United States: Illinois’ Targeted Tender Rule: An Important New Tool for Policyholders

Recent Illinois decisions have granted policyholders a unique right to select among primary carriers that owe them a defense. Under what has become known as the "targeted" or "selective" tender rule, an insured entitled to a defense from two or more primary insurers can designate a particular carrier to defend a suit. The selected insurer will owe the sole duty to defend the action and be precluded from seeking contribution from the nonselected insurer. The rule operates regardless of an other insurance clause in the selected insurer’s policy.¹

This article recounts the development of the targeted tender rule. It explains that the rule has progressed beyond selective tender to include a right to withdraw a prior tender, even after a case has settled. It also observes that one court has held that the right to target can be overcome by specific policy language requiring tender to other insurers. Finally, it discusses three as yet unsettled questions about the rule: (1) whether targeting tender renounces indemnification completely from the other insurer; (2) whether the rule applies to consecutive as well as concurrent insurers; and (3) whether targeting can overcome Illinois’ rule of horizontal exhaustion necessary to reach excess insurance coverage.

The targeted tender rule originated in Institute of London Underwriters v. Hartford Fire Ins. Co.² There, Institute sued Hartford for half of the settlement of an accident suit against The Great Lakes Towing Company. Hartford was Great Lakes’ CGL insurer, while Institute named Great Lakes an additional insured on a liability policy issued to Thatcher Engineering, which Great Lakes had employed. The accident suit was on behalf of a Thatcher employee.

Institute hired an attorney named Peterson to defend Great Lakes. "Great Lakes never requested [its CGL insurer] Hartford to defend or indemnify it with respect to the…action."³ Instead, at Peterson’s urging, Great Lakes told Hartford of the case and that the matter had been sent to Peterson. The tort suit eventually settled for $75,000, and Peterson asked Hartford for half of it. Great Lakes contacted Peterson and said Hartford should not have to contribute to the settlement. Great Lakes also told Hartford it did not want Hartford’s policy to respond. Hartford accordingly declined to contribute.

The appellate panel hearing Institute’s claim defined its issue as: "where two insurance policies potentially apply to a loss, may an insured elect which of its insurers is to defend and indemnify the claim by tendering its defense to one insurer and not the other and thereby foreclose the settling insurer from obtaining contribution from the non-settling insurer?"⁴ The panel affirmed a trial court ruling that answered "yes."

Relying on federal cases, the appellate court reasoned that "[a]n insurer’s obligations…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."⁵ The court held that because Great Lakes had never tendered its defense to Hartford nor asked Hartford to indemnify, and even told Hartford not to respond, "the doctrine of equitable contribution" that enables an insurer to recover from another insurer "also liable for the loss" did not apply.⁶ It judged that Institute owed everything because "each carrier whose policy is triggered is jointly and severally liable for the total indemnity and defense costs of a claim [up to the policy limits] without prorations."⁷

The U.S. Court of Appeals for the Seventh Circuit followed Institute in Employers Ins. of Wausau v. James McHugh Construction Co.⁸ There, a general contractor (McHugh) hired by the University of Chicago tendered its and the University’s defense for a suit to Wausau, the insurer of a subcontractor that named them additional insureds. Wausau sued, claiming McHugh’s and the University’s own insurers had to share costs. The Court of Appeals ruled against Wausau, concluding that McHugh and the University "were entitled…to tender their defense to the insurance company of their choosing…."⁹ It rejected the idea that a general duty of cooperation clause in Wausau’s policy overcame Institute and required tender to other insurers.

The Illinois Supreme Court first expressed approval of Institute’s right to target in Cincinnati Cos. v. West Am. Ins. Co.¹⁰ That case was an action by Cincinnati for equitable contribution against another insurer that had actual notice of a suit against their common insured, a land surveyor company. The Supreme Court allowed contribution. It decided that the other insurer’s actual notice triggered its duty to defend, though the insured did not formally tender its defense to that other carrier. This was significant because prior Illinois cases had held that actual notice triggered a duty to defend for only unsophisticated insureds.

