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.

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.

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

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

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. 

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