10 South Riverside Plaza, Suite 1530 Chicago, Illinois 60606 312-454-5110 Fax: 312-454-6166 www.rusinlaw.com SEMINAR May 1, 2007 SELECTIVE OR TARGETED TENDERS Gregory G. Vacala Managing Partner, Civil Litigation Department Direct Line: (312) 454-5298 gvacala@rusinlaw.com
SELECTIVE OR TARGETED TENDERS TABLE OF CONTENTS I. SELECTIVE OR TARGETED TENDERS: DEFINITION... 1-2 II. THE JOHN BURNS DOCTRINE....2-5 A. Primary Insurance... 2-3 B. Selective Targeted Tenders of Excess... 3-5 General Rule...3 Horizontal vs. Vertical Exhaustion... 4-5 III. DEACTIVATING A SELECTIVE OR TARGETED TENDER...5 IV. RIGHTS OF THE TARGETED OR SELECTED CARRIERS FOR CONTRIBUTION OR SUBROGATION... 6-9 A. Distinguish: Contribution, Indemnification and Subrogation... 6-7 B. Equitable Contribution: Generally a Remedy of Primary vs. Primary; or, Excess vs. Excess... 7-8 C. Equitable Subrogation: Generally a Remedy of Excess vs. Primary... 8-9 D. The Targeted Tender Prohibits Equitable Contribution...9 V. ONLY THE INSURED CAN TARGET A TENDER... 9-10 VI. STANDARD PROVISIONS IN LIABILITY POLICIES DO NOT PREVENT A TARGETED TENDER.....11 A. Other Insurance Clause...11 B. Duty to Cooperate Clause...11 VII. TARGETED/SELECTIVE TENDERS AND EXCESS...11 ii
VIII. AVOIDING WAIVER OF CONTRIBUTION OF SUBROGATION RIGHTS... 11-14 iii
I. SELECTIVE OR TARGETED TENDERS: DEFINITION A selective or targeted tender is an insured s right to pick and choose which of its insurers will be required to defend and indemnify it. The selective tender rule, as recognized by Illinois courts, gives an insured covered by multiple concurrent policies the right to choose or select which insurer(s) will defend and indemnify it with respect to a specific claim. The insured s choice is generally from two or more co-primary policies which exist by contractual risk transfer provisions. Our courts have recognized as paramount the right of the insured to seek or not to seek an insurer s participation in a claim as the insured chooses. Institute of London v. Hartford Insurance, 234 Ill.App.3d 70 at 79, 599 N.E.2d at 1316 (1 st Dist. 1992). The courts have reasoned that an insureds fear of cancellation or premium hike justifies the ability to target a tender. For instance, in Cincinnati Companies v. West American Insurance Co., 183 Ill.2d 317, 701 N.E.2d 499, 233 Ill.Dec. 649 (1998). The court stated: It is true that an insured may choose to forgo an insurer s assistance for various reasons, such as the insured s fear that premiums would be increased, or the policy canceled, in the future. See Institute of London, 234 Ill.App.3d at 78-79. Moreover, an insured s ability to forego that assistance should be protected. 183 Ill.2d at 326, 701 N.E.2d at 503. Selective or targeted tenders also apply to excess once an insured has exhausted its concurrent primary insurance coverage. After all primary coverage is triggered, the insured may selectively tender its indemnity to concurrent excess insurers. Illinois doesn t follow vertical exhaustion. In - 1 -
Illinois, prior to a targeted tender to the excess; all primary coverage available must be exhausted. North River Insurance v. Grinnell Mutual, 369 Ill.App.3d 563, 860 N.E.2d 460 (2007). A. Primary Insurance II. THE JOHN BURNS DOCTRINE Illinois practitioners often refer to a targeted or selective tender by reference to John Burns. In John Burns Construction Co. v. Indiana Insurance Co., 189 Ill.2d 570, 244 Ill.Dec. 912, 727 N.E.2d 211 (2000), the appellant, John Burns Construction Company (Burns), entered into a subcontract with Sal Barba Asphalt Paving, Inc. (Barba), to pave a parking lot. The subcontract required Barba to maintain liability insurance for Burns. Pursuant to the contract, Barba had Burns added as an additional insured to its policy with its insurer, Indiana Insurance Company (Indiana). An individual subsequently fell in the aforementioned parking lot and alleged that his injuries occurred as a result of the parking lot being improperly paved. The individual filed suit against Burns. John Burns, 189 Ill.2d at 571. Burns initially tendered its defense to Indiana. However, Indiana refused to accept the tender. In response, Burns tendered its defense to its own insurer, Royal Insurance Company (Royal). Thereafter, Burns and Royal filed an action for a declaratory judgment that Indiana defend and indemnify Burns in the underlying action. In a counterclaim for declaratory judgment, Indiana argued Royal was required to share the defense since the Indiana policy contained an other insurance provision. Indiana requested that Royal contribute equally to the costs it incurred. John Burns, 189 Ill.2d at 571-72. - 2 -
