February 14, 2017
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 13 CV 3482 -
Manish S. Shah, Judge.
Rovner, Williams, and Hamilton, Circuit Judges.
Hamilton, Circuit Judge.
appeal presents a dispute over warehouse liability insurance.
Defendant Lexington Insurance Company denied a claim by its
insured, Double D Warehouse, LLC, for coverage of Double
D's liability to customers for contamination of
warehoused products. One basis for denial was that Double D
failed to document its warehousing transactions with
warehouse receipts, storage agree- merits, or rate
quotations, as required by the applicable insurance policies.
Litigation ensued. Plaintiff PQ Corporation was a customer of
Double D whose products were damaged while warehoused there.
PQ is now the assignee of Double D's policy rights,
having settled its own case against Double D by stepping into
Double D's shoes to try to collect on Lexington's
insurance policies. PQ argued in essence that even though
Double D had not documented its warehousing transaction in
one of the ways specified in the insurance policies, there
were pragmatic reasons to excuse strict compliance with those
terms. The district court, however, granted summary judgment
in favor of Lexington, enforcing the documentation
requirement in the policy.
affirm. PQ has a point when it says that the documentation
Double D actually had (bills of lading and an online tracking
system) should serve much the same purpose as the
documentation required by the policies (especially warehouse
receipts). Yet commercially sophisticated parties agreed to
unambiguous terms and conditions of insurance. We hold them
to those terms. To do otherwise would disrupt the risk
allocations that are part and parcel of any contract, but
particularly a commercial liability insurance contract. PQ
has offered no persuasive reason to depart from the plain
language of the policies.
Factual and Procedural Background
D is an Illinois limited liability company that operates a
warehouse facility in Peru, Illinois. Double D maintained
liability insurance coverage with defendant Lexington, a
Delaware corporation. For approximately ten years, plaintiff
PQ, a Pennsylvania corporation, stored two chemical prod-
ucts at Double D's warehouse: a magnesium sulfate
compound commonly known as Epsom salts, and a sodium
meta-silicate sold under the trademark METSO BEADS®. In
2011, PQ began receiving complaints from its own customers
about product discoloration. PQ investigated and eventually
concluded that the likely culprit was vapors from phenol
formaldehyde resin that Double D also stored in its
warehouse. The vapors apparently reacted with PQ's highly
alkaline products. PQ notified Double D that it intended to
hold Double D responsible for any claims made by its
customers. Double D then alerted Lexington to the potential
annual warehouse legal liability insurance policies are at
issue: one effective from June 29, 2010 to June 29, 2011, and
the other from June 29, 2011, to June 29, 2012. Both policies
provided that Lexington would pay all sums for which Double D
became legally obligated "for direct physical Toss'
or damage to personal property of others because of [its]
liability as a warehouse operator, " subject to several
terms and conditions.
most important condition for our purposes appeared in
sections 1.1 ("Insuring Agreement") and II.4
("Property Not Covered"). It said that Lexington
would pay for damages only to the extent that Double D
produced a warehouse receipt or storage agreement signed by
its customer or a rate quotation that it had presented to its
customer before storing the property. Another relevant
condition appeared in section X.l.F ("Loss
Adjustment"), forbidding Double D from assuming any
obligation or admitting any liability without Lexington's
consent. A third condition, the "Pollution and
Contamination Exclusion, " barred coverage for any loss
caused by the release of pollution, defined broadly as
irritants or contaminants "which after ... release can
cause or threaten damage to human health ... or cause or
threaten damage ... to property insured hereunder."
2011, an independent adjuster hired by Lexington informed
Double D that he was investigating PQ's claim. The
adjuster also contacted counsel for PQ, requesting details
and supporting documents. The following June, PQ sent the
adjuster a claim letter with documentation. Seven months
later, Lexington denied coverage for PQ's claim, citing
the Insuring Agreement and Property Not Covered section, as
well as the Pollution and Contamination Exclusion. Lexington
explained that "neither Double D nor PQ ha[d] provided
Lexington with proof of a signed warehouse receipt, storage
agreement or rate quotation." Lexington also said that
because PQ had reported damage to its products caused by
chemical vapors, the Pollution and Contamination Exclusion
barred any coverage. Lexington reiterated its denial of
coverage in an April 2013 letter. Both denial letters
included a vague invitation: "Should you have any other
information you feel may be applicable or relevant to this
matter, please immediately forward it to [Lexington]. Please
be advised that Lexington will review any additional
information submitted under a full reservation of rights
under the Policy and at law ... ."
