Does a Mediation Trigger the Duty to Defend Under a CGL Insurance Policy?

Standardized commercial general liability (CGL) insurance policies impose a “duty to defend” that obligates insurers to defend insureds against “suits” seeking damages for claims potentially covered by the policy. The existence of a duty to defend is determined by the allegations in the “suit” filed against the insured.

Does a mediation qualify as a “suit” under a standardized CGL policy? That question was recently litigated in Illinois state court. See Illinois Tool Works, Inc. v. Ace Specialty Ins. Co., 2019 IL App (1st) No. 18-1945 (August 23, 2019). In that case, the insured manufacturer, ITW, operated a facility at a location (referred to as “AUS-OU”) that was later declared a Superfund site by the United States Environmental Protection Agency (EPA) after the discovery of environmental contamination.

In August 2004, another manufacturer notified ITW that it was negotiating with the EPA concerning the payment of cleanup costs related to the AUS-OU site, and claimed that ITW was partially responsible for those costs because manufacturing activities at ITW’s facility had allegedly released hazardous substances. In response, ITW agreed to share in the expense of remediating the AUS-OU site, and entered into a mediation with the EPA and other manufacturers to allocate cleanup costs. ITW notified its insurers about the mediation, and submitted bills for costs incurred, but the insurers did not reimburse ITW for those costs.

Subsequently, ITW was sued for contribution to cleanup costs for an adjacent site (“Site 36”). The insurers funded ITW’s defense of the Site 36 lawsuit.

After the Site 36 lawsuit settled, ITW filed an action against its insurers seeking a declaratory judgment that the insurers had a duty to defend and indemnify it for claims against it regarding both the Site 36 lawsuit and the AUS-OU mediation. The insurers acknowledged that they had a duty to defend ITW in the Site 36 lawsuit, but argued that the same duty did not apply to the AUS-OU mediation because it was not a “suit” under the policies.

The trial court agreed with the insurers that the AUS-OU mediation did not trigger a duty to defend because it was not a “suit” under the policies.

On appeal, ITW abandoned its argument that the mediation qualified as a “suit” under the policies, and instead maintained that the duty to defend triggered by the Site 36 lawsuit extended to the AUS-OU mediation because the contamination at issue in the Site 36 lawsuit and the AUS-OU mediation arose out of the same allegedly hazardous releases. That argument failed, and the appellate court affirmed.

Why did ITW decide, on appeal, not to press its argument below that the mediation qualified as a “suit” under the policies? The appellate court’s decision indicates that the relevant policies were issued to ITW’s predecessor between 1974 and 1985.

As per an August 2002 article published on the International Risk Management Institute, Inc. (IRMI) website by risk management consultant Craig Stanovich, it was only in 1986 that standardized CGL policies began defining the term “suit” to include (i) arbitration proceedings “in which such damages are claimed and to which the insured must submit or does submit with our consent;” and (ii) “any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”

While the definition of “suit” in the new standardized CGL policy does not specifically mention mediation, it seems clear that mediation would qualify as an “alternative dispute resolution proceeding.” Importantly, however, the new definition of “suit” obligates the insured to obtain the insurer’s consent to submit to an ADR proceeding before the insurer becomes obligated to defend the proceeding. Accordingly, assuming a mediation qualifies as a “suit” under the policy, an insured would first need to obtain the insurer’s consent to participate in pre-litigation mediation before the insurer would be obligated to cover mediation costs.

At any rate, given that ITW made its insurers aware of the mediation, and they appeared to have consented (or at least not objected), ITW might have prevailed under the newer definition of “suit” that imposes a duty to fund the costs of an “alternative dispute resolution proceeding” to which the insurer consents.

The importance of obtaining the insurer’s consent to ADR is illustrated by a recent California federal court decision. See Harper Constr. Co., Inc. v. Nat’l Union Fire Ins. Co., 377 F. Supp. 3d 1134 (S.D. Cal. 2019). In Harper, the court held that even if an insured’s interaction with the federal government in a construction dispute under the Contract Disputes Act constituted a form a type of ADR proceeding under the new CGL policy, the duty to defend was not triggered because the insurer had never consented to the proceeding.