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

|

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

|

A Necessary Distinction

|

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

|

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

|

In State Automobile, Habitat was a general contractorthat subcontracted with Central Building for certain work. Thesubcontract required Central Building to add Habitat as anadditional insured under its policy. Central Building was insuredby State Automobile and Habitat became covered as an additionalinsured under that policy. When a personal injury action was filedagainst Habitat by a worker injured on the site, it tendered itsdefense of that case to Central, which in turn tendered the defenseto State Auto.

|

However, State Auto refused to provide Habitat with a defenseand filed a declaratory judgment action requesting a finding thatits policy did not apply. State Auto advanced a number of argumentsin support of its position. It contended that the scope of thecoverage of the additional insured endorsement simply did not applyto the suit. Also, it contended that its policy, even if it didapply, 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 othervalid and collectible insurance available to the additional insuredwhether primary, excess, contingent or on any other basis unless acontract specifically requires that this insurance benon-contributory and/or primary or you request that you apply on anon–contributory and/or primary basis.

|

The subcontract agreement between Habitat and General Buildingdid not require that the additional insured coverage for Habitatsapply on a primary basis.

|

Superseding Provisions

|

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

|

Somewhat surprisingly, at least to this author, the appellatecourt affirmed the finding, concluding that the other insuranceprovision of the State Auto policy would require its coverage to beexcess to any coverage available to habitat under its own CGLpolicy. Thus, according to the court's analysis, the “horizontalexhaustion” doctrine required Habitat to exhaust its own primarypolicy before accessing what was only excess coverage under theState Auto policy. The appellate court, however, could notdetermine from the record whether or not Habitat had other primarycoverage available to it and remanded the case for furtherproceedings to resolve that issue.

|

State Auto appears to be directly repugnant to theclear admonition by the Supreme Court in Kajima that inapplying the “horizontal exhaustion” doctrine, the doctrine appliesonly to 'true' excess policies and not to policies that becomeexcess “by coincidence.” The State Auto policy did become excessonly “by coincidence” because of the application of its otherinsurance provisions. This was not the manner in which the SupremeCourt applied the “horizontal exhaustion” doctrine inKajima and is in fact directly contrary to the SupremeCourt's discussion. Nevertheless, the State Auto caseremains valid law.

|

The same appellate court that issued the StateAutomobile decision subsequently issued a comparable decisionin River Village v. Central Insurance Companies, whichagain involved a “targeted tender” to a company providingadditional insured coverage. Just as in StateAutomobile, the policy providing the additional insuredcoverage contained an endorsement providing that its coverage wasexcess to other valid and collectible insurance available to theadditional insured.

|

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

|

Conflicting Decisions

|

State Automobile and River Village aretroublesome decisions because they appear to directly conflict withthe rationale of the Supreme Court in Kajima regarding thecircumstances under which the “horizontal exhaustion” doctrineapplies. The decisions fail to recognize the distinction between“true” excess policies and policies that become excess only “bycoincidence” as a result of the application of other insuranceclauses. In both of the cases, the targeted insurance policy wasnot a “true” excess policy and one would therefore have thoughtthat 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 “otherinsurance” clause such that the additional insured's own coverageshould not have been considered to be “available.”

|

As result of these two decisions, the application of the“targeted tender” doctrine is problematic because in determiningthe liability of the targeted policy, whether or not that policywill apply may turn upon whether or not that policy has an “otherinsurance” clause which makes the additional insured coverageexcess to the additional insured's own primary coverage. In short,an additional insured party may lose the benefit of the “targetedtender” 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 willcontinue to be a point of contention whenever a “targeted tender”is made to an insurer whose policy is arguably only excess as aresult of an “other insurance” clause. Notably, it is only theappellate court for the first district that has appliedKajima in this fashion.

|

So Then, Where Are We?

|

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

|

Third, the doctrine of horizontal exhaustion is an additionalpoint of caution to be considered by an insured making a “targetedtender.” Unless the insured making a “targeted tender” can concludewith assurance that the targeted primary policy is sufficient inamount to cover the loss, a “targeted tender” should probably notbe made. Doing so may jeopardize excess coverage otherwiseavailable to the insured, both its own excess coverage and thatwhich might be provided to it as an additional insured from anotherparty.

|

Similarly, an insurer who receives a “targeted tender” would bewell advised to alert the insured to consider the possibility thatby making a “targeted tender,” the insured may be jeopardizing itsexcess insurance coverage. Doing so would not only be in the bestinterest of the insured, it also could result in the insureddeciding to invoke all possible primary coverage, which couldbenefit the targeted insurer as well.

|

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

|

The foregoing discussion demonstrates the extreme caution thatmust be applied by an insured or those counseling an insured as towhether or not to make a “targeted tender.” In some instances, a“targeted tender” may be a wise thing to do because the insured mayavoid implicating its own policy for the subject claim. But in manyother situations the making of a “targeted tender” may proveperilous to the insured. Unless one can safely determine that thetargeted policy will cover the loss entirely, one making a“targeted tender” runs the real risk of jeopardizing and forfeitingexcess coverage that might be necessary to cover the loss in itsentirety.

|

Because of these ambiguities, and because in many cases it isdifficult to predict the potential liability raised by a claim, theinsured may be better off by not making a “targeted tender,” butrather by tendering its defense to all primary carriers, includingits own and those carriers that may provide additional insuredcoverage. This is of course exactly what normally would haveoccurred prior to the adoption by the courts of the “targetedtender” doctrine. Things have perhaps gone full circle as a resultof the application of the “horizontal exhaustion” doctrine.


[1] State Automobile Mutual Ins. Co. v. HabitatConstruction 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).

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.