Filed Under:Claims, Litigation

The Clash of Insurance Coverage Doctrines Continues

Part Two: Horizontal Exhaustion Makes An Entrance

Thus far, we have seen that although the “targeted tender” doctrine permits an insured to avoid or take an end run around the “other insurance” clause of the commercial general liability (CGL) policy, the insured’s right to make a targeted tender is based upon particular policy language rather than upon public policy considerations. The doctrine can therefore be eliminated by appropriately drafted insurance coverage language.

See Related Article: Clash of Coverage Doctrines, Part One

Frequently, additional insureds are entitled to coverage that is much narrower in scope than would apply to a named insured under the same policy. Although there are numerous additional insured endorsements now in use, many limit the scope of coverage to the additional insured. For example, a commonly used additional insured endorsement [i]contains the following provisions as to the scope of coverage and exclusions:

The insurance provided to additional insureds is limited as follows:

The doctrine of horizontal exhaustion quite simply provides that where an insured has both primary and excess insurance coverage, it must exhaust or use up all of its primary insurance coverage before it can reach any of its excess coverage.

The horizontal exhaustion doctrine does not pose a problem where the insured has multiple primary policies and tenders the defense of a claim to all of those insurance carriers. If the tender has been made to all, then all of those policies have been implicated and the allocation for the loss among the respective primary carriers would be determined by the “other insurance” clauses of the policies.

Precisely that type of situation was addressed by the Illinois Supreme Court in Kajima Construction Services, Inc. v. St. Paul fire and Marine insurance Company, 227 Ill.App.3d 102, 879 N.E.2d 305 (2007). There, Kajima Construction Company was a general contractor. It entered into a subcontract agreement with Midwestern Steel Fabricators for certain work. The subcontract required that Midwestern name Kajima as an additional insured under its CGL policies. Pursuant to that provision, Kajima was in fact named as an additional insured under a $2 million primary and a $5 million umbrella policy issued bySt. Paul fire and Marine Insurance Company. Kajima also had $1 million of primary coverage through its own CGL carrier, Tokio Marine and Fire Insurance Company.

As result of a construction site accident, Kajima and Midwestern were both sued by an injured worker, Tom Jones. In response to that suit, Kajima made what it designated as a “targeted tender” toSt. Paul. Paul refused to accept that tender and Kajima then requested that its own insurer, Tokio, provide it with a defense, which Tokio did. Subsequently,St. Paulreconsidered and accepted Kajima’s tender of defense. At that point, Kajima was then being defended by two primary carriers, its own carrier, Tokio, andSt. Paul. As the case progressed, Tokio made a pretrial demand uponSt. Paulto settle the case for $3 million, which included St. Paul’s $2 million primary limits and $1 million from its excess coverage.St. Paulrefused to do so. Later, however, the case was settled for a total of $3 million, withSt. Paulpaying $2 million of its primary coverage and Tokio paying the limits of its $1 million primary coverage.

In a finding that the horizontal exhaustion doctrine preempted the targeted tender doctrine with respect to excess coverage, the Supreme Court relied upon the distinction between primary and excess coverage. It noted, for example, that premiums charged for excess coverage reflect an intent that umbrella policies serve a different function from primary policies, “[e]xcess premiums are lower because excess coverage is, by its very nature, not supposed to be triggered until the underlying policy has been exhausted up to its limits.” The court also stated:

Given the clear distinctions between primary and excess insurance coverage, we decline to extend the “targeted tender” doctrine to require one insurer to vertically exhausted primary and excess coverage limits before all primary insurance available to the insured has been exhausted. Extending the “targeted tender” rules require an access policy to pay before a primary policy would eviscerate the distinction between primary and excess insurance. Kajima, 227 Ill.2d 116.

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