Filed Under:Agent Broker, Commercial Business

Clashing Insurance Coverage Doctrines, Part Three

Excess Coverage, Defined

In the previous installment of this series, we cited the case of Kajima Construction Services, Inc. v. St. Paul fire and Marine insurance Company, 227 Ill.App.3d 102, 879 N.E.2d 305 (2007). You may recall that in resolving the issue, the Illinois Supreme Court concluded that the “horizontal exhaustion” doctrine applied and that the targeted tender doctrine did not apply to excess coverage.

In understanding the Kajima decision, it is imperative to note that in discussing the difference between primary and excess policies, the Supreme Court drew a clear distinction between “true” excess coverage and excess coverage that might arise “by coincidence,” where multiple primary insurance contracts applied the same loss.

A Necessary Distinction

Excess coverage “by coincidence” may arise when, as a result of the application of the “other insurance” clauses of multiple primary policies, one policy becomes only excess. In holding that the “targeted tender” doctrine did not apply to excess policies, the Supreme Court was clearly limiting its holding to “true” excess policies. This is a critical tenet of the Kajima decision and has become even more significant because subsequent appellate court decisions appear to have ignored that critical distinction between “true” excess policies and primary policies that become excess only “by coincidence.”

In State Automobile Mutual Insurance Company v. Habitat Construction Company[1] and River Village v. Central Insurance Companies,[2] the Illinois appellate court for the first district appears to have departed from the rationale of Kajima by applying the “horizontal exhaustion” doctrine to primary policies that became excess only “by coincidence” as a result of the application of “other insurance” clauses.

In State Automobile, Habitat was a general contractor that subcontracted with Central Building for certain work. The subcontract required Central Building to add Habitat as an additional insured under its policy. Central Building was insured by State Automobile and Habitat became covered as an additional insured under that policy. When a personal injury action was filed against Habitat by a worker injured on the site, it tendered its defense of that case to Central, which in turn tendered the defense to State Auto.

However, State Auto refused to provide Habitat with a defense and filed a declaratory judgment action requesting a finding that its policy did not apply. State Auto advanced a number of arguments in support of its position. It contended that the scope of the coverage of the additional insured endorsement simply did not apply to the suit. Also, it contended that its policy, even if it did apply, was only excess coverage because of the “other insurance" provision of the additional insured endorsement which provided:

Any coverage provided hereunder shall be excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent or on any other basis unless a contract specifically requires that this insurance be non-contributory and/or primary or you request that you apply on a non–contributory and/or primary basis.

The subcontract agreement between Habitat and General Building did not require that the additional insured coverage for Habitats apply on a primary basis.

Superseding Provisions

At first blush, State Auto involved what appears to be a simple “targeted tender” and under the rationale of the Burns decision, discussed above, the “targeted tender” doctrine supersedes the “other insurance” provisions of the policies at issue. Specifically, Habitat's own primary policy should not have been considered to be “available” because it made a “targeted tender” to State Auto. The trial court, however, in Habitat’s declaratory judgment action, found in favor of State Auto based upon the “horizontal exhaustion” doctrine as discussed by the Supreme Court in Kajima.

Somewhat surprisingly, at least to this author, the appellate court affirmed the finding, concluding that the other insurance provision of the State Auto policy would require its coverage to be excess to any coverage available to habitat under its own CGL policy. Thus, according to the court's analysis, the “horizontal exhaustion” doctrine required Habitat to exhaust its own primary policy before accessing what was only excess coverage under the State Auto policy. The appellate court, however, could not determine from the record whether or not Habitat had other primary coverage available to it and remanded the case for further proceedings to resolve that issue.

State Auto appears to be directly repugnant to the clear admonition by the Supreme Court in Kajima that in applying the “horizontal exhaustion” doctrine, the doctrine applies only to ‘true’ excess policies and not to policies that become excess “by coincidence.” The State Auto policy did become excess only “by coincidence" because of the application of its other insurance provisions. This was not the manner in which the Supreme Court applied the “horizontal exhaustion” doctrine in Kajima and is in fact directly contrary to the Supreme Court's discussion. Nevertheless, the State Auto case remains valid law.

The same appellate court that issued the State Automobile decision subsequently issued a comparable decision in River Village v. Central Insurance Companies, which again involved a “targeted tender” to a company providing additional insured coverage.  Just as in State Automobile, the policy providing the additional insured coverage contained an endorsement providing that its coverage was excess to other valid and collectible insurance available to the additional insured.

In River Village, the court followed its prior holding in State Automobile and held that the “targeted tender” doctrine did not apply because the targeted policy was only excess as a result of the application of the “other insurance" clause of that policy.

