Insurer Not Liable for $50 Million Default Judgment Against Insured

In Greene v. Westfield Insurance Company, 963 F.3d 619 (7th Cir. 2020), the Seventh Circuit affirmed the Northern District of Indiana’s entry of summary in favor of Westfield Insurance Company (“Westfield”) in a garnishment proceeding seeking to recover a $50.56 million default judgment entered against Westfield’s insured, VIM Recycling (VIM).  Westfield issued its first policy to VIM in January 1, 2004, renewed annually through January 1, 2008.

VIM operated a wood recycling facility in Elkhart around 2000.  In 2009 neighboring property owners (the “Neighbors”) filed suit in the N.D. of Indiana against VIM asserting claims for RCRA violations, nuisance, trespass, and negligence and seeking injunctive relief.  The District COurt dismissed this First Lawsuit in April 2010. The Neighbors appealed and the 7th Circuit reversed the dismissal. VIM failed to defend the Neighbors suit and a default was entered on the facts alleged by the Neighbor. VWIM never notified Westfield about this First Lawsuit.

On May 24, 2010, while the First Lawsuit was pending, the Neighbors filed a Second Lawsuit against VIM in Indiana state court that was nearly identical to the First Lawsuit.  In October 2010, VIM notified Westfield of the Second Lawsuit and requested coverage.  While Westfield assessed coverage for the Second Lawsuit it learned for the first time that there was a First Lawsuit and that it was on appeal.

Westfield initiated a declaratory judgment action in the Northern District of Indiana seeking a declaration that it had no duty to defend or indemnify VIM against the Second Lawsuit. VIM failed to answer the Declaratory Judgment Complaint, and the District Court entered a default finding that Westfield had no duty to defend or indemnify VIM against the Second Lawsuit.  Under Order of the District Court, the Neighbors and Westfield, entered into a stipulation “stating that Westfield had no duty to indemnify or defend in the state action because VIM did not provide timely notice of the lawsuit ‘or history of the environmental issues outlined therein.’ ”

The Neighbors next initiated a garnishment proceeding against Westfield on the default judgment entered in the First Lawsuit (which is now referred to as the Third Lawsuit). In the Third Lawsuit entered summary judgement in favor of Westfield concluding “that Westfield owed no insurance coverage because [its] policy excluded damages for expected or intended injuries, the neighbors’ damages were claims known to VIM at the time it purchased the policies, and VIM breached the policies’ notice requirement.” Both VIM and the Neighbors appealed. On appeal, VIM and the Neighbors asserted, among other things, that Westfield was estopped from raising any policy exclusions because it breached its duty to defend VIM against the First Lawsuit.

The Seventh Circuit held that VIM , among other things: entered into an Agreed Order with IDEM on July 14, 2001 acknowledging: its dust violations; that it paid to have some of the Neighbors cars washed in 2003; and that it was issued five Notices of Legal Action/Violation and Potential Violation letters prior to January 1, 2004.  The 7th Circuit found that the record supplied overwhelming evidence that VIM knew about the dust and the injuries it caused before the Westfield policy incepted.

The Seventh Circuit observed that since VIM knew of the Neighbors’ earlier injuries, it would have expected and intended the Neighbors’ later injuries as it continued to conduct its operations in the same manner. The Seventh Circuit rejected the Neighbors claims that VIM did not know about or expect these claims because the Neighbors had taken the opposite position in the First Lawsuit, and because the Neighbors had requested that the District Court calculate its damages award for a period that began in October 2003.

With respect to VIM’s and the Neighbor’s estoppel arguments, the 7th Circuit declined “to wade into [the] area of Indiana insurance law addressing indirect notice and prejudice.”  The Court found that “[e]ven if the indirect notice triggered Westfield’s duty to defend VIM, Westfield would not be equitably estopped from raising its policy defenses.”   The Court based its decision on the fact that the record clearly showed that had VIM tendered notice of the First Lawsuit to Westfield, as it had with the Second Lawsuit, “Westfield would likely have taken steps to investigate and the neighbors may have faced a defense in the underlying case.”