The John Burns court determined that Burns had the right to choose which insurer would be required to defend and indemnify it in the underlying action and that there was nothing in the relevant policy which limited Burns right to make this choice (John Burns, 189 Ill.2d at 574). The court stated that it agreed with the reasoning of the decisions reached in Bituminous Casualty Corp. v. Royal Insurance Co. of America, 301 Ill.App.3d 720, 234 Ill.Dec. 916, 704 N.E.2d 74 (1998); and Alcan United, Inc. v. West Bend Mutual Insurance Co., 303 Ill.App. 3d 72, 236 Ill.Dec. 560, 707 N.E.2d 687 (1999), which involved other insurance clauses. Quoting from the Alcan United decision, the John Burns court stated: Thus, in accordance with Bituminous Casualty and Institute of London, we hold an other insurance clause in a policy will not automatically reach into coverages provided under other policies merely because such other policies are in existence. The insured still must be given the right to determine whether it wishes to invoke its rights to such other coverages before those coverages become accessible under the other insurance provision of a triggered policy. John Burns, 189 Ill.2d at 577-78, quoting Alcan United, 303 Ill.App.3d at 81. B. Selective Targeted Tenders of Excess General Rule Questions often arise as to whether an insured may target both primary and excess policies. For example, an insured has primary coverage with A, B & C insurers and excess with X, Y & Z. May the insured demand that B & Y are triggered to the exclusion of A & C, X & Z? The answer is that it depends on whether the jurisdiction follows vertical or horizontal exhaustion. Illinois applies horizontal exhaustion. Illinois law does not allow vertical exhaustion. North River Insurance Co. v. Grinnell Mutual, 369 Ill.App. 563, 860 N.E.2d 460, 307 Ill.Dec. 806 (2006). Horizontal vs. Vertical Exhaustion - 3 -
Horizontal exhaustion involves an insured who has multiple primary and excess policies covering a common risk. If a covered claim occurs, the theory of horizontal exhaustion requires the insured to exhaust all primary policy limits before invoking excess coverage. In contrast to horizontal exhaustion, vertical exhaustion allows an insured to select coverage from an excess insurer as long as the insurance policies immediately beneath that excess policy, as identified in the excess policies declaration page, have been exhausted, regardless of whether other primary insurance may apply. As to the basis for the application of horizontal exhaustion, Illinois law draws a clear distinction between primary and excess umbrella insurance policies. Travelers Indemnity Co. v. American Casualty Co. of Reading, 337 Ill.App.3d 435, 439-40, 786 N.E.2d 582, 272 Ill.Dec. 43 (2003); New Hampshire Insurance Co. v. Hanover Insurance Co., 296 Ill.App.3d 701, 705, 696 N.E.2d 22, 231 Ill.Dec. 293 (1998); American Country Insurance Co. v. Hanover Insurance Co., 293 Ill.App.3d 1025, 1032, 689 N.E.2d 186, 228 Ill.Dec. 314 (1998); Illinois Emcasco Insurance Co. v. Continental Casualty Co., 139 Ill.App.3d 130, 134, 487 N.E.2d 110, 93 Ill.Dec. 666 (1985). An umbrella policy is unique in that it always remains excess over and above other contracts with few exceptions and thus could not be activated until all primary coverage is exhausted. Illinois Emcasco, 139 Ill.App.3d at 133-34. Based on prior authority from the appellate and supreme courts, Illinois declines to apply the vertical exhaustion rule. It holds that the selective tender rule should be applied to circumstances where concurrent insurance coverage exists for additional insureds. See American National Fire Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, 343 Ill.App.3d 93, 109, 796 N.E.2d 1133, 277 Ill.Dec. 767 (2003), (Quinn, J., specially concurring) ( [T]he targeted tender rule should be limited to instances involving parties which are additional insureds under concurrent - 4 -
