Kajima Construction Services, Inc. v. St. Paul Fire and Marine Insurace Co. , 368 Ill. App. 3d 665 ( 2006 )

SIXTH DIVISION
September 15, 2006
No. 1-05-1248
KAJIMA CONSTRUCTION SERVICES, ) Appeal from the
INC., AND TOKIO MARINE AND FIRE ) Circuit Court
INSURANCE COMPANY, ) of Cook County.
)
Plaintiffs-Appellants, )
)
v. ) No. 02 CH 4614
)
ST. PAUL FIRE AND MARINE INSURANCE ) Honorable
COMPANY, ) Mary Ann Mason,
) Judge Presiding.
Defendant-Appellee. )
)
JUSTICE O'MALLEY delivered the opinion of the court:
General contractor Kajima Construction Services (Kajima) and
its insurer, Tokio Marine and Fire Insurance Co. (Tokio)
(hereinafter plaintiffs), brought a declaratory judgment action
against its subcontractor's insurer, St. Paul Fire and Marine
Insurance Company (St. Paul), seeking reimbursement of a $1
million contribution by Tokio to indemnify Kajima in an
underlying personal injury lawsuit. Cross-motions for summary
judgment were filed by the parties. The circuit court granted
summary judgment in favor of defendant and against plaintiffs.
Plaintiffs appeal the judgment of the circuit court arguing that
it erred in holding that all primary insurance policies had to be
exhausted prior to reaching any excess insurance policies. For
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the reasons that follow, we affirm the judgment of the circuit
court.
BACKGROUND
In December 1997, Kajima entered into a construction
contract with Midwestern Steel Fabricators, Inc. (Midwestern),
for a building project in Glendale Heights, Illinois. Pursuant
to the contract, Midwestern was to obtain and maintain commercial
general liability insurance coverage with $1 million of primary
coverage and $5 million of umbrella coverage. Kajima was to be
named as an additional insured on Midwestern's policy.
Midwestern subsequently provided Kajima with a certificate of
insurance reflecting primary coverage limits of $2 million and $5
million in excess coverage issued by St. Paul to Midwestern,
naming Kajima as an additional insured.
During the construction project, Thomas Jones, an employee
of Midwestern’s subcontractor, was seriously injured.1 On
February 2, 1998, Jones filed a personal injury suit against
Kajima and Midwestern alleging that his injuries were a result of
their negligence. On March 3, 1998, Kajima made a "targeted
tender" to Midwestern and St. Paul wherein it notified them that
it expected to be defended and indemnified by St. Paul in the
1
Midwestern had subcontracted a portion of its obligation
under the contract between it and Kajima to Up Rite Steel
Company, which employed Jones.
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Jones action. Kajima subsequently renewed its targeted tender to
St. Paul on May 11, 1998, and June 4, 1998. St. Paul ultimately
agreed to defend Kajima under a reservation of rights on August
15, 2000.2
Prior to trial, Tokio demanded that St. Paul settle the
lawsuit with Jones for $3 million from St. Paul’s primary and
excess insurance policies without a contribution from Tokio. St.
Paul refused. In June 2001, the Jones case settled during trial
for $3 million. St. Paul paid its primary limits of $2 million
and Tokio contributed its primary limits of $1 million to satisfy
the settlement award. Plaintiffs, however, filed a declaratory
judgment action against St. Paul, seeking reimbursement of
Tokio’s contribution to the settlement. Plaintiffs argued that
Tokio was not responsible for defending or indemnifying Kajima
because Kajima made a targeted tender to St. Paul for its defense
and indemnification.
Plaintiffs and defendant filed cross-motions for summary
judgment. Plaintiffs argued that St. Paul was responsible for
the defense and indemnification of Kajima without contribution
from Tokio’s primary policy pursuant to the selective tender
rule. Defendant, however, argued that although Kajima has the
2
The record reveals that Tokio undertook Kajima's defense
for a period of time prior to August 15, 2000, due to St. Paul's
failure to respond to Kajima's tender of defense.
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right to tender its defense and indemnification to one of several
insurers that potentially cover the same risk, Illinois law
requires that all primary policies be exhausted prior to reaching
a true excess policy. The circuit court agreed with defendant
and entered summary judgment in favor of defendant and against
plaintiffs.
Plaintiffs filed this timely appeal from the judgment of the
circuit court, arguing that: (1) plaintiffs’ selective tender was
properly effected; (2) the selective tender rule supercedes the
horizontal exhaustion doctrine; (3) St. Paul failed to reserve
its rights under the Jones settlement; and (4) the two policies
cover different risks.
