It’s hard to figure out how the U.S. district court got it so wrong. The Seventh Circuit reversed a district court’s grant of summary judgment to an insurer on an environmental contamination claim. The district court believed that, because no lawsuit had been filed, no duty to defend could arise, and because the duty to defend is broader than the duty to indemnify, the insurer could not be responsible for indemnity if it had no duty to defend. The case is Keystone Consolidated Industries, Inc. v. Employers Insurance Co. of Wausau, 2006 WL 2166469 (7th Cir. August 3, 2006).
Keystone owned several properties contaminated with industrial chemicals, and the U.S. Environmental Protection Agency ordered a clean-up. Keystone sought indemnity for some $13 million in remediation costs. All of the Wausau policies were, of course, before the advent of the absolute pollution exclusion in Commercial General Liability policies in 1985 and one would normally expect them to cover the costs. Wausau nevertheless refused to pay, and the District Court ruled in the insurer’s favor. The lower court pointed out that the Wausau policies provided for a defense against a "suit," and said the EPA’s action did not qualify. (Actually, merely because there was no lawsuit does not necessarily mean there was no duty to defend, because the word "suit" can and has been interpreted to include administrative action like that of the EPA).
Incredibly, the District Court then jumped to the conclusion that because there was no duty to defend, there could be no duty to indemnify. As Justice Richard Cudahy of the Seventh Circuit pointed out, the language of an insurance policy determines both duties, and the duties are separate and can arise independently of each other. The Wausau polices said they would pay all covered claims for which the insured became legally responsible for — nothing was said about a "suit" being necessary for the duty to indemnify to be triggered. Well, that’s why they have appellate courts.