Litchfield Cavo LLP

In Illinois, whenever an insured has the luxury of being concurrently covered under two or more separate insurance policies for the same occurrence, that insured may choose which policy it wants to respond and "target" its tender of defense to that carrier. This has most frequently happened in the context of construction site bodily injury claims, but the practice has potential application to any situation in which an entity can claim concurrent coverage under more than one policy – either because the entity qualifies as an "additional insured" under a policy that it did not purchase, or because it happened to purchase two or more policies that provide overlapping coverage.

1. The Institute of London Decision

A "targeted tender" was first recognized in Institute of London Underwriters v. Hartford Fire Insurance Co., 234 Ill. App. 3d 70, 599 N.E.2d 1311 (1st Dist. 1992). There, Great Lakes Towing Company was covered as a named insured under its own Hartford policy and as an additional insured under an Institute of London policy. The Illinois Appellate Court held that Institute of London was not entitled to seek contribution from Hartford for one half of a settlement it paid on behalf of Great Lakes. The court found that Great Lakes did not tender the defense of the personal injury lawsuit to Hartford, though it had provided notice, since Great Lakes had specifically told Hartford’s adjuster that it did not want Hartford to indemnify the settlement. Institute of London, 599 N.E.2d at 1313. In recognizing an insured’s right to choose between two insurers whose policies each provide coverage, the court noted certain interests an insured may wish to protect by targeting only one insurer – including the interest in reducing future premiums and optimizing loss history. Id., 599 N.E.2d at 1316.

2. "Other Insurance" Provisions Do Not Defeat Targeted Tenders

After Institute of London, "targeted" insurers attempted to avoid the "target" by seeking contribution from the other carrier that provided concurrent coverage through enforcement of "other insurance" provisions. However, this tactic was expressly disallowed in Bituminous Casualty Corp. v. Royal Insurance Co., 301 Ill. App. 3d 720, 704 N.E.2d 74 (3rd Dist. 1998). The Bituminous Casualty appellate court held that the insured could select one insurer to provide its defense and indemnification. The chosen insurer, Bituminous Casualty, could not seek equitable contribution from the other insurer, Royal Insurance, which was not designated by the insured. Bituminous Casualty, 704 N.E.2d at 76-77. In reaching that conclusion, the court rejected Bituminous’ argument that the "other insurance" clauses found in both policies mandated contribution by both insurers stating: "It is only when an insurer’s policy is triggered that the insurer becomes liable for the defense and indemnity costs of a claim and it becomes necessary to allocate the loss among co-insurers. The loss will be allocated according to the terms of the "other insurance" clauses, if any, in the policies that have been triggered. As discussed above, Royal’s policy was not triggered and its obligation to defend and indemnify Johnson Construction… was excused by the targeted tender to Bituminous." Id., 704 N.E.2d at 79.

3. Insured Must Knowingly Foregoing Coverage

An insured must "knowingly forego" one available coverage in order to effectively "target" its tender of defense exclusively to the other available concurrent coverage. In Dearborn Insurance Co. v. International Surplus Lines Insurance Co., 308 Ill. App. 3d 368, 719 N.E.2d 1092 (1st Dist. 1999), the insured was covered under both its own policy with ISLIC and as an additional insured under a co-defendant’s policy with Dearborn. The co-defendant had already requested that Dearborn defend both insureds. Thus, a "targeted tender" to Dearborn was being attempted. However, the insured also provided notice to its own insurer, ISLIC. Dearborn, 719 N.E.2d at 1094. The appellate court concluded that this notice letter was enough to trigger ISLIC’s duty to defend even though the insured did not specifically request a defense. Id., 719 N.E.2d at 1097. Moreover, the court held that the insured did not "knowingly forego" a defense by ISLIC because it did not specifically tell its ISLIC not to defend the action against it, rather it left the decision to ISLIC. Id.

4. Deactivation of Tender of Defense

Illinois appellate courts have expanded the concept of "targeted tender" to hold that if an insured discovers that it has additional coverage from a second insurer in the course of the lawsuit against it, the insured may "deactivate" its original tender and "de-select" the insurer it originally targeted, in favor of the newly-discovered insurer. In Alcan United, Inc. v. West Bend Mutual Insurance Co., 303 Ill. App. 3d 72, 707 N.E.2d 687 (1st Dist. 1999), Alcan initially tendered its defense of a personal injury suit to its own insurer, Reliance, before it discovered that it also had coverage as an additional insured under a West Bend policy issued to a co-defendant. Alcan then attempted to "deactivate" its tender to Reliance and target West Bend alone to defend and indemnify it. The court concluded that an insured should be permitted to deactivate coverage "when the deactivation occurs upon the discovery of other coverage not known to have been in existence at the time the first tender took place." Alcan, 707 N.E.2d at 695.