ANALYSIS
I. STANDARD OF REVIEW
Summary judgment is appropriate where "the pleadings,
depositions, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment
as a matter of law." 735 ILCS 5/2-1005(c) (West 2004); General
Casualty Insurance Co. v. Lacey, 199 Ill. 2d 281, 284 (2002).
We review an order granting summary judgment de novo. General
Casualty Insurance Co., 199 Ill. 2d at 284; Travelers Indemnity
Co., v. American Casualty Co., of Reading, 337 Ill. App. 3d 435,
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439 (2003).
The question squarely presented to this court is whether the
selective tender rule supercedes well-settled principles of
Illinois law regarding horizontal exhaustion. We find that it
does not and hold that the selective tender rule applies to
concurrent, not consecutive insurance coverage.
II. SELECTIVE TENDER AND EXHAUSTION DOCTRINES
The selective tender or targeted tender doctrine is a rule
recognized by Illinois courts whereby an insured covered by
multiple concurrent policies has the right to choose which
insurer will defend and indemnify it with respect to a specific
claim. John Burns Construction Co., v. Indiana Insurance Co.,
189 Ill. 2d 570, 574 (2000); Cincinnati Cos. v. West American
Insurance Co., 183 Ill. 2d 317, 326 (1998); Institute of London
Underwriters v. Hartford Fire Insurance Co., 234 Ill. App. 3d 70,
78-79 (1992). In Institute of London, this court held that when
two insurance policies potentially apply to a loss, an insured
may designate one insurer to undertake its defense and indemnity
and thereby foreclose the settling insurer from obtaining
contribution from the nonsettling insurer. Institute of London,
234 Ill. App. 3d at 78-79. Our supreme court has clearly
established an insured's right to select exclusive coverage among
concurrent primary insurance policies. John Burns, 189 Ill. 2d
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at 574; Cincinnati, 183 Ill. 2d at 326. This court and our
supreme court have also held that once an insured instructs an
insurer not to involve itself in the defense or indemnification
of a claim, that insurer " 'would then be relieved of its
obligation to the insured with regard to that claim.' "
Bituminous Casualty Corp. v. Royal Insurance Co. of America, 301
Ill. App. 3d 720, 724 (1998) quoting Cincinnati, 183 Ill. 2d at
326. The insured may choose to forego an insurer's assistance
for various reasons, including the insured's fear that premiums
would increase or that the policy would be canceled in the
future. Cincinnati Cos. v. West American Insurance Co., 183 Ill.
2d 317, 326 (1998).
An insured has the right to selectively tender its defense
and indemnification to one of several common insurers; indeed,
this "right" has even been characterized as "paramount." Legion
Insurance Co. v. Empire Fire & Marine Insurance Co., 354 Ill.
App. 3d 699, 703 (2004) (explaining that an insured has the
paramount right to choose or knowingly forego an insurer's
participation in a claim); Alcan United, Inc. v. West Bend Mutual
Insurance Co., 303 Ill. App. 3d 72, 79 (1999) (recognizing the
paramount right of the insured " 'to seek or not to seek an
insurer's participation in a claim as the insured chooses' "),
quoting Institute of London, 234 Ill. App. 3d at 79.
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Horizontal exhaustion, on the other hand, 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. See Illinois Emcasco
Insurance Co. v. Continental Casualty Co., 139 Ill. App. 3d 130,
134 (1985); United States Gypsum Co. v. Admiral Insurance Co.,
268 Ill. App. 3d 598, 652-53 (1994). In contrast to horizontal
exhaustion, vertical exhaustion allows an insured to seek
coverage from an excess insurer as long as the insurance policies
immediately beneath that excess policy, as identified in the
excess policy's declaration page, have been exhausted, regardless
of whether other primary insurance may apply. United States
Gypsum Co., 268 Ill. App. 3d at 653; see also T. Hamilton, T.
Stark, Excess-Primary Insurer Obligations and the Right of the
Insured, 69 Def. Couns. J. 315, 320-21 (July 2002).
The requirement of horizontal exhaustion has been addressed
and applied by Illinois courts on several occasions. United
States Gypsum, 286 Ill. App. 3d at 598; Outboard Marine Corp. v.
Liberty Mutual Insurance Co., 283 Ill. App. 3d 630, 642-43
(1996); Roman Catholic Diocese of Joliet, Inc. v. Lee, 292 Ill.
App. 3d 447, 456-57 (1997); Missouri Pacific R.R. Co. v.
International Insurance Co., 288 Ill. App. 3d 69, 80-81 (1997);
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Illinois Central R.R. Co. v. Accident & Casualty Co. of
Winterthur, 317 Ill. App. 3d 737, 753 (2000); Maremont Corp. v.
