By: Mitchell H. Frazen

Over the course of the last two years, we have discussed with several of you the body of Illinois case law known as the "Institute of London doctrine," or, as we prefer to call it, the doctrine of "targeted tender." This rule grants to insureds that have coverage under policies issued by more than one insurer the right to select which of the insurers must defend and indemnify the insured for a claim, and it allows the insured to release the other insurer from any obligation under its policy. The situation of one insured having more than one insurer for a given claim frequently arises where construction contracts require a subcontractor to include the general contractor as an additional insured under its liability policy, but the same situation can occur in many other contexts, wherever one insurer extends coverage to an additional insured that maintains its own separate liability coverage.

Under the doctrine of "targeted tender," Illinois courts hold that the "targeted" insurer to which the defense was tendered must defend and indemnify the insured. More significantly, however, Illinois courts hold that the "targeted" insurer may not obtain contribution toward the amounts it paid in defense or indemnification from the other insurer, the one that was specifically "let off the hook" by its insured. That this rule controls regardless of the operation of the two policies’ "other insurance" clauses was just confirmed by the Illinois Supreme Court in John Burns Construction Co. v. Indiana Insurance Co.,__ Ill.2d __, __ N.E.2d __ (January 21, 2000). To understand the decision in that case, some background on the development of the "targeted tender" doctrine in Illinois is required.

The Institute of London Decision

A "targeted tender" was first allowed in Institute of London Underwriters v. Hartford Fire Insurance Co., 234 Ill.App.3d 70, 599 N.E.2d 1311 (1st Dist. 1992). In that Illinois appellate court decision, Institute of London Underwriters brought a declaratory judgment action against Hartford Fire Insurance Company seeking a determination that Hartford was obligated to contribute one-half of a personal injury settlement paid by Institute in a claim against Great Lakes Towing Company. The claim against Great Lakes was covered by both companies’ insurance policies: Great Lakes was the named insured under its own Hartford policy, and it was an additional insured under an Institute policy issued to a subcontractor, Thatcher Engineering Corporation. Great Lakes tendered the defense of the personal injury lawsuit to Thatcher with the intention that coverage be sought under Thatcher’s policy with Institute of London. Great Lakes also notified Hartford, its own liability insurer, of the lawsuit, but it told Hartford that it wanted Institute to defend it. When the lawsuit was settled, Institute requested that Hartford contribute one-half of the settlement amount, but Hartford declined.

The Illinois Appellate Court held that Institute of London was not entitled to any contribution from Hartford. The court began its analysis by stating the general rule that "[a]n insurer’s obligations under an insurance contract are ordinarily triggered when the insured or someone’s action on the insured’s behalf tenders the defense of an action potentially within the policy coverage." 234 Ill.App.3d at 73, 599 N.E.2d at 1313. The court found, however, that Great Lakes did not tender the defense of the personal injury lawsuit to Hartford, that Great Lakes never sought Hartford’s assistance, and that Great Lakes’ vice president had specifically told Hartford’s adjuster that it did not want Hartford to indemnify the settlement. Accordingly, the Institute of London court held that Hartford was excused from performing under its policy and from contributing to the settlement funded by Institute.

In recognizing an insured’s right to choose between two insurers whose policies each provide it with coverage, the court noted:

Great Lakes had bargained with Thatcher to be an additional insured in its liability policy for the construction project Thatcher was to perform on Great Lakes' premises. Great Lakes did not tender its defense to Hartford because it concluded it was not responsible for the accident resulting in the death of Thatcher’s employee, Garcia, and that Thatcher’s insurer, the Institute, was the appropriate carrier to respond to the Garcia claim. Great Lakes may well have feared that if the loss were attributed to its policy with Hartford the result might be a rise in premiums or cancellation of its policy. This factor alone suggests the insured ought to have the right to seek or not to seek an insurer’s participation in a claim as the insured chooses when more than one carrier’s policy covers the loss.