The court discussed targeting in rejecting a challenge to its actual notice holding. West American, which was sued for contribution, argued that allowing actual notice to trigger its duty to defend would defeat the targeted tender rule recognized in Institute. The Supreme Court disagreed. It stated:

The Illinois Supreme Court confirmed its acceptance of the targeted tender rule in John Burns Construction Co. v. Indiana Ins. Co.¹² In doing so, it settled a conflict among Illinois Appellate Court panels as to whether an other insurance clause in the targeted insurer’s policy thwarted the rule.

The conflict began when a panel of the Illinois Appellate Court’s First Appellate District refused an attempted targeted tender in the John Burns case.¹³ The case involved a general contractor (Burns) that wanted to be defended and indemnified by its subcontractor’s insurer (Indiana) rather than its own carrier (Royal). Burns told the subcontractor it was looking "solely to…Indiana…for defense and indemnification" and notified Royal for "informational purposes only."¹⁴ Indiana refused the tender, and Burns thereafter sought a defense from Royal. Burns and Royal sued Indiana. Indiana admitted a duty to defend but sought a declaration that Royal had to contribute half the cost of defense and indemnification based on Indiana’s "other insurance" clause. A trial court agreed, and the First District panel affirmed.

The appellate court decided that Burns’ original tender to Indiana triggered Royal’s duty to defend. It said this tender "triggered the ‘other insurance’ clause in Indiana’s policy, which in turn triggered Royal’s duty to defend."¹⁵ It judged Institute distinguishable because there "the insurance company to whom tender was made…did not have an ‘other insurance’ clause in its policy, so it could not seek contribution from the second insurance carrier…."¹⁶

A panel of the Illinois Appellate Court’s Third Appellate District rejected the First District’s John Burns holding in Bituminous Cas. Corp. v. Royal Ins. Co.¹⁷ There, a general contractor (Johnson Construction) was sued by a subcontractor’s employee. Johnson had coverage with Royal but was also insured by the subcontractor’s Bituminous policy. Johnson told Royal it wanted "to look solely to Bituminous…to act as Johnson Construction’s sole primary carrier. Royal was to remain on notice as excess carrier only."¹⁸ Bituminous settled the injury case and sued Royal.

The court held the Illinois Supreme Court in Cincinnati "firmly established an insured’s right to select exclusive coverage." ¹⁹ "[S]ince Johnson Construction knowingly chose to forego Royal’s assistance,…Royal’s policy was not triggered and Royal was…relieved of its obligation" for the underlying case.²⁰ The Bituminous court rejected the First District’s view that an other insurance clause defeated that result. It reasoned: "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.… Royal’s policy was not triggered and its obligation to defend and indemnify Johnson Construction with regard to the [underlying]…lawsuit was excused by the targeted tender to Bituminous."²¹

When John Burns reached the Illinois Supreme Court, it reversed the First District’s holding that an other insurance clause in the targeted policy defeats selective tender. The Supreme Court held that "Burns had the right to choose which insurer would be required to defend and indemnify it…, and that nothing in the Indiana policy limited Burns’ right to select which insurer would be required to do this."²² The court observed that "an ‘other insurance’ clause in a policy will not automatically reach into coverages provided under other policies merely because such other policies are in existence. The insured still must be given the right to determine whether it wishes to invoke its rights to such other coverage before those coverages become accessible under the ‘other insurance’ provision of a triggered policy."²³ The court stated:

In Alcan United, Inc. v. West Bend Mut. Ins. Co.,²⁵ the Illinois Appellate Court expanded the rule to include a right to target by deactivating a previous tender. The case involved a contractor, Alcan, insured under its subcontractor’s West Bend policy. Alcan was insured by Reliance, too. When Alcan was sued by an employee of the subcontractor, Alcan’s broker forwarded suit papers to Reliance. A Reliance adjuster then tendered the defense to West Bend, but West Bend failed to respond. Alcan then sued West Bend and the subcontractor.

