
cognizable as the torts of strict liability, negligence and negligent
nisrepresentation. Board of Education-v. A, C, and S, Inc.,
131 Ill. 2d 428, 449, 546 N.E.2d 580, 590 (Ill. 1989). As there
is no exclusion of losses caused by unreasonably dangerous products
in the AFM policies, under the multiple causation doctrine there is
ro coverage even if the exclusions relied on by AFM were
germane.
6la
The Board maintains that none of this comes as any surprise
to AFM and it clearly intended to provide coverage in a multiple
Causation situation. First, the Board argues the policies at issue
themselves either explicitly or implicitly provide multiple causation
coverage. Thus, both the 1978 and 1982 policies contained a
related perils provision, in which AFM agrees that if one cause or
loss is not excluded there will be coverage under the policy despite
the existence of an excluded cause. These policies also contain a
Consequential Damage provision which provides at least as broad
coverage, since as long as there is a covered damage to the
property, the policy will cover it no matter what other exclusions
apply. Finally, the Board argues if AFM wanted to do so, it could
have written limiting language into its policies to exclude the
multiple causation doctrine. The Board cites Bragg, Concurrent
Causation and the Art of Policy Drafting: New Perils for Property
Insurers, 20 Forum 385, 391 (1985), Withers, Proximate Cause and
Multiple Causation in First-Party Insurance Cases, 20 Forum 256
(1985).
In response, AFM argues that in A, C and S, the Supreme
Court sustained the adequacy of the Board’s tort action because the
Board's complaint alleged that the defective product caused damage
contamination to the Board’s property. The nature of the defect and
the existences of "property damage” -- contamination -- other than
the product itself, took the Board’s claim from the realm of contract
into the realm of tort. The nature of the defect alleged was the
propensity of asbestos in a readily releasable form to break down
into friable particles which may cause a health hazard. /d. at 589.
To call asbestos an “unreasonably dangerous product” and to
denominate it a “peril” begs the question of what is the claimed
physical event and whether that physical event is excluded by the
policy. The unreasonable nature of the product is what both the
Board and the Supreme Court relied on to assert property damage
is nothing more than “inherent vice” by another name.
62a
AFM similarly argues that asbestos or unreasonably dangerous
products are not perils or events subject to the exclusion or to the
multiple causation doctrine. They are property; i.e., building
materials; products like wood or steel or iron. They may contain
a condition contributing to the occurrence of a loss, just as the
presence of a wood frame in a home is not a peril. Asbestos
containing property, just as other building materials, is covered
under a property policy as long as the damage to the property is
caused by a non-excluded peril and other policy prerequisites are
met. AFM further maintains that the Board is attempting to
transmute the property asbestos or unreasonably dangerous products
into a peril via the very exclusions in the policy which preclude
coverage.
As to the merits of the multiple causation doctrine I am
recommending that the district court find that this doctrine is not
applicable to the case at bar. At the outset, I am troubled by the
fact that the Board is simply applying a new label to the ACM.
This new label or name of dangerous product does not create a
second proximate or concurrent cause. They are one and the same.
This multiple causation doctrine was extensively discussed in United
States Fidelity & Guaranty Co. v. State Farm Mutual Automobile
Insurance Co. (USF&G I), 107 Ill. App. 3d 190, 192, 437 N.E.2d
663, 666 (1st Dist. 1982), and United States Fidelity & Guaranty
Co. v. State Farm Mutual Automobile Insurance Co. (USF&G II),
152 Ill. App. 3d 46, 48, 504 N.E.2d 123 (ist Dist. 1987), appeal
denied, 151 Ill. 2d 551, 511 N.E.2d 438 (1987) (collectively
USF&G).
In these two connected cases, Happyland Day Care Center had
purchased from USF&G insurance against claims “caused by an
occurrence and arising cut of the ownership, maintenance or use
of the insured premises and all operations necessary or incidental
to the business of the named insured conducted at or from the
insured premises." USF&G I, 437 N.E.2d at 664-65. The
insurance policy excluded claims “arising out of the ownership,
63a
maintenance, operation, use, loading or unloading of any
automobile or aircraft owned or operated by any person in the
course of his employment by any insured.” /d. at 665. While
some of the children were being driven from the day care center to
a dance class, a child was injured when she "fell from, was thrown
from, or otherwise exited" the automobile. /d. USF&G brought
a declaratory judgment action seeking to establish that it did not
owe a defense or coverage to the day care center. The Illinois
Appellate Court determined that the injury was caused by two
independent, proximate causes: the negligence of the day care
center to supervise the children and the negligence of the day care
employees in operating the vehicle. The court then held:
If a proximate cause of an injury is within the included
coverage of an insurance policy, the included coverage 1s
not voided because an additional proximate cause of the
injury is a cause which is excluded under the policy
Thus, in order for an injury to be excluded from coverage
under an insurance policy, the injury must have been
caused solely by a proximate cause which 1s excluded
under the policy.
USF&G II, 504 N.E.2d at 125. Because USF&G could not prove
that the automobile-related negligence was the sole proximate cause
of the injury, the court ruled that the claims were covered and thus
USF&G had a duty to defend (USF&G 1) and to indemnify
(USF&G II).
USF&G must be read together with Allstate Insurance Co. \
Pruitt, 177 Ill. App. 3d 407, 532 N.E.2d 401 (1st Dist. 1988),
which limits the applicability of the USF&G principles to cases in
which the two causes of injury are wholly independent of one
another. Relying, on USF&G J, the Pruitts argued that “the
separate and distinct allegation of failure to supervise may be
covered even in a case in which negligent operation is also alleged
and excluded.” 532 N.E.2d at 430. The Illinois Appellate Court
distinguished USF&G / as a case in which “the underlying
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64a
complaint described acts of alleged negligence and theories of
recovery wholly independent from those relating to the allegedly
negligent operation of the automobile." J/d.; see also State Farm
Fire & Cas. Co. v. Mann, 172 Ill. App. 3d 86, 88, 526 N.E.2d
389, 393 (ist Dist. 1988) ("the [USF&G] court limited its holding
to cases where the actionable event could be proved independent of
the excluded motor vehicle").
In the case at bar we are faced, as in Allstate, with two events
which are virtually indistinguishable from each other and cannot be
argued to be wholly independent from each other. The Board has
simply attempted to relabel the ACM with the name dangerous
product. Thus, the reasoning behind the concurrent or multiple
proximate causation doctrine is inapplicable
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