In Kajima Const. Services, Inc. v. St. Paul Fire and Marine Ins. Co., 2007 WL 4200949 (Ill., 2007), a general contractor (Kajima) and its primary liability insurer (Tokio) filed a declaratory judgment action against a subcontractor's (Midwestern) insurer (St. Paul), which had issued both primary and excess umbrella coverages to Midwestern.
As part of Kajima's and Midwestern's construction contract, Midwestern was required to obtain commercial general liability coverage with Kajima named as an additional insured. Midwestern therefore provided Kajima with a certificate of insurance from St. Paul naming Kajima as an additional insured and providing Kajima with $2 million in general liability coverage and $5 million in umbrella coverage. Kajima also had its own primary CGL insurance policy with Tokio with limits of $1 million per occurrence.
During the construction project, an employee of Midwestern's subcontractor was injured and later sued Kajima and Midwestern. Kajima made a “targeted tender” to St. Paul and before trial in the underlying case, Tokio demanded that St. Paul settle for $3 million, without contribution from Tokio. St. Paul refused and the case later settled for $3 million, with St. Paul paying its $2 million primary limits and Tokio paying its $1 million primary limits.
The First District Appellate Court rejected Kajima's and Tokio's argument that because Kajima selectively tendered its defense and indemnification to St. Paul, St. Paul must respond with both its primary and excess coverage before Tokio's primary limits were invoked.
On appeal to the Illinois Supreme Court, Kajima argued that, pursuant to the targeted tender rule, it had the absolute right to tender its defense and indemnification to St. Paul in the underlying case. Kajima further argued that once it made a targeted tender to Midwestern and St. Paul , Kajima's insurer became deselected and was relieved of its obligation to Kajima with regard to the underlying claim. Thus, the Tokio policy was no longer available and St. Paul had the sole responsibility to defend and indemnify Kajima. Kajima further argued that horizontal exhaustion could not coexist with targeted tender in circumstances such as those in this case. In addition, because targeted tender was the more recent of the two doctrines and the doctrine was adopted by the court, the court should hold that targeted tender prevailed over horizontal exhaustion.
St. Paul , on the other hand, argued that the court did not need to resolve the alleged conflict between horizontal exhaustion and targeted tender because horizontal exhaustion was limited to cases involving bodily injury or property damage spanning multiple policy periods over several years of coverage.
The court specifically rejected St. Paul 's argument that horizontal exhaustion did not apply in this instance, explaining that although it was true that horizontal exhaustion originated in cases involving a continuous tort or long-term environmental and hazardous waste claims, there was no evidence that horizontal exhaustion was limited to such claims.
The court next discussed the differences between primary and excess insurance before stating that St. Paul 's umbrella policy was a “true” excess policy and that extending the targeted tender rule to require an excess policy to pay before a primary policy “would eviscerate the distinction between primary and excess insurance.”
Therefore, the court determined that the targeted tender to one of several liability insurers for defense and indemnity could be applied if concurrent primary coverage existed for additional insureds, but to the extent that defense and indemnity costs exceeded the primary limits of the targeted insurer, the deselected primary policy must answer for the loss before the insured could seek coverage under an excess policy.