Alcan and Reliance conceded that the underlying suit was potentially covered by Reliance but claimed Alcan had chosen West Bend to defend and indemnify. West Bend responded that Alcan’s tender to Reliance "could not be ‘de-activated’ when the subsequent tender was made to West Bend so as to make West Bend the exclusive insurer…."²⁶ Alcan replied "it had the right to choose West Bend as its exclusive insurer and to excuse Reliance from any further coverage obligation upon discovering West Bend’s coverage…."²⁷ The appellate court agreed. It held:

A recent case held this deactivation can be conditional. It upheld a deactivation letter in which the insured reserved a right to renew the tender if the targeted insurer denied coverage.²⁹

The Illinois Appellate Court’s Second District expanded the right of deactivation into the post-settlement stage in Richard Marker & Associates v. Pekin Ins. Co.³⁰ There, two insurers refused to defend a breach of contract suit against an architectural firm. The insured settled the underlying action and withdrew its tender to Statewide. The insured sued the other carrier, Pekin, for defense costs and the settlement. Pekin sought to file a third-party complaint alleging Statewide owed equitable contribution under Pekin’s other insurance clause. The Second District held the insured was entitled to target Pekin by withdrawing its tender to Statewide after settling the underlying suit. It said the insured’s "paramount" right to forgo an insurer’s assistance by deactivation was not "relinquished simply because" the underlying case settled.³¹

In American Country Ins. Co. v. Kraemer Bros.,³² the Illinois Appellate Court upheld a policy provision that required an insured contractor to tender its defense to other insurers. The case was a suit by American Country claiming no duty to defend or indemnify Kraemer Bros. Kraemer was a general contractor named an additional insured under an American Country policy issued to a subcontractor. That policy had an endorsement listing as one of the insured’s "Duties In The Event of Occurrence, Claim or Suit" to "Promptly tender the defense of any claim made or ‘suit’ to any other insurer which also has available insurance for a loss which we cover under Coverages A or B of this coverage part."³³

When Kraemer was sued in a personal injury action, it tendered its defense to American Country. Kraemer advised that it had instructed its own insurer not to defend or indemnify. In the declaratory action, the appellate court agreed with American Country that Kraemer had breached a policy duty to tender to its own insurer. It stated:

Kraemer Bros. was decided before the Illinois Supreme Court issued its John Burns decision strongly in favor of targeted tender. It has been suggested that the Kraemer Bros. holding might be in danger in light of the John Burns analysis. ³⁵ The Kraemer Bros. holding was challenged in at least one Illinois Appellate Court case, but the court decided the case on other grounds without reaching the challenge.³⁶

Although the targeted tender rule is firmly supported in Illinois Supreme Court decisions, recent cases and commentator articles have debated three key questions about it. Those questions concern whether the insured must renounce coverage completely under the nonselected policy to target successfully, whether the rule applies in cases of successive as well as concurrent coverage, and whether the rule will bind excess carriers to pay without all primary coverage having been exhausted. Each issue is treated below.

An important question remains about whether an insured can exclude a primary carrier from defending while preserving that carrier’s duty to indemnify in some capacity. As the rule is typically framed, an insured renounces coverage completely by directing an insurer not to defend. For example, in Cincinnati, the Illinois Supreme Court stated that "an insured may knowingly forgo the insurer’s assistance by instructing the insurer not to involve itself in the litigation. The insurer would then be relieved of its obligation to the insured with regard to that claim."³⁷ Insureds have, however, attempted to keep the nonselected insurer’s coverage in reserve in the event a loss exceeds the targeted insurer’s limits. Cases appear to point both ways as to the ability of insureds to do that.

