Illinois Appellate Court Holds Primary Carrier With Defense Obligation May Be Required To Pay All Defense Costs Under An "All Sums" Allocation And Then Seek Contribution From Other Parties
April, 2007
In Caterpillar, Inc. v. Century Indemnity Co., No. 3-06-0161, slip. op. (Ill. App. 3d Dist. Feb. 2, 2007), the Illinois Appellate Court, Third District found that in an asbestos coverage action, a primary insurer’s obligation to pay defense costs were to be allocated on an “all sums” basis.
Facts
A. Background
The policyholder (“Caterpillar”) manufactured and sold heavy equipment used in construction, mining and industrial applications. It was sued for bodily injuries resulting from exposure to asbestos in its equipment. Approximately 1800 separate asbestos bodily injury suits involving 6,000 claims were at issue in the coverage dispute. Caterpillar defended and paid the defense costs itself. Caterpillar had primary insurance coverage from Insurance Company of North America (“INA”) from 1952 to 1981 and from Employers Insurance of Wausau (“Wausau”) from 1981 to 1985. The INA and Wausau primary policies included at various times deductibles that required the policyholder to bear responsibility for defense costs and/or damages associated with claims triggering those policies’ coverage obligations. Between 1985 and 2006, Caterpillar established self-insured retentions (SIRs) and purchased insurance to cover the SIRs from Caterpillar Insurance Co., a captive company it owned.
Caterpillar spent $30 million defending the claims. INA reimbursed $7.3 million, claiming that its defense payment obligation was properly apportioned on a pro-rata basis across the trigger period.
B. Procedural History
Caterpillar moved for summary judgment, claiming that INA and Wausau had a duty to defend all of the asbestos claims against it. INA moved for summary judgment arguing that, to the extent it had a duty to defend the asbestos suits, it was only required to pay a pro-rata share of the expenses based on its policy periods’ share of the total triggered periods. The trial court granted Caterpillar’s motion in part and INA’s motion in part, finding that Caterpillar provided sufficient notice and that INA had a duty to defend all lawsuits where the allegations could potentially result in recovery from Caterpillar. The trial court also ordered a pro-rata allocation of defense costs and scheduled a trial for determining reasonableness of the defense costs incurred.
Caterpillar moved for reconsideration or certification of the trial court’s ruling for interlocutory appeal. The trial court denied the motion to reconsider and certified its allocation ruling for appeal.
Analysis
The Primary Insurers’ Defense Costs Obligations Are To Be Allocated On An
“All Sums” Basis.
The Third District appellate court reversed the ruling that INA’s duty to defend was limited to a pro-rata share of defense costs, finding that the language of the primary policies at issue dictated an “all sums” allocation.
The court focused on the insuring agreements in some of the policies which stated that INA’s defense obligation includes payment “on behalf of the insured for all sums which the insured shall become legally obligated to pay” as damages because of injury and defense of “any suit” against the insured alleging damages due to injury. The court also focused on the occurrence definition which limited coverage to occurrences happening during the policy period.
The court rejected INA’s argument that the scope of coverage is limited by the provisions which require an occurrence or personal injury to take place during the policy period. The court found that the plain terms of the promise of insurance do not link the scope of coverage to the trigger of coverage. The court explained that the policies do not state that INA will only pay the portion of loss attributable to injury during the policy period. Thus, the court concluded that under the express language of the promise of insurance, that once a policy is triggered, the scope of coverage includes payment of “all sums” and defense of “any suit” without a limitation based on the “policy period” provisions.
Caterpillar also relied upon the “other insurance” provision in INA’s policies to support its interpretation that INA is required to pay defense costs in full once a policy is triggered. INA asserted that the “other insurance” provision was an anti-stacking provision, meant to restrict the amount of coverage where more than one INA policy applies to a single loss. The court rejected INA’s argument, finding that typical anti-stacking provisions generally serve to limit coverage under multiple policies with overlapping coverage issued for the same period. The court noted that because the “other insurance” provision at issue allowed the policyholder to elect which INA policy to cover its loss, it provided further support for an “all sums” allocation.
Caterpillar also argued that it is not a co-insurer under the “other insurance” provision. Caterpillar asserted that the “other insurance” provisions only allowed INA to seek contribution from other insurance triggered by the loss after INA has paid its defense costs. INA contended that the periods that the policyholder was self-insured constitute “other insurance” which is required to share liability pro-rata. The court rejected INA’s argument, finding that the policyholder is not to be included in the allocation for periods when it was self-insured. The court found that self-insurance is not considered “other valid and collectible insurance” for purposes of assigning liability between insurance providers and self-insureds for contribution purposes.
The court also found that its “all sums” allocation decision was prescribed by the Illinois Supreme Court decision in Zurich Ins. Co. v. Raymark Industries, Inc., 514 N.E.2d 150 (1987). The court found that Raymark controlled the issue of whether a primary insurer’s duty to defend was limited to a pro-rata share. The court rejected INA’s reliance on other Illinois decisions including AAA Disposal v. Aetna Cas. & Sur. Co., 821 N.E.2d 1278 (Ill. App. 2005) , Outboard Marine Corp. v. Liberty Mutual Ins. Co., 670 N.E.2d 740 (Ill. App. 1996), Missouri Pacific R.R. Co. v. International Ins. Co., 679 N.E.2d 801 (Ill. App. 1997) and U.S. Gypsum Co. v. Admiral Ins. Co., 643 N.E.2d 1226 (Ill. App. 1994), for its position that pro-rata allocation should apply. The court distinguished these cases as dealing with different situations such as excess policies and indemnification obligations.
Learning Point
The Third District found that an insured could require a primary carrier with a duty to defend to pay all of its defense costs under an “all sums” allocation and then seek contribution from other parties. This decision was based on the specific language within the primary policies at issue relating to the duty to defend and the policies’ “other insurance” clauses. The decision was limited to a primary carrier’s duty to defend and did not address how indemnity obligations under excess policies should be allocated.
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