Filed Under:Claims, Litigation

A Clash of Coverage Doctrines

Multiple Coverage Claims: Targeted Tender vs. Horizontal Exhaustion

The “targeted tender” and “horizontal exhaustion” doctrines are important insurance coverage doctrines that have significant consequences to both insurers and insureds.

In this three-part series, we will examine both doctrines and explain how an insured that invokes the former may find its excess insurance 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 has probably been no other insurance coverage topic that has generated more litigation, both at the trial and appellate court levels. That continues to be the case even though they doctrine has now been a part of insurance coverage rubric for more than 10 years.

Nature and Origin

In this series, we will discuss the nature and origins of that doctrine, qualifications upon its application and, most importantly, implications of an insured making a “targeted tender.” Perhaps foremost among those considerations is that an insured making a “targeted tender” runs the risk of jeopardizing its excess coverage for the claim at issue as a result of the “horizontal exhaustion” doctrine.

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

This doctrine is based upon the simple rationale that where an insured is covered by more than one primary insurance policy, the insured has the right to determine which of those policies should respond to a loss or defend a claim. In the absence of the targeted tender doctrine, the issue of what policy would apply to a particular loss would normally be governed by the “other insurance” clauses of the primary policies.

The 'Other Insurance' Clause

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

The insurance provided to Burns by Royal was not ‘available’ in the language of the other insurance provision, for Burns had expressly declined to invoke that coverage. Moreover, we do not believe that the presence of the ‘other insurance’ provision in the Indiana policy service by itself to trigger the coverage afforded by Royals policy. And the ‘other insurance’ provision does not in itself overcome the right of an insured to tender defense of an action to one insurer alone.

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

One Contractor, Multiple Policies

In the construction industry, it is becoming increasingly common for general contractors and others to be insured under multiple policies. Normally, for example, the general contractor will require that all subcontractors name it as an additional insured under their policies. The general contractor may thus enjoy coverage under multiple policies for any construction project, and if the general contractor is sued by an injured worker, then it may be in the general [contractor’s] best interest to invoke the coverage afforded to it as an additional insured under a subcontractor’s policy rather than to invoke its own coverage under its policy. The reason for doing so is fairly obvious: The general may want to avoid making claims under or using up its own insurance coverage limits for a particular loss where the loss is covered by another policy under which it is an additional insured.

An important caveat to the application of the targeted tender doctrine is that in adopting it, the Supreme Court in Burns specifically noted that the other insurance provision ‘in itself’ does not overcome the right of an insured to tender the defense of an action to an insurer of its choosing. Although not expressly discussed by the Supreme Court in the Burns case, appellate court decisions have recognized that the insured’s right to make a targeted tender may indeed be foreclosed by specific policy language.

In American Country Insurance v. Kraemer Brothers, 298 Ill.App.3d 305, 699 Nk.e.2d 1056 (1st dist.1998), a decision which predated the adoption of the targeted tender doctrine by the Supreme Court, the appellate court did consider whether the insured’s right to make a targeted tender could be foreclosed by appropriate policy language.

Kraemer involved a typical construction site accident scenario. Kraemer Brothers Construction Company was the general contractor for a project and contracted with a subcontractor, D. H. Johnson Construction Company for certain work. The subcontract required Kraemer to be named as additional insured under Johnson’s policy. Johnson was insured under a CGL policy issued by American Country Insurance and, as required by its subcontract agreement with Kraemer, Johnson arranged for Kraemer to be named as an additional insured under this policy with American Country. Kraemer was subsequently sued by a worker employed by Johnson who was injured in a construction site accident.

Notice of Occurrence

At that time, Kraemer had coverage potentially available to the company under its own policy, which was written by United States Fidelity & Guarantee Company and under the American Country policy under which it was an additional insured. When it was sued, Kraemer made the conscious decision that it did not want to involve its own insurance and therefore made what it thought was a “targeted tender” to American Country. Kraemer specifically informed American Country that it was not invoking its own coverage under its own CGL policy. Unfortunately for Kraemer, the American Country policy contained a particular provision, in addition to the standard other insurance clause, which purported to require all insureds to tender their defense to all possible insurers that might provide coverage. The clause in question imposed the following specific duties upon the insured in the event of an occurrence, claim, or suit:

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

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

Relying upon these provisions of its policy, in response to Kraemer’s tender of defense, American Country denied that tender, claiming that Kraemer had breached its duties as an additional insured by not tendering its defense to its own CGL carrier. American Country also filed a declaratory judgment action, seeking a finding that it had no duty to defend Kraemer for that reason. The trial court found in favor of Kraemer, but the appellate court reversed and found in favor of American Country. The appellate court concluded that the specific provisions of the American Country 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 policy required the insured to probably tender the defense to any other insurer with available insurance. The USF & G policy is available insurance to which Kraemer refused to tender its defense. Kraemer clearly breached the terms of the American Country policy and is not entitled to a defense or indemnity."

Policy Provisions vs. Public Policy

The appellate court went on to reject the contention by Kraemer that an insurance provision that requires an insured to tender its defense to all carriers that might provide coverage violates public policy. Thus, according to Kraemer, an insurer can avoid the targeted tender doctrine by appropriately drafted policy language.

Since the appellate court decision in Kraemer, the Illinois Supreme Court has not had occasion to consider whether such a policy provision violates public policy, as Kraemer contended. There is, however, no reason to believe that the Supreme Court would find that the right to a targeted tender by an insured is fundamentally rooted in public policy rather than based upon particular language of an insurance policy.

Thus, insurers can certainly amend their policies to avoid being the subject of a targeted tender. In some instances, of course, an underlying contract between the insured and other parties may require the named insured to provide additional coverage to other parties that is primary and ‘noncontributory.’ In that situation, the insured would likely request an endorsement permitting such additional insured coverage.

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

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