In Chicago Hospital Risk Pooling Program ("CHRPP") v. Illinois State Medical Inter-Insurance Exchange ("ISMIE"),³⁸ the Illinois Appellate Court saw an issue of fact in this regard. The case stemmed from a medical malpractice suit against Dr. Carlos Baldoceda. He was insured under an ISMIE professional liability policy and also covered under CHRPP, a trust established under statute for the pooling of nonprofit hospital risks. ISMIE agreed to defend. CHRPP declined the doctor’s request for a defense under a reservation of rights, claiming ISMIE had a primary duty to defend and indemnify. CHRPP nevertheless paid $1 million on behalf of Dr. Baldoceda to settle the malpractice action. CHRPP then sought half the settlement costs from ISMIE. ISMIE responded that Dr. Baldoceda had made a selective tender. Acircuit court judge decided the selective tender rule did not apply to CHRPP because it was not a traditional insurer. The appellate court disagreed, judging CHRPP was close enough to a traditional insurance company to be bound by the rule.

Although the court held Dr. Baldoceda had "the ‘paramount’ right to exclusively select his CHRPP coverage to the exclusion of his ISMIE coverage," it saw a fact issue to be decided on remand concerning the effectiveness of the doctor’s tender.³⁹ The court stated:

To the best of my research, this issue has yet to be decided on remand.⁴¹

Although the above language suggests full renunciation of coverage is necessary, the Bituminous case discussed above may indicate otherwise. In Bituminous, there was an effective targeted tender saying "it was [the insured] Johnson Construction’s intent to look solely to Bituminous…to act as Johnson Construction’s sole primary carrier. Royal Insurance was to remain on notice as excess carrier only."⁴² Bituminous would suggest an insured can target its defense while keeping the other insurer in reserve in an excess capacity. Similarly, a recent appellate decision saw an effective deactivation of a prior tender though the insured reserved a right to renew its tender if the targeted insurer disclaimed coverage.⁴³ The court said the deactivated insurer "was then only to provide standby coverage in the event [the targeted insurer] Legion refused to defend."⁴⁴ It might be argued that a deselected insurer should have to stand by as possible excess coverage as well.⁴⁵ What view will prevail on this point will have to be decided in future cases.

The Illinois Supreme Court and Appellate Court decisions that have applied the targeted tender rule to date have done so in the context of concurrent primary coverage. Commentators have disputed whether targeted tender should also be available in cases of consecutive coverage. In Andrew S. Boris and Diane Karp Ehrhart, Nuts and Bolts of Insurance Coverage Litigation: The Elusive Duty to Tender in Illinois,⁴⁶ the authors maintain the John Burns rule is not necessarily applicable where a continuous injury spans multiple policy periods. They stated:

Similarly, in Thomas M. Hamilton and Troy A. Stark, Excess-Primary Insurer Obligations and the Rights of the Insured,⁴⁸ the authors advocate that the rule be limited "to only those situations where the insured is named as an additional insured under a concurrent primary policy." An Illinois Appellate Justice writing individually has advocated restricting the targeted tender rule in that way. In American National Fire Ins. Co. v. National Union Fire Ins. Co.,⁴⁹ a case in which targeted tender was argued but did not form the basis for the court’s decision, Justice Patrick J. Quinn issued a special concurrence that quoted heavily from the Hamilton and Stark article. The justice decried the rule generally as giving "policyholders rights not afforded to them in the terms and conditions of the policy."⁵⁰ He pointed to an article that viewed the rule as an unconstitutional impairment of contractual obligations.⁵¹ Justice Quinn concluded that "if Illinois retains the targeted tender rule, it should be limited to instances involving parties which are additional insureds under concurrent primary policies."⁵²

In possible contrast with this reasoning, at least one Illinois Appellate Court decision appears to have assumed that targeting can be accomplished in circumstances of consecutive coverage. In Dearborn Ins. Co. v. International Surplus Lines Ins. Co.,⁵³ Dearborn, issued a claims-made professional liability policy covering Canon Insurance Service for December 31, 1989 to December 31, 1990. International issued a claims-made professional liability policy to Canon for March 15, 1991 to March 15, 1992. Dearborn sued International for costs incurred in defending and indemnifying Canon in a consolidated case called Sundance. Dearborn was asked to defend and indemnify Canon. Canon’s insurance broker also sent a letter to International enclosing a case pleading and advising that another carrier was being asked "to respond" for Canon, and so it was probably best for International to accept the notice as "a possible claim" and nothing International had to take an active role in unless its claims people felt differently.⁵⁴ International opened a claim file but did not defend Canon.

