As A Matter Of First Impression, Illinois Selective Tender Rule Does Not Require An Insured To Vertically Exhaust Concurrent Insurance Policies And Deselected Primary Insurers Must Answer For A Loss Before An Excess Policy Must Respond
October, 2006
Kajima Construction Services, Inc. v. St. Paul Fire and Marine Ins. Co., 2006 WL 2662703 (Ill. App.).
Facts
General contractor Kajima Construction Services, Inc. and its insurer brought a declaratory judgment action against its subcontractor’s insurer, seeking reimbursement of an indemnity payment made to settle a bodily injury lawsuit filed against it by an employee of the subcontractor. Kajima was named as an additional insured on primary and excess policies issued to the subcontractor by defendant St. Paul Fire and Marine Insurance Company. Kajima made a “targeted tender” to St. Paul. When the injury action settled for $3 million, St. Paul paid its primary limits of $2 million and Kajima’s own primary insurer paid the remaining $1 million. Kajima and its carrier then sought recovery of the $1 million from St. Paul’s excess policy. The trial court granted summary judgment to St. Paul, finding that all primary insurance policies had to be exhausted prior to reaching any excess policies.
Analysis
The Illinois Appellate Court affirmed, finding as a matter of first impression that the selective tender rule does not supersede well-settled principles of Illinois law regarding horizontal exhaustion.
The court reached its conclusion by first reviewing the nature and purposes of the selective tender, horizontal exhaustion, and vertical exhaustion theories. The selective tender (or targeted tender) doctrine is a rule recognized by Illinois courts whereby an insured covered by multiple concurrent policies has the right to choose which insurer will defend and indemnify it with respect to a specific claim. Once an insured instructs an insurer not to involve itself in the defense or indemnification of a specific claim, the insurer is relieved of its obligation with respect to that claim. Horizontal exhaustion involves an insured who has multiple primary and excess policies covering a common risk. If a covered claim occurs, horizontal exhaustion requires the insured to exhaust all primary policy limits before invoking any excess coverage. Vertical exhaustion, by contrast, allows an insured to seek coverage from an excess insurer as long as the insurance policies immediately beneath that excess policy (as identified in the excess policy’s declarations page), have been exhausted regardless of whether other primary insurance may apply.
The court noted that the requirement of horizontal exhaustion has been addressed and applied by several Illinois courts. In each of those cases, the court held that the insured must first exhaust all available primary insurance policies before an excess policy could be invoked. The court noted further that no Illinois case “has either applied or favorably commented on the vertical exhaustion theory.”
Based on the widespread acceptance in Illinois of horizontal exhaustion and the accompanying rejection of vertical exhaustion, the court “decline[d] plaintiffs’ invitation to apply the vertical exhaustion rule here. In our view, the selective tender rule should be applied to circumstances where concurrent primary coverage exists for additional insureds. *** To the extent that defense and indemnity costs exceed the primary limits of the selected insurer, the deselected insurer or insurers’ primary policies must answer for the loss prior to invoking coverage under an excess policy.”
Learning Point:
This decision is significant because it is the first case addressing horizontal exhaustion among concurrent primaries in a construction setting. It is also noteworthy because the court characterized horizontal exhaustion as a well-settled principle of Illinois law, and the Illinois Supreme Court has never squarely addressed horizontal exhaustion in either an environmental or construction setting.
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