Targeted Tenders

By Thomas J. Keevers

The term "targeted tender" refers to a policyholder’s right, where the policy holder is covered by more than one insurance policy, to choose a particular insurance company to defend and indemnify the policyholder in a law suit, to the exclusion of other insurance companies. Targeted tenders usually arise in construction injury cases, where the owner and general contractor, in addition to their own insurance, are also named as insureds under the policies of one or more of the subcontractors.

Illustration. Let’s say General Contractors, Inc. hires Plumb Steel Erectors, Inc. to erect steel at its construction site. One of Plumb’s iron workers is injured when he trips over a wire which was left exposed across a walkway by an employee of the electrical contractor, Buzz Electric. Buzz Electric claims it left the wire exposed at the direction of the cement finisher, Smooth-Out, Inc., who was behind in its work. The iron worker sues three entities: Buzz, Smooth-Out, and General. (He cannot sue Plumb, because he is barred by the Illinois Workers’ Compensation Act.)

Before the work began, General required each of the subcontractors to provide it with a certificate of insurance, naming General as an additional insured under the subcontractors own insurance policies. General is therefore covered under four policies: its own, plus those of Plumb, Buzz, and Smooth-Out. But General would like to protect its own loss history, and to keep its premiums to a minimum, so instead of tendering the defense to its own insurance carrier, it tenders to the subcontractors’ carriers.

Now the effect of this “targeted tender” on the subcontractors’ carriers is that they are stuck with defending General and cannot seek contribution from General’s own carrier, even though that carrier covers General for the same risk.

The seminal Illinois case, Institute of London Underwriters v. Hartford Fire Insurance Companies, 234 Ill.App.3d 70, decided in 1992, was the first to recognize the right of a policy holder to choose which insurance carrier it wanted to defend him, and to exclude his own carrier. At the time the Institute case was decided, it was generally believed that it would not have wide application because of a rather peculiar circumstance: the Institute of London Underwriters’ policy contained no “other insurance” clause—that is, no provision which would allow the insurance carrier to look to other insurance coverage in force to spread the loss.

Eventually the Illinois Supreme Court settled the matter in two cases: John Burns Construction Company v. Indiana Insurance Company, 189 Ill.2d 570, 727 N.E.2d 211 (2000); and Cincinnati Companies v. West American Insurance Company, 183 Ill.2d 317, 701 N.E.2d 499 (1998.) Those cases affirmed the right of the policy holder to make a targeted tender, regardless of what the “other insurance” clauses of the respective policies said. The court held that an insurance company cannot avail itself of “other insurance” unless that “other insurance” coverage is “triggered” by the policy holder. The court in Burns reasoned that insurance under another policy is “not available” to a carrier which seeks to employ the “other insurance” clause of its own policy until the insured expressly invokes the coverage of that other policy. Put another way, only the insured has a right to invoke the coverage of a policy and until that is done that policy has not been “triggered” for the “other insurance” clause to apply.

However, because Illinois law has always drawn a clear distinction between primary insurance and excess/umbrella insurance, the targeted tender rule applies differently where excess policies are concerned. An insured cannot make a targeted tender to an excess carrier until all primary policies available to him are exhausted, and that includes a carrier to whom he chose not to tender the claim. In other words, the excess carrier has no duty to contribute to the claim until all primary insurance is exhausted, including the carrier whose coverage has not been “triggered” by the insured. This is known as “horizontal exhaustion:” the coverage of all primary carriers, being on the same level, must pay their policy limits before any excess carrier is required to pay at all. Kajima Construction Services, Inc., v St. Paul Fire and Marine Insurance Company, 856 N.E.2d 452, 305 Ill. Dec. 647 (2006).

However, in a case where all primary coverage is in fact exhausted, the targeted tender rule applies among excess carriers in the same way as it applies to primary carriers. The insured has a right to choose which excess coverage he wishes to trigger. North Riverside Insurance Company v. Grinnell Mutual Reinsurance Company, - - -N.E.2d - - -, 2006 WL 3545139 (Ill. App. First Dist.,12-8-06).

• A targeted tender can only be made by the policy holder. One insurance company cannot target another insurance company.
• An insured making a targeted tender must comply with the notice provisions of the targeted insurer’s policy. Thus, where notice wasn’t given to the targeted carrier until three years after suit was filed, the insurer had no duty to provide coverage. American National Fire Insurance Company v. National Union Fire Insurance company, 343 Ill.App.3d 93, 796 N.E.2d 1133 (2003).
• But, actual notice to the carrier is sufficient to trigger a duty to defend a policy holder. Thus, even notice by the plaintiff’s attorneyto the carrier is deemed sufficient. Note, however, this duty is owed only to the insured; actual notice does not trigger a right in a targeted insurance company to seek contribution from another carrier, unless the policy holder actually avails himself of the triggered coverage.
• Notice to another insured, however, is not notice to the carrier. Thus where a general
• contractor tendered the defense to its subcontractor, intending it to be passed on to the subcontractor’s insurance company, the tender was deemed insufficient where the subcontractor did not in fact notify the carrier. American National Fire Insurance Company v. National Union Fire Insurance company, 343 Ill.App.3d 93, 796 N.E.2d 1133 (2003).
• Where an insured tendered its defense to two insurance carriers, his subsequent withdrawal of his tender from one carrier was deemed proper. Richard Marker Associates v. Pekin Insurance Company, 318 Ill.App.3d 1143.
• A condition in an insurance policy requiring an insured to also tender the defense of any claim to any other insurer which has insurance coverage is a valid, enforceable provision. American Country Insurance Company v. Kraemer Brothers, Inc., 298 Ill.App.3d 805, 699 N.E.2d 1056 (1998).
• Does the SIR (Self-Insured Retention) of the “targeted” policy apply to the additional insured’s coverage? It depends on the wording of the policy. Where, for example, the SIR endorsement states: “You will be responsible for the payment of the Retention Amount,” and “you” is defined as the “named insured,” the SIR will not apply to the additional insured. American National Fire Insurance Company v. National Union Fire Insurance Company, 343 Ill.App.3d 93, 796 N.E.2d 1133 (2003).
• Excess Carriers: Even where a targeted tender is made, the coverage of all primary carriers, including non-targeted carriers, must be exhausted before an excess carrier has a duty to contribute. In other words, if a carrier whose coverage would otherwise be available does not exhaust its limits in payment of the claim, an excess insurer has no duty to contribute payment. Kajima Construction Services, Inc., v St. Paul Fire and Marine Insurance Company, 856 N.E.2d 452, 305 Ill. Dec. 647 (2006).
• Where all primary coverage has been exhausted, the rules of targeted tenders also apply to excess carriers. American National Fire Insurance Company v. National Union Fire Insurance company, 343 Ill.App.3d 93, 796 N.E.2d 1133 (2003).