Illinois Supreme Court Limits Targeted Tenders To Excess
The Illinois Supreme Court has ruled that targeted tenders do not trump the rule of horizontal exhaustion in construction defect cases. As a result, additional named insureds must now exhaust their own primary insurance before they can reach the excess layer of additional insured coverage. The court declared that “extending the targeted tender rule to require an excess insurer to pay before a primary policy would eviscerate the distinction between primary and excess insurance.” The court ruled, therefore, that despite Kajima’s targeted tender to St. Paul after the sub’s primary exhausted, Kajima was required to exhaust its own primary insurance before St. Paul paid.
In Kajima Construction Services, Inc. v. St. Paul Fire & Marine Ins. Co., No. 103588 (Ill. November 29, 2007), a general contractor and its own insurer (Tokio Marine) sued St. Paul to recover $1 million that Tokio had contributed to a $3 million personal injury settlement. St. Paul, which had issued primary and umbrella coverage to a subcontractor that named Kajima as an additional insured, paid its $2 million primary limit but stated that its umbrella policy was excess of Kajima's own primary insurance and need therefore not contribute.
For the last several years, Illinois has followed the unique path of allowing insureds to designate the particular line of coverage under which they wish to be covered where multiple policies cover a construction claim. In most such cases, therefore, a general contractor's first line of coverage is the CGL policy issued to a subcontractor on which it is listed as an additional insured. The logical extension of this "targeted tender" theory would make the sub's umbrella policy the second line of defense. However, that analysis conflicts with the principle of "horizontal exhaustion," wherein all available primary insurance must be exhausted before an umbrella pollicy must pay. As a result, most courts have ruled that the general contractor's own CGL policy must pay after the sub's primary insurance.
In adopting the majority rule, the Illinois Supreme Court seems to have implicitly acknowledged some of the practical and doctrinal problems that result from a court making up a legal doctrine that is rooted more in a court's vision of public policy than the language of the policies themselves.
