The “targeted tender” and “horizontal exhaustion” doctrines areimportant insurance coverage doctrines that have significantconsequences to both insurers and insureds.

In this three-part series, we will examine both doctrines andexplain how an insured that invokes the former may find its excessinsurance coverage jeopardized by the latter.

Since it was first recognized by the Illinois Supreme Court, the“targeted tender” doctrine has sparked debate. In fact, there hasprobably been no other insurance coverage topic that has generatedmore litigation, both at the trial and appellate court levels. Thatcontinues to be the case even though they doctrine has now been apart of insurance coverage rubric for more than 10 years.

Nature and Origin

In this series, we will discuss the nature and origins of thatdoctrine, qualifications upon its application and, mostimportantly, implications of an insured making a “targeted tender.”Perhaps foremost among those considerations is that an insuredmaking a “targeted tender” runs the risk of jeopardizing its excesscoverage for the claim at issue as a result of the “horizontalexhaustion” doctrine.

The targeted tender doctrine was first recognized by theIllinois Supreme Court in Cincinnati Companies v. WestAmerican Insurance Company, 183 Il.2d 317, 701 N.E.2d 499(1998); however, the discussion of the doctrine by the court inJohn Burns Construction Company v. Indiana InsuranceCompany, 189 Ill.2d 570, 727 N.E 2d 211 (2000) is most oftenreferenced when discussing the doctrine.

This doctrine is based upon the simple rationale that where aninsured is covered by more than one primary insurance policy, theinsured has the right to determine which of those policies shouldrespond to a loss or defend a claim. In the absence of the targetedtender doctrine, the issue of what policy would apply to aparticular loss would normally be governed by the “other insurance”clauses of the primary policies.

The 'Other Insurance' Clause

In Cincinnati Casualty and John Burns, theIllinois Supreme Court essentially held that the insured's right toselect or target a particular policy trumps the “other insurance”clause. The other insurance clause is premised upon there beingother available insurance to the insured. In Burns,however, the Supreme Court explained, relying on prior lower courtappellate decisions, that an insurance policy is not “available” tothe insured until the insured says that it is:

The insurance provided to Burns by Royal was not 'available' inthe language of the other insurance provision, for Burns hadexpressly declined to invoke that coverage. Moreover, we do notbelieve that the presence of the 'other insurance' provision in theIndiana policy service by itself to trigger the coverage affordedby Royals policy. And the 'other insurance' provision does not initself overcome the right of an insured to tender defense of anaction to one insurer alone.

Before proceeding further, it is appropriate to consider why aninsured might find the targeted tender doctrine attractive. Why,for example, would an insured not want all policies thatmight apply to a claim or loss to apply? After all, one wouldnormally think “the more coverage, the better.” The easy answer isthat if an insured has multiple primary policies from which to pickand choose, then it may be to the advantage of the insured toselect one policy to the exclusion of others. This commonly happenswhere an insured has its own CGL policy under which it is the namedinsured but also has coverage under another policy under which itis only an additional insured.

One Contractor, Multiple Policies

In the construction industry, it is becoming increasingly commonfor general contractors and others to be insured under multiplepolicies. Normally, for example, the general contractor willrequire that all subcontractors name it as an additional insuredunder their policies. The general contractor may thus enjoycoverage under multiple policies for any construction project, andif the general contractor is sued by an injured worker, then it maybe in the general [contractor's] best interest to invoke thecoverage afforded to it as an additional insured under asubcontractor's policy rather than to invoke its own coverage underits policy. The reason for doing so is fairly obvious: The generalmay want to avoid making claims under or using up its own insurancecoverage limits for a particular loss where the loss is covered byanother policy under which it is an additional insured.

An important caveat to the application of the targeted tenderdoctrine is that in adopting it, the Supreme Court inBurns specifically noted that the other insuranceprovision 'in itself' does not overcome the right of an insured totender the defense of an action to an insurer of its choosing.Although not expressly discussed by the Supreme Court in theBurns case, appellate court decisions have recognized thatthe insured's right to make a targeted tender may indeed beforeclosed by specific policy language.