primary policies ). To the extent that defense and indemnity costs exceed the primary limits of the selected insurer, the deselected insurer or insurers primary policies must answer for the loss prior to invoking coverage under an excess policy. The selective tender rule is properly limited to concurrent insurance coverage. Kajima and Tokio Marine Insurance v. St. Paul, 368 Ill.App.3d 665, 856 N.E.2d 452, 2006 Ill.App.LEXIS 837; 305 Ill.Dec. 647. III. DEACTIVATING A SELECTIVE OR TARGETED TENDER An insured may deactivate a tender with an insurer previously selected for purposes of invoking coverage with another insurer. In Alcan United, Inc. v. West Bend, 303 Ill.App.3d 72, 236 Ill.Dec. 560, 707 N.E.2d 687 (1999), the court also held that the insured s right to choose encompasses the right to deactivate coverage with an insurer previously selected for purposes of invoking exclusive coverage with another insurer. Alcan United, 303 Ill.App.3d at 82. Furthermore, the court in Richard Marker Associates v. Pekin Insurance Co., 318 Ill.App.3d 1137, 1143-44, 252 Ill.Dec. 922, 743 N.E.2d 1078 (2001), relying on the decision reached in Alcan United, also determined that an insured, who had tendered his defense to two insurers, had the right to subsequently withdraw ( deactivate ) his tender from one insurer and forego its coverage. Richard Marker, 318 Ill.App.3d at 1143-44. See also: Legion Insurance v. Empire Fire, 354 Ill.App 3d 699 (2004). - 5 -
IV. RIGHTS OF THE TARGETED OR SELECTED CARRIERS FOR CONTRIBUTION OR SUBROGATION Advice is often requested from selected or targeted insurers as to their rights against the nontargeted carriers who have policies providing coverage. Generally the targeted carrier is the carrier provided under the contract. The non-targeted carrier is the insured s own carrier. A. Distinguish: Contribution, Indemnification and Subrogation The terms contribution, indemnification and subrogation are often used interchangeably, but there are distinct differences between them. 15 Couch on Insurance 3d 217:5 (rev. 2004). The remedies of contribution and indemnity are mutually exclusive, and contribution is prohibited where a party has a right to indemnity. 18 C.J.S. Contribution 26, at 30 (1990). Contribution as it pertains to insurance law is an equitable principle arising among coinsurers which permits one insurer who has paid the entire loss, or greater than its share of the loss, to be reimbursed from other insurers who are also liable for the same loss. Cincinnati Cos. v. West American Insurance Co., 183 Ill.2d 317, 322, 701 N.E.2d 499, 233 Ill.Dec. 649 (1998); Royal Globe Insurance Co. v. Aetna Insurance Co., 82 Ill.App.3d 1003, 1005, 403 N.E.2d 680, 38 Ill.Dec. 449 (1980); 15 Couch on Insurance 217:5 (rev. 2004). Contribution applies to multiple, concurrent insurance situations and is only available where the concurrent policies insure the same entities, the same interests, and the same risks. Royal Globe, 82 Ill.App.3d at 1005; 15 Couch on Insurance 3d 218:3 (rev. 2004). These elements must be met before the insurance can be considered concurrent or double. 15 Couch on Insurance 3d 218:3 (rev. 2004). Accordingly, when two insurers cover - 6 -
