Agreement to Use Alternative Dispute Resolution Methods Are Designed to, and Actually Avoid Litigation

Contract Prevents or Limits Litigation

Caterpillar Inc. (Caterpillar), brought a complaint for declaratory judgment, breach of contract, and other relief against Employers Insurance Company of Wausau (Wausau), among others, seeking an order from the trial court declaring Wausau was contractually required to pay or indemnify Caterpillar for the costs incurred while defending itself against personal injury claims arising from welding fumes.

In Caterpillar Inc. v. Century Indemnity Company, as Successor to CCI Insurance Company, as Successor to Insurance Company of North America; Insurance Company of North America; Employers Insurance Company of Wausau; and Resolute Management, Inc., Appeal No. 3-19-0032, 2019 IL App (3d) 190032, Appellate Court of Illinois Third District (July 2, 2019) the trial court, pursuant to the parties’ 1999 settlement and partial policy release agreement (1999 Agreement), granted Wausau’s request to stay this litigation and compelled the parties to comply with the agreed dispute resolution procedure contained in section 7 of the 1999 Agreement.

BACKGROUND

Wausau sold Caterpillar insurance policies between 1981 and 1985. Between 1995 and 2007, Caterpillar defended itself against thousands of personal injury claims alleging Caterpillar was liable for bodily injuries resulting from exposure to welding fumes. In 2007, as a result of its efforts, Caterpillar was dismissed from the welding fumes litigation pending in federal court.

Caterpillar sued requesting a declaration from the trial court that the insurance policies issued by Wausau between 1981 and 1985 required Wausau to pay or indemnify Caterpillar for the $18 million in costs Caterpillar incurred while defending itself against  welding fumes claims. Wausau and Century Indemnity Company (Century) refused to pay or indemnify Caterpillar for its defense costs. Wausau resisted Caterpillar’s lawsuit on the grounds that Wausau’s obligation to pay or indemnify Caterpillar for its defense costs must be settled under the parties’ 1999 Agreement, including section 7’s dispute resolution procedures calling for mediation and arbitration.

Relying on the 1999 Agreement, Wausau’s counsel asserted that Wausau was discharged and released from insurance coverage liability for the welding fumes claims and that the parties’ insurance relationship was extinguished by the 1999 Agreement. Wausau’s counsel also stated “a dispute exists between Caterpillar and Wausau with respect to the nature, scope, and effect of the 1999 Agreement and its applicability to the underlying welding rod fumes claims.”

In its answer, Wausau twice requested that the trial court stay the litigation pending arbitration. Further, in its first affirmative defense, Wausau stated Caterpillar’s claim for insurance coverage in the trial court was barred by “a dispute resolution agreement.” Wausau’s second and third affirmative defenses asserted that the parties’ insurance relationship had been extinguished and Caterpillar’s claims for coverage were barred by discharge and release.

The trial court filed a written order, wherein the trial court observed that “neither party aggressively pursued [the] litigation.” The trial court also observed that Wausau initiated mediation and neither party would be prejudiced by engaging in mediation. The trial court granted Wausau’s renewed motion to stay, compelling the parties to comply with section 7 of the 1999 Agreement.

ANALYSIS

Waiver of the Right to Dispute Resolution

Although arbitration is the preferred method for resolving disputes in Illinois, a party may waive his or her contractual right to arbitrate. A finding of waiver is generally disfavored. However, a waiver exists when a party acts inconsistently with the agreement to arbitrate, indicating an abandonment of that right.

Wausau’s Presentation of Substantive Issues Under the 1999 Agreement

Caterpillar argues Wausau presented substantive issues to the trial court by filing an answer to Caterpillar’s complaint, complete with 43 affirmative defenses, demanding a jury trial, answering cross-claims filed by Century, and attending trial court hearings without raising section . Thus, Caterpillar asserts Wausau’s conduct was inconsistent with, and constitutes a waiver of, section 7 of the 1999 Agreement.