When Dearborn sued International for contribution, International claimed Canon had elected not to tender to it. The appellate court disagreed. It held International had actual notice that triggered its duty to defend, and the broker’s letter was a clear tender. The court said Canon did not direct that Dearborn "provide the exclusive defense and coverage."⁵⁵ Canon gave International "no such specific direction not to defend in this case."⁵⁶ It seems implicit in this analysis that the court believed the targeted tender rule would have applied, though the policies had different periods, if an exclusive tender had been made.

All Illinois Supreme and Appellate Court decisions allowing targeted tender have dealt with the rule’s impact on excluded primary carriers. None has stated whether targeting away from a primary insurer will enable the insured to reach excess carrier levels without exhausting the excluded carrier’s coverage limits. Recent trial court decisions, however, have treated this question. It has also been a subject of commentator debate.

In Pacific Ins. Co. v. Cincinnati Ins. Co.,⁵⁷ Judge Richard A. Siebel of the Circuit Court of Cook County, Illinois ruled that targeted tender will not apply to require an excess carrier sitting above the targeted primary to pay a settlement before the excluded primary carrier’s limits have been exhausted. The insured in the case, W.B. Olson, Inc., had agreed to provide management services for a construction project at the Bartlett Public Library. The Library had hired Northwest Structural Steel, Inc. to serve as general contractor. Olson had a CGL policy issued by Cincinnati. It also became an additional insured under Northwest’s $1 million CGL policy and $4 million umbrella policy, both of which were issued by Pacific.

A Northwest employee named Don Skibbie sued Olson for bodily injuries. Olson sent the Skibbie summons and complaint to Northwest, and Northwest tendered defense of the suit to Pacific. Pacific accepted the tender of defense and indemnity without reserving rights. Olson’s insurance agent notified Cincinnati too, and Cincinnati likewise agreed to defend without reservation of rights. Pacific settled the Skibbie suit for $1.5 million. Pacific paid its $1 million CGL policy limits and demanded that Cincinnati pay $500,000 under its CGL policy. Cincinnati refused. Pacific paid the $500,000 under its umbrella policy and sued Cincinnati. Each side moved for summary judgment. Cincinnati argued that it had no duty to contribute because Olson had made a selective tender of its defense and indemnity to Pacific. Judge Siebel ruled Pacific could not deny there was a selective tender, but he agreed with Pacific that the targeted tender rule does not apply as between a primary policy and an excess policy.

Judge Siebel said "there is no reported decision which addresses…whether the selective tender rule can be extended to an umbrella policy."⁵⁸ He said the ‘selective tender’ rule…has been applied only where an insured has concurrent coverage for the same liability" and the cases applying it "involved…primary policies covering the same loss."⁵⁹ He reasoned, "Excess and primary policies do not cover the same risks," and "[u]mbrella policies are considered to be ‘catastrophe coverage’ and cannot be considered on the same level as primary policies."⁶⁰ The concurrent coverage in the case "would implicate the Cincinnati CGL and the Pacific CGL policies, not the Cincinnati and the Pacific Umbrella policies."⁶¹ He concluded: "Extension of the selective tender rule to require an umbrella policy to pay prior to a primary policy would run counter to the Appellate Court’s recognition of the market-driven pricing of primary and umbrella policies."⁶² He ruled the "priority of payment should be 1) the Pacific CGL Policy; 2) the Cincinnati CGL Policy; and 3) the Pacific Umbrella Policy." ⁶³ No appeal was taken from Judge Siebel’s decision.

