Kajima Construction Services, Inc. v. St. Paul Fire and Marine Insurace Co.

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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