234 Ill.App.3d at 78-79, 599 N.E.2d at 1316.

Later Appellate Court Decisions

In the Institute of London case, the targeted policy of insurance did not include an "other insurance" clause. Two more recent decisions in the Illinois Appellate Court have specifically addressed the effect of "other insurance" clauses on the operation of the "targeted tender" rule, concluding that these policy clauses will not control. In Bituminous Casualty Corp. v. Royal Insurance Co., 301 Ill.App.3d 720, 704 N.E.2d 74 (1998), the insured’s right to choose the coverage to be targeted, despite the presence of "other insurance" clauses, was emphasized. The facts in that case were nearly identical to those in Institute of London. The insured, Glen H. Johnson Construction Company, a general contractor, had coverage for the loss under its general liability insurance policy issued by Royal Insurance, and also under the policy issued to its subcontractor by Bituminous Casualty. Unlike in Institute of London, however, both policies had "other insurance" clauses. Johnson Construction chose to look solely to Bituminous for defense and indemnification. After settling the underlying case, Bituminous sought contribution from Royal for one-half the amount it had expended to defend and indemnify Johnson Construction. The trial court granted that relief, but was reversed on appeal.

The Bituminous Casualty appellate court held that Johnson Construction could and did select one insurer to provide its defense and indemnification. Having made that choice, the chosen insurer, Bituminous Casualty, could not seek equitable contribution from the other insurer, Royal Insurance, who was not designated by the insured. 301 Ill.App.3d 720, 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:

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.

301 Ill.App.3d 720, 704 N.E.2d at 79.

While still awaiting the final word on this doctrine from the Illinois Supreme Court, the Appellate Court 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), the court adopted the Insitute of London reasoning with a twist: It allowed an insured that had initially tendered the defense of a suit to one insurer to "de-select" that insurer in favor of a second insurer when the insured later discovered it had additional coverage. Alcan was insured by Reliance and also by West Bend Mutual as an additional insured under a policy issued to a subcontractor for the specific project on which a claimant was injured. Alcan initially tendered its defense in the claimant’s personal injury suit to its own insurer, Reliance, before it discovered that it also had coverage under the West Bend policy. Alcan then attempted to "deactivate" its tender to Reliance and target West Bend alone to defend and indemnify it. The court concluded that it could do so:

Under the reasoning and policy considerations of… Institute of London… giving the insured the option to choose coverage, the insured also should be permitted to deactivate coverage with a carrier previously selected for purposes of invoking exclusive coverage with another carrier. This should be true, particularly, 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. Thus, as Alcan never chose contemporaneous coverage under the policies issued by West Bend and Reliance, and as coverage under Reliance’s policy was deactivated before coverage under West Bend’s policy was sought, there was no "other insurance" upon which West Bend could seek contribution.

303 Ill.App.3d at 83, 707 N.E.2d at 695.

In summary, the Institute of London line of Illinois appellate court cases hold that a targeted insurer can only seek contribution from another insurer under their "other insurance" clauses if both insurers have been contemporaneously tendered the defense of the insured. If only one insurer is targeted, it can not obtain contribution from the non-targeted insurer toward the costs of defense, settlement or judgment.

Only one Illinois appellate court decision has held to the contrary, that a targeted insurer may obtain contribution from a non-targeted co-insurer by virtue of the terms of the two policies’ "other insurance" clauses. In John Burns Construction Co. v. Indiana Insurance Co., 299 Ill.App.3d 169, 173, 700 N.E.2d 763, 766 (1st Dist. 1998), the appellate court noted that the Institute of London decision had not considered the effect of the policies’ "other insurance" clauses because there was no such provision in the Institute of London policy. It therefore held that "an insurer to whom litigation is tendered may seek contribution from another insurer whose policy is applicable, where the insurer to whom tender is made had an ‘other insurance’ clause in its policy, even though such an action is contrary to the wishes of the insured." That holding, rejected in Alcan, was also rejected by the Illinois Supreme Court.

The Illinois Supreme Court Endorses "Targeted Tender"

In 1998, the Illinois Supreme Court first discussed the concept of "targeted tender" in Cincinnati Companies v. West American Insurance Co., 183 Ill.2d 317, 326, 701 N.E.2d 499, 503 (1998), observing generally that:

[A]ny insured... covered by more than one policy can knowingly designate one of the insurers to defend. Where the insured makes such a designation, the duty to defend falls solely on the selected insurer. That insurer may not in turn seek equitable contribution from the other insurers who were not designated by the insured. This rule is intended to protect the insured's right to knowingly forego an insurer's involvement.