separate and distinct risks there can be no contribution among them. 15 Couch on Insurance 3d 218:3 (rev. 2004). In contrast to contribution, subrogation and indemnification are devices for placing the entire burden for a loss on the party ultimately liable or responsible for it and by whom it should have been discharged. 15 Couch on Insurance 3d 217:5 (rev. 2004). Indemnification differs from subrogation in that the entity seeking indemnification does so in its own right, while in the latter the subrogee succeeds to another s right to payment. 15 Couch on Insurance 3d 217:5 (rev. 2004). It is well settled that the doctrine of equitable contribution is not applicable to primary/excess insurer issues. River City, 325 Ill.App.3d at 274 (it is well established that excess insurers cannot seek equitable contribution from primary insurers); Schal Bovis, 315 Ill.App.3d at 363 (same); Home Insurance v. Cincinnati Insurance, 213 Ill.2d 307, 821 N.E.2d 269 (2003); Home Indemnity Co. v. General Accident Insurance Co. of America, 213 Ill.App.3d 319, 321, 572 N.E.2d 962, 157 Ill.Dec. 498 (1991); United States Fidelity & Guaranty Co. v. Continental Casualty Co., 198 Ill.App.3d 950, 955, 556 N.E.2d 671, 145 Ill.Dec. 53 (1990); Reliance National Indemnity Co. v. General Star Indemnity Co., 72 Cal. App.4 th 1063, 1078, 85 Cal.Rptr.2d 627, 635 (1999); 15 Couch on Insurance 3d 218:7 (rev. 2004). This is because by definition the policies do not cover the same risks the protections under the excess policy do not begin until those of the primary policy cease. Home Indemnity, 213 Ill.App.3d at 321; United States Fidelity & Guaranty, 198 Ill.App.3d at 955. B. Equitable Contribution: Generally a Remedy of Primary vs. Primary; or, Excess vs. Excess In insurance law, the principle of equitable contribution permits an insurer which has paid the entire loss to recover reimbursement from other insurers who are also liable for the loss. - 7 -
Cincinnati Cos. v. West American Ins. Co., 183 Ill.2d 317, 322, 701 N.E.2d 499 (1998); Institute of London Underwriters v. Hartford Fire Ins., 234 Ill.App.3d 70, 73, 599 N.E.2d 1311 (1 st Dist. 1992); Royal Globe Ins. Co. v. Aetna Ins. Co., 82 Ill.App.3d 1003, 1005, 403 N.E.2d 680 (1980). In addition, authority exists for the proposition that an insurer cannot bring an equitable contribution action until it has paid the claim or debt. Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill.App.3d 70, 78, 599 N.E.2d 1311 (1 st Dist. 1992) [payment of the debt to the third party claimant is prerequisite to the right of bringing an action for equitable contribution]; Providence Washington Ins. Co. v. American Bridge, 200 Ill.App.3d 597, 600, 558 N.E.2d 396 (1990). C. Equitable Subrogation: Generally a Remedy of Excess vs. Primary The elements of an equitable subrogation claim in Illinois are as follows: (1) the defendant carrier must be primarily liable to the insured for a loss under a policy of insurance, (2) the plaintiff carrier must be secondarily liable to the insured for the same loss under its policy, and (3) the plaintiff carrier must have discharged its liability to the insured and at the same time extinguished the liability of the defendant carrier. 345 Ill.App.3d at 44, citing North American Insurance Co. v. Kemper National Insurance Co., 325 Ill.App.3d 477, 481, 758 N.E.2d 856, 259 Ill.Dec. 448 (2001); State Farm General Insurance Co. v. Stewart, 288 Ill.App.3d 678, 686-87, 681 N.E.2d 625, 224 Ill.Dec. 310 (1997). A subrogation action brought by an excess insurer against a primary insurer is completely distinct from a contribution action. The elements necessary to maintain a contribution action focus prospectively on the risk that the parties set out to cover. For a coinsurer to recover, it must have insured the identical risk. In contract, a subrogation claim only requires that the secondary insurer - 8 -
insure the same loss as the primary insurer. This requirement looks retrospectively at the loss suffered. D. The Targeted Tender Prohibits Equitable Contribution A question is often asked us as to whether the selected or targeted insurer may seek contribution from other insurers who have not been selected or targeted. The general answer is no. The insurance company which the insured did not select may not be sued by the targeted carrier. In John Burns Construction Co. v. Indiana Ins. Co., 189 Ill. 2d 570, 727 N.E.2d (2000), the Illinois Supreme Court held that an insured had the right to select which of its policies would be required to defend and indemnify it with respect to an underlying action. The court further held that the targeted carrier could not seek equitable