No Coverage for a Loss Known Before Inception of the Policy

$50.56 Million Judgment Useless When Defendant is Judgment Proof and Insurer Owes Nothing

After more than ten years of litigation between a group of neighbors in Elkhart, Indiana and a nearby wood recycling facility the disputes came to an end with the Seventh Circuit. The neighbors alleged that VIM Recycling’s waste disposal practices exposed them to dust and odors in violation of federal environmental law. They also brought state tort law claims for the resulting loss of use and enjoyment of their property and adverse health effects. At certain points the defendants—VIM Recycling, a related entity, and their owner, Kenneth Will—successfully fended off the neighbors’ claims. But sometimes they did nothing at all. These litigation choices eventually led to a $50.56 million default judgment against VIM.

In Carmine Greene, et al. v. Westfield Insurance Company, No. 19-2260, United States Court of Appeals For the Seventh Circuit (June 26, 2020) what began as a case about environmental pollution evolved into a joint garnishment action against VIM’s insurer, Westfield Insurance, to satisfy some of that $50.56 million judgment.

FACTS

VIM began operating its Elkhart wood recycling facility around 2000. Problems allegedly began in the nearby residential community soon thereafter. By 2009 a group of neighbors banded together to bring a class action lawsuit to recover for damage to their property. The plaintiffs alleged that the company processed old, dry wood outside without the proper emissions, all of which violated the Fugitive Dust Control Plan that the Indiana Department of Environmental Management, or IDEM, imposed on the site in July 2000.

The neighbors claimed that VIM’s disposal practices harmed the surrounding environment and their health.

While some of the pollution and injuries were taking place, VIM had acquired general commercial liability policies with Westfield Insurance. These policies collectively ran from January 1, 2004 through January 1, 2008, and obligated Westfield to pay up to $2 million of any judgments against VIM for “property damage” or “bodily injury.”

The litigation history was important to the court’s decision. It involves three separate lawsuits over the course of 10 years.

First Lawsuit

On October 27, 2009, the neighbors filed their original complaint in the Northern District of Indiana against three related VIM defendants. At the time of the court’s dismissal, Westfield Insurance had no knowledge of (or involvement in) the litigation. The reason was because VIM never notified Westfield that it had been sued in federal court for events that took place within the policy coverage periods.

Second Lawsuit.

VIM did seek coverage from Westfield in a different case. On May 24, 2010, the neighbors filed a second, nearly identical lawsuit against VIM in Indiana state court. Pending an investigation into its own coverage obligations, Westfield responded by hiring its own lawyer to serve as its assigned defense counsel for VIM in this state action.

Third Lawsuit.

Westfield meanwhile continued to evaluate its potential exposure in the case pending in state court. It concluded that it had no coverage obligations and sent a letter to VIM stating as much. It then sought a declaratory judgment in federal court against both VIM and the neighbors. VIM never answered the complaint, and the district court entered a default declaring that Westfield had no duty to defend or indemnify VIM in the state action.

Between 2010 and 2011 there were three cases in play—the original federal case (this case), the state case, and the federal declaratory judgment case relating to the state case. Westfield Insurance successfully disclaimed any obligation in Indiana state court through the federal declaratory judgment action but did not concern itself with this case, which it had only heard about indirectly from its own lawyer when it had been dismissed.

ANALYSIS

After securing the default judgment but realizing they were unable to recover much from VIM, the neighbors moved to institute proceedings against Westfield under Federal Rule of Civil Procedure 69, which allows the court to “garnish,” or recover, a money judgment that one party owes another. The neighbors invoked the rule and sought to garnish West field’s indemnity obligation to VIM pursuant to its insurance policies to satisfy part of the $50.56 million award.

There are two relevant exclusions in VIM’s general commercial liability policies with Westfield. The policies generally applied to any damages VIM was legally obligated to pay because of “bodily injury” or “property damage” that took place within the coverage period. If an exclusion applies, however, Westfield had no obligation to VIM, and the neighbors cannot seek to recover any of their judgment from Westfield.

Each of the four policies in place during the relevant period contained an exclusion for “known claims.” VIM’s policies with Westfield specifically stated that they did not cover losses if “a listed insured or authorized employee knew prior to the policy period, that the bodily injury or property damage occurred” and that “any continuation, change or resumption” of the property damage or bodily injuries “during or after the policy period will be deemed to have been known prior to the policy period.” The second exclusion provides that coverage does not extend to any bodily injury or property damage “expected or intended from the standpoint of [VIM].”

The Seventh Circuit interpreted the “known claim” and “expected or intended injury” exclusions based on their plain language. Though they are distinct the language of both focuses on when VIM first learned about the property damage and bodily injuries that gave rise to the neighbors’ lawsuit in 2009.

Recall that, as part of entering a default judgment against VIM, the district court properly deemed and accepted as true all allegations advanced by the neighbors in their second amended complaint. Considered collectively, the record supplies overwhelming evidence that VIM—and Kenneth Will in particular—knew about the fugitive dust and resulting injuries before the first Westfield policy went into effect. Any damages for those injuries, then, were both known claims and expected injuries.

The pertinent inquiry concentrates more on known facts. Expected injury or damage means that the insured acted although he was consciously aware that the harm caused by his actions was practically certain to occur.

Will was certainly aware of these underlying facts before the policies went into effect. He knew that the neighbors were complaining to IDEM between 2000 and 2003. Indeed, he admits in his affidavit that he paid to have their cars washed.  All of this occurred before 2004. By January 1, 2004 Will knew of and routinely acknowledged the dust problems. The overwhelming weight of evidence here—the facts the neighbors themselves relied on when they won their default judgment in 2015—supports the district court’s conclusion that VIM was consciously aware that the kind of environmental harms alleged in the Class’s complaint, and on which the default judgment is based, were practically certain to result from their operation of the Elkhart facility over the period of coverage.  Summary judgment was appropriate because there is no genuine dispute of material fact.

An insurer that has received notice of a lawsuit and believes it has no duty to defend should act as Westfield did in VIM’s state case—it should either file a declaratory judgment action or hire counsel to defend its insured under a reservation of rights.

The record does not support a conclusion that Westfield acted in bad faith by flatly refusing VIM coverage in this federal case. Westfield in no way avoided or breached its duty to defend by leaving its insured out in the cold. At best it had only indirect notice of the lawsuit and no indication that VIM or the neighbors—who were both in possession of the facts essential to provide direct notice—would ever seek coverage. Since Westfield shirked no responsibilities in the face of VIM’s and the neighbors’ belated, opportunistic pursuit of policy coverage, even if the indirect notice triggered any duty to defend, Westfield would not be estopped from claiming its applicable policy exclusions.

ZALMA OPINION

Judgment proof defendants who allow major judgments to be entered against them because they have no assets to pay the judgments cause creative plaintiffs’ lawyers to try to collect from the defendant’s insurer. The problem the plaintiffs’ lawyers face, as did the plaintiffs’ in this case, is to collect from the policy it must provide coverage to the insured to defend and the insurer must breach its duty to defend. In this case the insurer provided a defense to what it knew about, excluded the loss by clear and unambiguous policy language and was forced to deal with the case for many years because of arguments that attempted to change facts to fit coverage. Creative, perhaps, but still a failure and the $50 million judgment is no more than a piece of paper that can be framed and put on a wall and is worth the value of the frame.


© 2020 – Barry Zalma

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 a

n insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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