Lexington's denial of coverage, Double D sued Lexington
in an Illinois state court alleging breach of contract and
seeking a declaration as to its rights under the policies.
Lexington removed the action to federal court. (Diversity of
citizenship is complete with both Double D and PQ as
plaintiffs and Lexington as defendant, and the amount in
controversy exceeds $75, 000. See 28 U.S.C. § 1332(a).)
Shortly after the removal, PQ sued Double D in state court.
PQ and Double D settled. The key term of the settlement was
that Double D agreed to a consent judgment under which it
assumed "one hundred percent ... of the fault for
PQ's damages" and assigned its rights against
Lexington to PQ in exchange for PQ's promise not to
collect on any judgment from Double D. PQ then replaced
Double D as plaintiff in the federal action. PQ later filed a
Second Amended Complaint adding a claim for attorney fees and
costs under Section 155 of the Illinois Insurance Code,
Lexington eventually filed cross-motions for summary
judgment. At summary judgment, PQ did not argue that Double D
complied with the literal terms of the documentation
condition appearing in the Insuring Agreement and Property
Not Covered section. Nor could it: the parties agree that
Double D did not use warehouse receipts or contracts in its
dealings with PQ, nor did it supply PQ with rate quotations
that would satisfy the policies. PQ argued instead that
Lexington knew Double D used bills of lading and an online
tracking system as a substitute for warehouse receipts. PQ
argued that the term "warehouse receipt" is
ambiguous and that the district court should consider
extrinsic evidence tending to show that Lexington was aware
of how Double D ran its business.
district court disagreed, explaining that (1) bills of lading
are not warehouse receipts, (2) PQ never signed any
"receipt" generated by the online tracking system,
and (3) Lexington's knowledge of Double D's business
practices was "irrelevant to whether Double D in fact
satisfied its contractual obligations-Double D either met
those obligations or it did not (and in this case it did
not)." PQ Corp. v. Lexington Ins. Co., No. 13
CV 3482, 2016 WL 4063149, at *5-6 (N.D. 111. July 29, 2016).
The district court then considered whether Lexington waived
strict enforcement of the documentation condition. The court
rejected that possibility as well, finding no evidence that
Lexington acted inconsistently with an intent to enforce the
condition. Id. at *7. The court could have ended its
analysis there. However, it went on to hold in the
alternative that Double D had violated its duty under the
Loss Adjustment section to obtain consent from Lexington
before admitting liability to PQ. Id. at *9. The
court also rejected PQ's claim under Section 155 of the
Illinois Insurance Code. Id. The district court
entered final judgment in Lexington's
Standard and Scope of Review
review de novo the district court's grant of
summary judgment to Lexington. In doing so, we apply the same
standard that the district court applied, construing all
facts and drawing all reasonable inferences in favor of PQ.
Indianapolis Airport Authority v. Travelers Property
Casualty Co., 849 F.3d 355, 361 (7th Cir. 2017).
parties agree that Illinois substantive law applies. In
Illinois, "the general rules governing the
interpretation of ... contracts also govern the
interpretation of insurance policies. 'If the policy
language is unambiguous, the policy will be applied as
written, unless it contravenes public policy'"
Nationwide Agribusiness Ins. Co. v. Dugan, 810 F.3d
446, 450 (7th Cir. 2015), quoting Hobbs v. Hartford Ins.
Co. of the Midwest, 823 N.E.2d 561, 564 (111. 2005).
"Courts will not strain to find ambiguity in an
insurance policy where none exists." McKinney v.
Allstate Ins. Co., 722 N.E.2d 1125, 1127 (111. 1999).
"Although policy terms that limit an insurer's
liability will be liberally construed in favor of coverage,
this rule of construction only comes into play when the
policy is ambiguous." Hobbs, 823 N.E.2d at 564.
Duty to ...