As this comment was not necessary to the court’s decision, however, the Illinois Supreme Court had not actually decided the scope and operation of "targeted tender." Its January 21, 2000 decision in John Burns Construction is its first substantial ruling on this doctrine.

In John Burns Construction, the insured John Burns Construction was sued for a slip-and–fall injury at a parking lot it had constructed. Burns was insured under its own liability policy, issued by Royal Insurance, and Burns was also an additional insured under a policy issued by Indiana Insurance to its asphalt subcontractor on the parking lot project, Barba Asphalt Paving. Burns tendered its defense to its subcontractor Barba, and it asked that Indiana Insurance 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 Insurance refused to defend Burns in the personal injury action. When Burns and Royal filed a declaratory judgment action against Indiana, it admitted that it owed coverage to Burns, but Indiana Insurance argued that it was entitled to contribution from Royal under the terms of the Indiana Insurance policy’s "other insurance" clause. That provision of Indiana’s policy limited its obligation to payment of an equal share with any other insurance available to its insured.

The question presented to the Illinois court was therefore whether the "targeted" insurer, to whom a suit was tendered, could obtain contribution from the other insurer whose policy also covered the insured, but whose coverage the insured had chosen not to trigger. As noted above, the trial and appellate courts had ruled that Indiana Insurance was entitled to contribution because its "other insurance" clause provided a formula for sharing the costs of defending and indemnifying the claim with other available coverage.

The Illinois Supreme Court reversed, holding 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 that:

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. Moreover, we do not believe that the presence of the "other insurance" provision in the Indiana policy serves by itself to trigger the coverage afforded by Royal’s policy. An "other insurance" provision does not in itself overcome the right of an insured to tender defense of an action to one insurer alone.

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Burns made clear that it did not want Royal to become involved in the matter and that the defense was being tendered solely to Indiana. Therefore, Indiana was foreclosed from seeking equitable contribution from Royal.

Implications of "Targeted Tender"

Over the almost eight years since the Institute of London decision, Illinois insureds and their counsel have increasingly used the doctrine of "targeted tender" to shift the costs of their defense and indemnification away from their own liability insurers and onto other insurers to which they never paid a premium. From an underwriting perspective, this has substantially increased the exposure of insurers whenever they add an additional insured to the coverage offered to their Illinois named insureds.

From a claims-handling perspective, the "targeted tender" doctrine will require increased attention to the specific way in which the insured has notified its insurers of the claim against it. Some education of insureds about their option of targeting their other insurers may be useful at the earliest stage of their claims reporting. At a minimum, an inquiry should be made about the existence of other policies under which an insured may also have coverage, so that the insured can make an informed selection of a "target" insurer.

The most serious implication of the Illinois "targeted tender" doctrine, however, is the way in which it trumps the cost-sharing mechanism of policy "other insurance" clauses. No longer can an insurer assume that it will be able to obtain contribution from its insured’s other insurers on a pro rata (or any other) basis. The potential for contribution from other insurers may be entirely eliminated by the insured’s decision to "target" only one insurer.

Although very broad in its implications, there are still a few limits to the "targeted tender" doctrine. First, the rule has never been applied by any Illinois court in a continuing tort context, in which the multiple insurers of an insured had non-overlapping coverage spanning multiple policy years. To date, the doctrine has only been applied where the insured had simultaneous coverage with more than one insurer for the specific claim.

Second, an insured has not been allowed to "deactivate" or "de-select" its tender to one insurer in favor of another after knowingly seeking coverage from both insurers. It therefore appears that if an insured knows what coverage it has, and decides to tender its defense to more than one of its insurers, it may not be allowed to later target one of those insurers and release the other one. In those circumstances, the rights of each insurer to equitable contribution from the other will remain intact.

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We hope this update and analysis will be helpful to you in evaluating tenders by insureds in Illinois. Please feel free to contact us for further information about "targeted tender" or any other coverage issue.

This article is published by Litchfield Cavo and is for information only. It is not a substitute for legal advice or individual analysis of a particular legal matter. Readers should not act without seeking professional legal counsel. Transmission and receipt of this publication does not create an attorney-client relationship. Please read our entire disclaimer. For further information, write to us at firm@litchfieldcavo.com.