In American Country Insurance v. KraemerBrothers, 298 Ill.App.3d 305, 699 Nk.e.2d 1056 (1^stdist.1998), a decision which predated the adoption of the targetedtender doctrine by the Supreme Court, the appellate court didconsider whether the insured's right to make a targeted tendercould be foreclosed by appropriate policy language.

Kraemer involved a typical construction site accidentscenario. Kraemer Brothers Construction Company was the generalcontractor for a project and contracted with a subcontractor, D. H.Johnson Construction Company for certain work. The subcontractrequired Kraemer to be named as additional insured under Johnson'spolicy. Johnson was insured under a CGL policy issued by AmericanCountry Insurance and, as required by its subcontract agreementwith Kraemer, Johnson arranged for Kraemer to be named as anadditional insured under this policy with American Country. Kraemerwas subsequently sued by a worker employed by Johnson who wasinjured in a construction site accident.

Notice of Occurrence

At that time, Kraemer had coverage potentially available to thecompany under its own policy, which was written by United StatesFidelity & Guarantee Company and under the American Countrypolicy under which it was an additional insured. When it was sued,Kraemer made the conscious decision that it did not want to involveits own insurance and therefore made what it thought was a“targeted tender” to American Country. Kraemer specificallyinformed American Country that it was not invoking its own coverageunder its own CGL policy. Unfortunately for Kraemer, the AmericanCountry policy contained a particular provision, in addition to thestandard other insurance clause, which purported to require allinsureds to tender their defense to all possible insurers thatmight provide coverage. The clause in question imposed thefollowing specific duties upon the insured in the event of anoccurrence, claim, or suit:

5.) promptly give notice of an occurrence, an offense which mayresult in a claim, a claim which is made or a suit, to any otherinsurer which has available insurance for a loss we cover undercoverage is A or B or this coverage part.

6.) promptly tender the defense of any claim made or suit to anyother insurer which also has available insurance for a loss whichwe cover under coverage is A or B of this coverage part.

Relying upon these provisions of its policy, in response toKraemer's tender of defense, American Country denied that tender,claiming that Kraemer had breached its duties as an additionalinsured by not tendering its defense to its own CGL carrier.American Country also filed a declaratory judgment action, seekinga finding that it had no duty to defend Kraemer for that reason.The trial court found in favor of Kraemer, but the appellate courtreversed and found in favor of American Country. The appellatecourt concluded that the specific provisions of the AmericanCountry policy superseded or trumped Kraemer's right to make a“targeted tender.” With respect to the application of that clause,the appellate court stated:

“And in the case sub judice, the insurance policyrequired the insured to probably tender the defense to any otherinsurer with available insurance. The USF & G policy isavailable insurance to which Kraemer refused to tender its defense.Kraemer clearly breached the terms of the American Country policyand is not entitled to a defense or indemnity.”

Policy Provisions vs. Public Policy

The appellate court went on to reject the contention by Kraemerthat an insurance provision that requires an insured to tender itsdefense to all carriers that might provide coverage violates publicpolicy. Thus, according to Kraemer, an insurer can avoidthe targeted tender doctrine by appropriately drafted policylanguage.

Since the appellate court decision in Kraemer, theIllinois Supreme Court has not had occasion to consider whethersuch a policy provision violates public policy, as Kraemercontended. There is, however, no reason to believe that the SupremeCourt would find that the right to a targeted tender by an insuredis fundamentally rooted in public policy rather than based uponparticular language of an insurance policy.

Thus, insurers can certainly amend their policies to avoid beingthe subject of a targeted tender. In some instances, of course, anunderlying contract between the insured and other parties mayrequire the named insured to provide additional coverage to otherparties that is primary and 'noncontributory.' In that situation,the insured would likely request an endorsement permitting suchadditional insured coverage.

In the forthcoming installment, we will discuss othercaveats associated with application of the targeted tenderdoctrine, as well as the “horizontal exhaustion” doctrine.