contribution from the non-targeted carrier despite the presence of an other insurance provision in the targeted policy. V. ONLY THE INSURED CAN TARGET A TENDER The rights of a carrier against other carriers of its insured, are created by the insured when it determines which policy it requests to provide coverage. The cases allowing a targeted tender have defined it as the insured s right to select which insurer would be required to respond to a loss, or to knowingly forego an insurer s assistance. See John Burns, supra, at 574; Cincinnati Cos., supra, at 326; Bituminous Casualty Corp. v. Royal Ins. Co. of America (3 rd Dist. 1998), 301 Ill.App.3d 720, 723, 726, 704 N.E.2d, [only the insured or someone acting at the specific request of the insured can properly tender and trigger a defense]; Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill.App.3d 70. - 9 -
In recognizing this right of the insured, courts have acknowledged the insured s reason for doing so. Thus, in Bituminous Casualty Corp. v. Royal Ins. Co. of America, 301 Ill.App.3d 720, 722, 704 N.E.2d 74, the court noted that the general contractor/insured s procedure of shifting the risk to its subcontractors insurers allowed the general contractor to minimize its own loss history and to maintain lower premiums. Similarly, in Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill.App.3d 70, 78-79, the court noted that the insured s actions were not arbitrary, whimsical or vindictive as the insured had bargained with a contractor to be an additional insured on the contractor s policy for the project and [the insured] may well have feared that if the loss were attributed to its policy with Hartford the result might be a rise in premiums or cancellation of its policy. This factor alone suggests the insured ought to have the right to seek or not seek an insurer s participation in a claim as the insured chooses when more than one carrier s policy covers the loss. Thus, reviewing courts have held that only the insured or someone acting at the specific request of the insured (i.e. insurer with insured authority) can properly make a targeted tender. Bituminous Casualty Corp. v. Royal Ins. Co. of America, 301 Ill.App.3d 720, 726, 704 N.E.2d 74; Institute of London Underwriters, supra, 234 Ill.App.3d at 75-76, [coverage cannot be triggered by a tender from a rival insurer which contravenes the insured s wishes]. Although a targeted tender may be made by someone other than the insured, a tender letter from the insured itself or an affidavit by the insured would provide the best evidence that the targeted tender is, in fact, being made by the insured or with its authorization. VI. STANDARD PROVISIONS IN LIABILITY POLICIES DO NOT PREVENT A TARGETED TENDER - 10 -
A. Other Insurance Clause The other insurance provision in a policy does not itself overcome an insured s right to tender the defense of an action to one insurer alone. John Burns, supra, 189 Ill.2d at 578. B. Duty to Cooperate Clause The typical duty to cooperate clause does not change the rule that the insured may select which insurer will provide the defense. The insured s duty to cooperate does not extend to being required to tender its defense to other insurers. Employers Ins. of Wausau v. James McHugh Construction Co., 144 F.3d 1097 (7 th Cir. 1998). VII. TARGETED/SELECTIVE TENDERS TO EXCESS Once an insured has exhausted all its concurrent primary insurance coverage, it may selectively tender its indemnity to concurrent excess insurers. North River Insurance v. Grinnell Mutual, 369 Ill.App.3d 563, 860 N.E.2d 460 (2007). (See Section II, B herein.). VIII. AVOIDING WAIVER OF CONTRIBUTION OR SUBROGATION RIGHTS To preserve its remedies of equitable contribution or subrogation, the insurer must avoid the waiver of those rights. Oftentimes, waiver can be implied by failure to assert the rights. Some simple rules for avoiding waiver include: 1. Always document all requests to your insured and its co-insurers in writing. - 11 -