5. "Anti-Target" Cooperation Clauses

The only limitation to a "targeted tender" recognized to date was announced in the case of American Country Ins. Co. v. Kraemer Brothers, Inc., 298 Ill. App. 3d 805, 699 N.E.2d 1056 (1st Dist. 1998). In that case, the "targeted" insurer’s policy contained a cooperation clause that required any named insured or additional insured to tender the defense of a claim to "any other insurer which also has available insurance." Kraemer Brothers, 699 N.E.2d at 1060. When the additional insured failed to tender the defense of the claim to its own carrier, American Country denied the "targeted tender" on the ground that the additional insured breached this cooperation clause. The additional insured argued that such a requirement was against the public policy recognized in Institute of London and limited its freedom to select which insurer it wanted to defend. The appellate court sided with the insurance company and held that such a requirement in a cooperation clause was enforceable and was not against public policy. Id., 699 N.E.2d at 1061. Especially helpful to the court’s decision was the fact that this particular policy language was included in endorsement forms that had been accepted by the Illinois Department of Insurance. Id.

6. The Illinois Supreme Court Endorses Targeted Tender

All of the above cases were decided by Illinois appellate courts. It was not until 1998 that the Illinois Supreme Court generally endorsed the practice of "targeted tender" in Cincinnati Companies v. West American Insurance Co., 183 Ill. 2d 317, 701 N.E.2d 499 (1998). However, the comments in the Cincinnati Companies case were not necessary to the court’s decision and were essentially dicta. Only recently came guidance from the top court in the January 21, 2000 decision in John Burns Construction Co. v. Indiana Insurance Co., 189 Ill.2d 570, 727 N.E.2d 211 (2000). There, John Burns Construction was insured under its own liability policy issued by Royal and was also an additional insured under a policy issued by Indiana to a subcontractor. Burns tendered its defense to its subcontractor, and asked that Indiana defend and indemnify it for the personal injury claim. Burns specifically advised Royal, its own insurer, that it did not want Royal to become involved in the suit. Indiana argued that it was entitled to contribution from Royal under the terms of the Indiana policy’s "other insurance" clause. The Illinois Supreme Court held that the "other insurance" clause in Indiana’s policy could not overcome the insured’s right, under Institute of London, to "target" one insurer to defend and indemnify it. The court agreed with the holdings of Bituminous Casualty and Alcan, and concluded: "Indiana may not take advantage of the other insurance provision in its policy. The insurance provided to Burns by Royal was not "available," in the language of the other insurance provision, for Burns had expressly declined to invoke that coverage." John Burns, 727 N.E.2d at 217.

7. Remaining Uncertainties About Targeted Tenders

While there is now a substantial body of Illinois case law regarding the practice of targeted tenders, uncertainties remain. First, there has not been a case decided to date in which an insured "deactivated" its tender to one insurer in favor of another after knowingly seeking coverage from both insurers. The Alcan decision suggests that if an insured knows what coverage it has, and decides to tender its defense to more than one of its insurers, it will not be allowed to later target just one of those insurers and release the other one. In those circumstances, the right of each insurer to equitable contribution from the other may remain intact.

Second, there has not been a case decided to date in which an insured attempted to target its tender of defense of a continuing bodily injury or property damage claim with consecutive coverage. As mentioned above, all of the cases discussing targeted tenders of defense have done so where there was concurrent coverage. In consecutive coverage cases in which there is a continuing damage/injury claim, an Illinois court would have to reconcile the "targeted tender" doctrine with the established doctrine of "horizontal exhaustion" in which all triggered primary coverage must be exhausted before an excess policy responds. See Outboard Marine Corp. v. Liberty Mutual Ins. Co., 283 Ill. App. 3d 630, 283 N.E.2d 740 (2nd Dist. 1996). Any excess carrier directly above a "targeted" primary carrier could potentially avoid coverage based on the insured’s failure to "horizontally exhaust" all available coverage or the excess carrier could potentially forestall the attempted target and force the insured to trigger all available primary coverage.

Third, the Illinois Supreme Court has not passed on the enforceability of "anti-target" cooperation clauses like the one found in the intermediate level Kraemer Brothers decision. To the extent that John Burns holds that a non-targeted policy is not "available", it seems to call into question the applicability of a cooperation clause that requires the insured to tender the defense of a claim to any other "available" insurance. The potential for circular reasoning exists and has raised some debate over the implication of the omission of any reference to Kraemer Brothers in the John Burns decision. Compare, Nuts & Bolts of Insurance Coverage Litigation: The Elusive Duty to Defend, CBA Record, May 2000; with a direct response thereto in Letters to the Editor, CBA Record, June 2000.

Fourth, is the possible wavier implications to an insured that targets its tender to only one carrier while, as required under Dearborn, "knowingly foregoing" coverage. If that insured subsequently decides that it wants to expand its tender of defense to include another carrier – perhaps because the value of the claim is reassessed to be greater than the limits of liability of the targeted carrier – could the subsequent carrier successfully argue that the insured has waived its right to present a claim? If the waiver argument is not successful, this subsequent carrier could face potential prejudice from the previously targeted carrier’s handling of the defense.

Lastly, there is a question as to whether this body of Illinois case law will be persuasive in other states as insureds attempt targeted tenders of defense in similar situations. See Attorneys Liability Protection Soc. v. Reliance Ins. Co., 117 F.Supp. 1114, 1121 (D. Kan. 2000) (recognizing the doctrine of targeted tenders of defense and citing the body of Illinois case law, but declining to rule on any issues).

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