Conflicting Decisions

State Automobile and River Village are troublesome decisions because they appear to directly conflict with the rationale of the Supreme Court in Kajima regarding the circumstances under which the “horizontal exhaustion” doctrine applies. The decisions fail to recognize the distinction between “true” excess policies and policies that become excess only “by coincidence” as a result of the application of other insurance clauses. In both of the cases, the targeted insurance policy was not a “true” excess policy and one would therefore have thought that the “horizontal exhaustion” doctrine should not apply. Rather, consistent with the Supreme Court's decision in Burns, the “targeted tender” doctrine should have trumped the “other insurance" clause such that the additional insured’s own coverage should not have been considered to be “available.”

As result of these two decisions, the application of the “targeted tender” doctrine is problematic because in determining the liability of the targeted policy, whether or not that policy will apply may turn upon whether or not that policy has an “other insurance” clause which makes the additional insured coverage excess to the additional insured’s own primary coverage. In short, an additional insured party may lose the benefit of the “targeted tender” doctrine if the targeted policy has an “other insurance’ clause which renders the additional insured coverage excess.

Until the Illinois Supreme Court addresses this issue, this will continue to be a point of contention whenever a “targeted tender” is made to an insurer whose policy is arguably only excess as a result of an “other insurance” clause. Notably, it is only the appellate court for the first district that has applied Kajima in this fashion.

So Then, Where Are We?

Although perhaps not as clear as one might like, certain conclusions can be clearly drawn, notwithstanding the ambiguity in the law that currently exists. First, the targeted tender doctrine permits an insured to select which of multiple possible primary policies should apply or respond to a particular claim or loss. Second, an insured making or considering making a “targeted tender” should consider whether or not the targeted policy is sufficient in terms of coverage and limits to cover the claim that is in dispute. Unless one can definitely conclude that the targeted policy covers the loss, making a “targeted tender” may not be such a bright idea.

Third, the doctrine of horizontal exhaustion is an additional point of caution to be considered by an insured making a “targeted tender.” Unless the insured making a “targeted tender” can conclude with assurance that the targeted primary policy is sufficient in amount to cover the loss, a “targeted tender” should probably not be made. Doing so may jeopardize excess coverage otherwise available to the insured, both its own excess coverage and that which might be provided to it as an additional insured from another party.

Similarly, an insurer who receives a “targeted tender” would be well advised to alert the insured to consider the possibility that by making a “targeted tender,” the insured may be jeopardizing its excess insurance coverage. Doing so would not only be in the best interest of the insured, it also could result in the insured deciding to invoke all possible primary coverage, which could benefit the targeted insurer as well. 

Fourth, until he Supreme Court addresses the issues raised by State Automobile and River Village, it remains unclear as to whether the “horizontal exhaustion” doctrine applies to those situations where the targeted policy becomes excess only “by coincidence” as a result of the “other insurance" provisions of an additional insured endorsement.

The foregoing discussion demonstrates the extreme caution that must be applied by an insured or those counseling an insured as to whether or not to make a “targeted tender.” In some instances, a “targeted tender” may be a wise thing to do because the insured may avoid implicating its own policy for the subject claim. But in many other situations the making of a “targeted tender” may prove perilous to the insured. Unless one can safely determine that the targeted policy will cover the loss entirely, one making a “targeted tender” runs the real risk of jeopardizing and forfeiting excess coverage that might be necessary to cover the loss in its entirety.

Because of these ambiguities, and because in many cases it is difficult to predict the potential liability raised by a claim, the insured may be better off by not making a “targeted tender,” but rather by tendering its defense to all primary carriers, including its own and those carriers that may provide additional insured coverage. This is of course exactly what normally would have occurred prior to the adoption by the courts of the "targeted tender" doctrine. Things have perhaps gone full circle as a result of the application of the “horizontal exhaustion” doctrine.

[1] State Automobile Mutual Ins. Co. v. Habitat Construction Company, 377. Ill.App.3d 281, 875 n.e.2d 1159 (1ST dIST. 2007).


[2] River Village LLC v. Central Insurance Companies, 396 Ill.App.3d 480, 919 N.E.2d 426 (1st dis. 2009). 

Featured Video

Most Recent Videos

Video Library ››

Top Story

5 things to know about the NAIC's new cybersecurity model law

The NAIC's newly-adopted Insurance Data Security Model Law provides guidance for carriers, agents, brokers and their business partners.

Top Story

5 insurance advisor marketing mistakes to avoid

The right marketing tactics can help insurance agents and brokers reach their goals.

More Resources


eNewsletter Sign Up

Agent & Broker Insider eNewsletter

Proven success tips and essential information to help agents and brokers grow their practice – FREE. Sign Up Now!

Mobile Phone

Advertisement. Closing in 15 seconds.