Continental Casualty Co., 326 Ill. App. 3d 272, 279-80 (2001).
In each case, this court held that the insured must first exhaust
all available primary insurance coverage, including uninsured
periods and self-insured periods, before an excess policy could
be invoked. No Illinois case has either applied or favorably
commented on the vertical exhaustion theory. Maremont, 326 Ill.
App. 3d at 280.
The United States Gypsum court stated:
"Adopting Gypsum's position permitting 'vertical exhaustion'
would allow Gypsum to effectively manipulate the source of
its recovery, avoiding difficulties encountered as a result
of its purchase of fronting insurance and the liquidation of
some of its insurers. This would permit Gypsum to pursue
coverage from certain excess insurers at the exclusion of
others. Such a practice would blur the distinction between
primary and excess insurance [citation] and would allow
certain primary insurers to escape unscathed when they would
otherwise bear the initial burden of providing
indemnification. Likewise, certain co-excess insurers could
avoid contributing to the indemnification of the insured
when they would otherwise be responsible for any amount up
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to the limit of the policy it issued." U.S. Gypsum, 268
Ill. App. 3d at 654.
The question, however, of whether an insured that
selectively tenders its defense and indemnification to an insurer
will be required to exhaust its primary limits and reach its
excess limits before a deselected insurer will be obligated to
contribute its primary limits has yet to be answered. In the
instant case, plaintiffs contend that it exercised its paramount
right to selectively tender its defense and indemnity to St.
Paul.3 As a result, St. Paul alone must respond to the defense
and indemnity with both its primary and excess coverage policy
limits before Tokio's primary limits are invoked. In other
words, St. Paul must vertically exhaust its primary and excess
policies as a result of Kajima's selective tender. Defendant
responds that although the selective tender rule is recognized
and applied by Illinois courts, it is applicable only to
concurrent insurance coverage and not consecutive, primary and
excess coverage policies where other primary coverage is
available. We agree.
Plaintiffs cite to Institute of London Underwriters and John
3
Although defendant argues that Kajima failed to effect a
selective tender, we need not decide whether plaintiffs'
selective tender was proper because it would not change the
outcome of this case.
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Burns for the proposition that a common insured has the right to
select which insurer it wants to provide it with a defense and
indemnification. John Burns, 189 Ill. 2d at 575 quoting,
Cincinnati Cos., 183 Ill. 2d at 326 (holding that " 'an insured
may knowingly forgo the insurer's assistance by instructing the
insurer not to involve itself in the litigation. The insurer
would then be relieved of its obligation to the insured with
regard to that claim' "); Institute of London Underwriters, 234
Ill. App. 3d at 73 (finding that a claim for equitable
contribution is defeated by an insured's instructions to its
insurer not to defend or indemnify a specific action).
Plaintiff, however, cites to no authority to support its
assertion that an excess policy may be activated by an insured
through a selective tender prior to exhausting the insured's
other primary coverage. Plaintiffs also concede that no
published case or court in Illinois has ever extended the
selective tender rule to preempt the horizontal exhaustion
doctrine and require an insurer to vertically exhaust its primary
and excess coverage limits.
Defendant contends that the selective tender rule should
only apply to concurrent insurance coverage among multiple
insurers. Specifically, defendant argues that plaintiffs'
application to excess coverage of the selective tender rule runs
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afoul of well-established principles of Illinois insurance law
recognizing differences between primary and excess coverage.
U.S. Gypsum, 268 Ill. App. 3d at 651-54; Illinois Emcasco, 139
Ill. App. 3d at 134. Defendant further contends that applying
vertical exhaustion would be tantamount to ignoring distinctions
that this court has previously recognized between primary and
excess insurance. Illinois Emcasco, 139 Ill. App. 3d at 134.
In the instant case, it is undisputed that Kajima has $3
million in primary general liability coverage available to it.
The Tokio policy provides $1 million in primary coverage to
Kajima as the named insured and St. Paul provides $2 million in
primary coverage to Midwestern, naming Kajima as an additional
insured. It is also undisputed that the umbrella policy issued
to Midwestern which also names Kajima as an additional insured is
a true excess policy. Indeed, " '[U]mbrella coverages, almost
without dispute, are regarded as true excess over and above any
type of primary coverage, excess provisions arising in regular
policies in any manner, or escape clauses.' " Illinois Emcasco,
139 Ill. App. 3d at 134, quoting 8A J. Appleman, Insurance Law
and Practice § 4906, at 348, § 4909.85, at 453-54 (1981).
Illinois law draws a clear distinction between primary and
excess umbrella insurance policies, and we will not ignore our
prior findings. Travelers Indemnity Co. v. American Casualty Co.