2. Always elicit your insured s help in activating tenders; a tender in your own name may be useless since only the insured can activate a tender to create your contribution, indemnity and subrogation rights. 3. Always document your rights, claims, demands and tenders in all settlement and release documents where you are funding now by payment for your insured but preserving your rights against co-insurers. 4. Know the content and coverage of your policy for purposes of all communications. (For instance, in Home Insurance v. Cincinnati Insurance, 213 Ill 2d 307, 821 N.E. 2d 269 (2004) the court found an excess carrier primary where the excess did not realize its own policy contents.) 5. When dealing with co-insurers, never guess, speculate or surmise on the contents of their policy and its interaction with your policy. (See: Home Insurance.) If you are in doubt, demand in the alternative, e.g. some sample language in letters between insurers: (1.) You did not send me your policy. Assume it has a provision similar to ISO #. If I am correct, your coverage has been triggered and you are responsible to share 50/50 with our company. We paid the entire $500,000 loss. You owe us reimbursement of $250,000. (2.) You did not send me your policy. I am the excess carrier. I paid $5,000,000 and in the process also paid your primary limit of $1,500,000. You owe us reimbursement of $1,500,000. 6. Object to the reasonableness of any settlement made without your participation Waiver arises from an affirmative act, is consensual, and consists of an intentional relinquishment of a known right. Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 396, 620 N.E.2d 1073, 189 Ill.Dec. 756 (1993). A waiver may be either expressed or - 12 -
implied, arising from acts, words, conduct, or knowledge of the insurer. Crum & Forster Managers Corp., 156 Ill.2d at 396; Western Casualty & Surety Co. v. Brochu, 105 Ill.2d 486, 499, 475 N.E.2d 872, 86 Ill.Dec. 493 (1985). An implied waiver arises when conduct of the person against whom waiver is asserted is inconsistent with any intention other than to waive it. Liberty Mutual Insurance Co. v. Westfield Insurance Co., 301 Ill.App.3d 49, 53, 703 N.E.2d 439, 234 Ill.Dec. 578 (1998). Where there is no dispute as to the material facts and only one reasonable inference can be drawn, it is a question of law as to whether waiver has been established. Liberty Mutual, 301 Ill.App.3d at 53. The failure of a paying insurer to reserve its rights against a nonpaying insurer may constitute a waiver of the right to equitable remedies. 15 Couch on Insurance 3d 218:32 (rev. 2004). An insurer desiring to reserve its rights against a second insurer must make this position clear in its correspondence with the second insurer; it is also considered good practice to include such reservation language in any settlement agreement or order, then provide a copy of it to the nonsettling insurer. 15 Couch on Insurance 3d 218:32 (rev. 2004). An insurer by its conduct may waive rights against another insurer. An insurer is presumed to know the contents of its own policy and if it is excess or primary. If it assumes a claim, e.g., for another insurer, premised on the existence or absence of a clause it must so assert same. Home Insurance v. Cincinnati Insurance, 213, Ill.2d 307, 821 N.E.2d 269 (2004). The totality of Home s conduct was inconsistent with any claim that it would seek full reimbursement for the Fisher settlement from Cincinnati. Home accepted Allied s defense without a specific reservation of rights and without asserting that it was an excess insurer. Instead, it only asserted that it would share in the cost of Allied s defense and indemnity with Western on a 50/50 basis. Moreover, Home only sought $300,000 from Cincinnati at the time of the settlement, not the full amount. It also never asserted that it was an excess insurer at the time of settlement. - 13 -
In Liberty Mutual, the nonsettling insurer waived the right to contest the reasonableness of the settlement where it did not indicate that it was concerned about the reasonableness of the settlement at the time it was made. Liberty Mutual, 301 Ill.App.3d at 53. Selective or Targeted Tenders 5-1-07 Seminar (00544089.DOC) - 14 -