Illinois Selective Tender Rule Remains Viable Subject To The Application Of Horizontal Exhaustion

North River Ins.  Co.  v. Grinnell Mut. Reinsurance Co., 2006 WL 3545139 (Ill. App. 1st Dist., 2006).

This coverage dispute arose out of an injury on a construction site.  The general contractor, Kajima, had primary and umbrella coverage with Tokio Marine & Fire Insurance Company.  Kajima was also an additional insured under policies purchased by its subcontractors.  When Kajima was sued, it made a selective tender of its defense to its subcontractors’ primary carriers.  The subcontractors’ primary carriers accepted Kajima’s tender and provided a defense.  When it became apparent that a settlement could not be reached within the primary limits of the subcontractors’ policies, Tokio was asked to contribute but refused.  Instead, U.S. Fire, the umbrella carrier of one of the subcontractors, contributed to the settlement.  U.S. Fire then sought reimbursement from Tokio, asserting that Tokio’s primary coverage should be exhausted before any umbrella carrier was required to respond.  U.S. Fire also argued that Tokio’s umbrella policy should have contributed equally with the U.S. Fire policy due to the policies’ mutually repugnant “other insurance” clauses.  Tokio argued that its coverage was not available since Kajima had selectively tendered to other insurers.

The court first held that the horizontal exhaustion doctrine preempts the selective tender rule to the extent that all concurrent primary coverage must be exhausted before an excess policy is required to respond.  This decision is consistent with, and based upon similar facts as the September 2006 decision reported as Kajima Construction Services, Inc. v. St. Paul Fire and Marine Ins. Co., 856 N.E.2d 452 (Ill. App. 1st Dist. 2006), where the court determined that to the extent defense and indemnity costs exceed the primary limits of a selected insurer’s policy, all other concurrent primary policies must respond before excess coverage is triggered.  The court, therefore, agreed that U.S. Fire was entitled to reimbursement from Tokio’s primary policy. 

The court next held that that once all concurrent primary coverage is exhausted, the insured has the right to selectively tender to concurrent excess carriers.  Finding that a selective tender defeats consideration of “other insurance” clauses, the court held that U.S. Fire could not seek contribution from the Tokio umbrella policy.

On one other significant note, the court indicated that an allocation of fault among the parties may be appropriate before the insurers issued payment.  The timing of that allocation, however, was not met here.  Rather than reject the concept outright, the court found that Tokio had waived the issue.  Significantly, the court stated that any allocation of fault must be completed prior to or during settlement negotiations. 

Under North River, the right of an insured to selectively target a policy is preserved as long as the application of the doctrine is consistent with horizontal exhaustion.

This decision is significant because it is the first case addressing horizontal exhaustion among concurrent excess policies in a construction setting.  It is also noteworthy because the court has now applied as a well-settled principle of Illinois law, horizontal exhaustion.  Notably, the Illinois Supreme Court has yet to squarely address horizontal exhaustion in either an environmental or construction setting.