·        The impact of the targeted tender rule on concurrent coverage cases;

·        The scope of the targeted tender rule and steps insurers should take in connection with evaluating and responding to a targeted tender;

·        The relationship between targeted tender and the requirement of horizontal exhaustion;

·        The evolution and status of Illinois law on allocation in the context of consecutive coverage;

·        Pro rata verses “all sums” allocation;

·        The impact of uninsured periods; and

·        Effective advocacy with respect to issues of allocation of losses.

 

The commentary focuses upon the Illinois Supreme Court’s recent decision in Kajima Construction Services, Inc. v. St. Paul Fire and Marine Insurance Company, 227 Ill. 2d 102 (2007). This case involves the interplay between Illinois’ “targeted tender” or “selective tender” rule and the requirements of “horizontal exhaustion.” The authors point out with respect to the court’s decision: “the Illinois Supreme Court set proper limits on Illinois’ targeted tender rule and provided clarity with respect to Illinois law on allocation. The decision makes clear that a targeted tender does not preempt the fundamental requirement of horizontal exhaustion. Further, the decision properly limits the application of the targeted tender rule to ‘circumstances where concurrent primary insurance coverage exists for additional insureds.’”

 

The commentary begins with an overview of Ilinois’ targeted tender rule. Then it examines Illinois jurisprudence on allocation of losses spanning from the 1987 Illinois Supreme Court decision in Zurich Insurance Company v. Raymark Industries, Inc., 118 Ill. 2d 23 (1987) to the Kajima decision. In the midst of this discussion of several Illinois court decisions, the authors offer guidance to practitioners.

 

First, practitioners are reminded to consider a fact-based allocation in the appropriate case. The authors observe: “The most accurate allocation method – and the one that most closely adheres to the requirements of most insurance policies – is to determine precisely what injury or damage took place during each policy period or each uninsured period and allocate the loss accordingly. In many long-tail claims, the inability to make such a determination or the litigation costs associated with attempting to make such a showing has caused parties to advocate and courts to apply either a pro rata proxy or an all sums fiction for apportioning losses. Nonetheless, practitioners should consider with respect to a given claim whether factual evidence and/or expert testimony could be developed that would provide a meaningful basis to allocate losses consistent with the portfolio interests of the client.”

 

In reviewing the allocation of losses cases, the authors note that most of the Illinois decisions find that the “all sums” language found in many commercial general liability policies don’t support vertical exhaustion because “all sums” cannot be read in isolation from the “to which this policy applies” qualifier and the language limiting coverage to damages or injuries “during the policy period.” The authors advise: “In advocating any particular allocation methodology, it is important for the practitioner to understand the language in the subject insurance policies as well as the legal precedent in the relevant jurisdiction. Many excess policies are written on an ‘ultimate net loss’ or ‘loss’ basis and do not contain ‘all sums’ language…. Most of the cases that have held in favor of an ‘all sums’ or vertical exhaustion allocation ─ which remains the minority view ─ have placed their reliance mostly or entirely on a so-called promise to pay ‘all sums.’ Accordingly, practitioners representing insurers seeking a pro rata allocation with respect to policies that do not contain ‘all sums’ language should forcefully point out the absence of any contractual basis to support an ‘all sums’ ruling.” 

 

The commentary proceeds to provide a full analysis of the Kajima decision. It then addresses the impact of the Kajima decision on the targeted tender rule. In that regard, the authors conclude: “The Kajima decision is significant in the context of concurrent coverage cases because it does not allow a targeted tender to trump the requirement of horizontal exhaustion. Accordingly, all primary coverage must be exhausted before an excess policy is required to respond regardless of whether the policyholder purports to make a targeted tender to implicate excess coverage.” 

 

They further note: “The decision also is significant because the Illinois Supreme Court properly limits the application of the targeted tender rule to ‘circumstances where concurrent primary insurance coverage exists for additional insureds’ [2007 Ill. LEXIS 1702, at *5]. Accordingly, a policyholder may not make a targeted tender to select insurers in the context of long-tail claims and consecutive policies.” The authors advise: “The de-selected insurer would be well-served by communicating with its insured and confirming in writing the insured’s directions that the insurer not provide defense or indemnity for the subject claim. Recalcitrance on the part of the targeted tender may result in the de-selected insurer having to participate in the defense or indemnity on behalf of the insured and in instituting an action against the targeted insurer ….”

 

Finally, the commentary addresses the impact of the Kajima decision on the allocation of losses in Illinois. They find that in Kajima, the Illinois Supreme Court recognized that horizontal exhaustion is required under Illlinois law in instances of long-tail claims, consecutive policies and concurrent coverage. The authors conclude, “… in the aftermath of Kajima, Illinois should be viewed as a horizontal exhaustion, prorate allocation jurisdiction.”  

 

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