The court concluded Wausau’s responsive pleadings did not submit substantive issues to the trial court before Wausau had asserted its right to dispute resolution under section 7 of the 1999 Agreement. As a result, the above facts defeat Caterpillar’s contention that Wausau waived its right to dispute resolution.

Wausau’s Delays Before Asserting the Right to Dispute Resolution

It seems clear that Caterpillar understood Wausau did not have a duty to defend Caterpillar in the welding fumes litigation and did not make a request for Wausau to present Caterpillar’s defense.

If, on the one hand, Caterpillar’s notices merely served to inform Wausau of a duty to pay or indemnify Caterpillar for defense costs at the conclusion of the welding fumes litigation, then it would be reasonable for Wausau to wait for a final tally of and formal demand for defense costs by Caterpillar before invoking section 7 of the 1999 Agreement. Otherwise, Wausau would seek to establish a dispute over the scope and applicability of the 1999 Agreement under section 7’s meeting requirement, then potentially seek to resolve the dispute over defense costs more broadly under the mediation and arbitration requirements, before the amount of Caterpillar’s defense costs became fixed by a final judgment, settlement, or dismissal.

If, on the other hand, Caterpillar intended for the notices to inform Wausau of an immediate duty to pay growing defense costs as they accrued during the ongoing welding fumes litigation, then Wausau may have been expected to establish a dispute over those amounts under section 7.1 between 1999 and 2007. However, nothing in the record indicates Caterpillar’s notices during this time included an immediate demand for Wausau to pay any portion of Caterpillar’s defense costs.

Further, even if Wausau, at a minimum, had “actual notice” of the welding fumes claims and the pending litigation against Caterpillar, the record does not identify the particular duty triggered by that actual notice. Caterpillar’s notices raise more questions about Wausau’s duty to pay or indemnify Caterpillar for defense costs than they do answers. These questions require consideration of the scope and applicability of the 1999 Agreement and the underlying insurance policies, which is a task uniquely suited for dispute resolution.

Period of 2007 to 2011

Similarly, the record is unclear whether, after the dismissal of the federal welding fumes litigation, Caterpillar specifically demanded Wausau to pay or indemnify any part of Caterpillar’s defense costs. The delay between 2007 and 2011 seems equally attributable to Caterpillar. Wausau’s inaction before the initiation of the current litigation was not dilatory.

Period of 2011 to 2016

In this case, it is undisputed that, on July 15, 2011, the parties conducted a meeting that qualified as the first step of dispute resolution under section 7.1 of the 1999 Agreement. By all accounts, the meeting was fruitless.

Wausau’s course of conduct during the four-year period between March 17, 2011, and April 14, 2015, cannot be viewed as inconsistent with Wausau’s right to dispute resolution. As discussed above, the record reflects that after being served with Caterpillar’s complaint on April 6, 2011, and then consistently throughout the course of the proceedings in the trial court, Wausau took immediate and significant action to resolve the parties’ dispute under the procedure outlined in section 7.

Section 7.4’s Two-Year Limitations Period

The trial court properly stayed the insurance litigation and compelled the parties to comply with section 7 of the 1999 Agreement. In resolving the parties’ dispute over Caterpillar’s defense costs, the parties must initially determine the scope and applicability of the 1999 Agreement to the welding fumes claims.

Therefore, the Court of Appeal agreed with the trial court and required the parties to resolve their dispute by use of the alternative dispute resolution system provided by the contract between Wausau and Caterpillar.

ZALMA OPINION

Because almost every court in the U.S. has an overabundance of cases that they do not have the time to try to a jury quickly they all favor alternative dispute resolution contracts to ease the burden on the court and allow the parties a quick resolution of claims. In this case Caterpillar agreed with its insurer to resolve disputes by means of mediation and/or arbitration. Caterpillar wished to litigate thinking, probably correctly, that it could get a bigger judgment from trial than arbitration. Its attempt failed because it signed the agreement and then tried by using creative lawyers to get around the contract terms. They were simply not creative enough to convince the trial court or Court of Appeal.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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