Illinois Insurance - Illinois Supreme Court holds that (a) the doctrine of horizontal exhaustion is not limited to continuous tort or long-tail claims; and (b) the Illinois doctrine of “targeted tender” does not supersede the Illinois doctrine of “horizontal exhaustion”
Kajima Construction Services, Inc. v. St. Paul Fire & Marine Ins. Co., Docket No. 103588 (Ill. Nov. 29, 2007)
A general contractor (Kajima) and its primary insurer (Tokio) filed a declaratory judgment action against a subcontractor’s (Midwestern’s) insurer (St. Paul), which had issued both primary and excess umbrella coverage
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 procured a $2
million primary policy and a $5 million excess umbrella policy from St. Paul, each of which named Kajima as an additional insured. 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. Before trial in the underlying case, Tokio demanded that St. Paul settle the suit for $3 million, without contribution from Tokio. St. Paul
refused. The case later settled for $3 million, with St. Paul paying its $2 million primary limits and Tokio paying its $1 million primary limits.
On appeal, 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 are invoked.
On appeal to the Illinois Supreme Court, Kajima argued that “horizontal exhaustion” could not co-exist with “targeted tender” in circumstances such as those present in this case and that since “targeted
tender” was the more recent of the two doctrines, the Supreme Court should hold that “targeted tender” prevails 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” is limited to those 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. The Court stated, “[a]lthough it is true that horizontal exhaustion originated in cases involving
a continuous tort or long-term environmental and hazardous waste claims, we find no evidence that horizontal exhaustion is limited to such claims.”
Next, the Court discussed the differences between primary and excess insurance, citing extensively to Justice Freeman’s opinion in Roberts v. Northland Ins. Co., 185 Ill. 2d 262, 275 (1998). The Court determined that
the St. Paul umbrella policy was a “true excess” policy and stated that, “[e]xtending the targeted tender rule to require an excess policy to pay before a primary policy would eviscerate the distinction between
primary and excess insurance.” Consequently, the Court stated that the “better rule is that set forth by the appellate court – that targeted tender can be applied to circumstances where concurrent primary insurance
coverage exists for additional insureds, but to the extent that defense and indemnity costs exceed the primary limits of the targeted insurer, the deselected insurer or insurers’ primary policy must answer for the loss before
the insured can seek coverage under an excess policy.”