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of Reading, 337 Ill. App. 3d 435, 439-40 (2003); New Hampshire
Insurance Co. v. Hanover Insurance Co., 296 Ill. App. 3d 701, 705
(1998); American Country Insurance Co. v. Hanover Insurance Co.,
293 Ill. App. 3d 1025, 1032 (1998); Illinois Emcasco Insurance
Co. v. Continental Casualty Co., 139 Ill. App. 3d 130, 134
(1985). We find Illinois Emcasco to be particularly instructive
in the present case. In that case, this court recognized general
differences between primary coverage policies and umbrella
policies and took underlying policy considerations into account.
Illinois Emcasco, 139 Ill. App. 3d at 133-34. We examined the
intentions of the contracting parties, the premiums paid and the
conditions to coverage relative to both primary and excess
insurance coverage. We concluded, after construing the policy as
a whole, that 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 this court and our supreme
court, we decline plaintiffs' invitation to apply the vertical
exhaustion rule here. In our view, 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
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Pittsburgh, 343 Ill. App. 3d 93, 109 (2003), (Quinn, J.,
specially concurring) ("[T]he targeted tender rule *** should be
limited to instances involving parties which are additional
insureds under concurrent 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. We therefore hold that the circuit court
properly denied plaintiffs' motion for summary judgment and
properly limited the use of the selective tender rule to
concurrent insurance coverage.
III. OTHER ARGUMENTS
Plaintiffs also argue that defendant failed to reserve its
rights relative to the umbrella policy and, thus, cannot now
argue policy defenses to avoid indemnifying Kajima. We find this
argument to be unpersuasive and meritless. The failure of a
paying insurer to reserve its rights against a nonpaying insurer
may constitute a waiver of the right to equitable remedies. Home
Insurance Co. v. Cincinnati Insurance Co., 213 Ill. 2d 307, 326-
27 (2004), citing 15 Couch on Insurance 3d § 218:32 (rev. 2004).
Here, St. Paul did not contribute from its excess policy because
Tokio contributed $1 million to satisfy the settlement agreement.
St. Paul was not a paying insurer and, thus, it was not required
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to reserve its rights.
Plaintiffs also argue that Tokio and St. Paul insured
substantively different risks and, as a result, St. Paul is
required to vertically exhaust primary and excess policy limits
on Kajima's behalf. Although plaintiffs do not allege that the
loss at issue here was not covered by Tokio's policy, they claim
that Tokio insured Kajima against claims arising from Kajima's
work and St. Paul insured Kajima against liability arising from
Midwestern's work. Plaintiffs rely on Schal Bovis, Inc. v.
Casualty Insurance Co., 315 Ill. App. 3d 353, 363 (2000), where
we held that multiple primary insurers were not entitled to
equitable contribution when each insurer covered additional
insureds only to the extent that liability arose from work
provided by the named insured. We find plaintiffs' reliance on
Schal Bovis misplaced and their argument meritless. Plaintiffs
do not explain why vertical exhaustion is appropriate under Shal
Bovis or how this case could be applied to benefit them in the
instant case. It is undisputed that St. Paul's umbrella policy
is excess and plaintiffs concede that equitable contribution does
not apply in the context of primary and excess insurer issues.
Home Indemnity Co. v. General Accident Insurance Co., 213 Ill.
App. 3d 319, 321 (1991). Moreover, plaintiffs do not advance any
recognized legal basis for either equitable contribution or
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reimbursement. We, therefore, hold that the circuit court
properly denied this claim.
IV. WAIVER
Plaintiffs also argue, for the first time on appeal, that
public policy requires the imposition of vertical exhaustion in
this instance because plaintiffs would have been better situated
if they had no insurance because St. Paul's excess policy would
cover the loss and Kajima would not be affected. We hold that
plaintiffs waived this argument on appeal. It is well settled
that issues not raised in the trial court are deemed waived and
may not be raised for the first time on appeal. See Haudrich v.
Howmedica, Inc., 169 Ill. 2d 525, 536 (1996); Daniels v.
Anderson, 162 Ill. 2d 47, 58-59 (1994). However, waiver aside,
we find plaintiffs' argument unavailing especially when the
problem of which Kajima complains can be easily remedied by
requiring its subcontractors to increase their primary limits of
insurance coverage.
V. CONCLUSION
For the foregoing reasons, we hold that the selective tender
rule does not entitle an insured to vertically exhaust
consecutive insurance policies and deselected primary insurers
must answer for a loss before an excess insurance policy will be
activated. Accordingly, the judgment of the circuit court is
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affirmed.
Affirmed
TULLY and FITZGERALD-SMITH, JJ., concur.
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