Judge Siebel’s ruling was praised in Thomas M. Hamilton and Troy A. Stark, Excess-Primary Insurer Obligations and the Rights of the Insured.⁶⁴ There, the authors recounted Illinois’ rule of horizontal exhaustion established in United States Gypsum Co. v. Admiral Ins. Co.,⁶⁵ which requires an insured to exhaust all triggered primary coverage before it can collect from an excess carrier. The authors said "it seems impossible" for the theories of horizontal exhaustion and targeted tender "to coexist." ⁶⁶ They believed Judge Siebel’s Pacific opinion "reached what is probably the best solution to the potential conflict…."⁶⁷

Illinois Appellate Justice Quinn has weighed in on this question as well. His special concurrence in American National Fire Ins. Co. v. National Union Fire Ins. Co.,⁶⁸ stressed the reasoning in the Hamilton and Stark article. The justice said that in order to harmonize targeted tender with horizontal exhaustion, an insured should "have two options: it can either (1) exhaust all primary policies in order to have access to its excess insurance, or (2) engage in a targeted tender and deselect certain insurers, thereby foregoing its excess insurance coverage."⁶⁹ He believed that way "the important distinction between primary and excess insurers will be maintained."⁷⁰

A federal district court judge recently espoused this view as well. In Liberty Mut. Ins. Co. v. Tokio Marine & Fire Ins. Co.,⁷¹ U.S. District Judge Ronald A. Guzman followed Judge Siebel’s Pacific decision to hold that an excess carrier owed no duty to pay where a settlement exhausted the primary policy immediately below it but did not exceed the amount of other primary coverage. The case involved a subcontractor, Tiffiny, that had a primary policy with limits of $1 million and an excess policy with limits of $5 million, both issued by Liberty Mutual. General contractor Howell and project owner Sanyo were named additional insureds under those policies. Howell also had commercial general liability insurance from Tokio Marine with limits of $1 million. When Sanyo and Howell were sued by someone injured at the construction site, Sanyo and Howell told Tokio they did not want it to defend or indemnify them. Liberty defended them under the Tiffiny primary policy. Liberty demanded Tokio to contribute to a $1.2 million settlement of the injury action, but Tokio refused. Liberty then settled without Tokio for $1.2 million. Liberty then sued Tokio for a $200,000 contribution. In its defense, Tokio argued that Sanyo and Howell had selectively tendered to Liberty’s excess policy. In response, Judge Guzman cited Pacific as "persuasive authority…that selective tender applies only to concurrent coverage for the same risk, and excess and primary policies do not cover the same risk."⁷² Judge Guzman said the Liberty excess policy limited the insureds’ right to recovery to amounts that exceeded the Liberty primary policy plus all amounts payable under other valid and collectible insurance available to the insured. He said "the Tokio Primary Policy was valid and collectible insurance available to Howell and Sanyo in the amount of $ 1,000,000."⁷³ He concluded that the retained limit for the injury action "was therefore $2,000,000—greater than the settlement amount."⁷⁴ Because the settlement did not reach that amount, he ruled that "Howell and Sanyo … could not selectively tender to" the excess policy.⁷⁵ He decided Tokio was not liable for the contribution, however, in light of the insureds’ instruction that it not defend or indemnify for the injury case. An appeal is currently pending from Judge Guzman’s decision and may result in Seventh Circuit input about the impact of targeted tender on excess insurers.⁷⁶

So far, the targeted tender rule appears to be unique to Illinois insurance law.⁷⁷ Although the rule been argued in other cases, my research has found no decision taking a position on whether Illinois’ rule accords with the law of other states.⁷⁸ Two commentators have predicted that "it is those states, like Arizona, Michigan, Minnesota and Montana, which require the insured to submit a specific request for defense, that will most likely adopt the doctrine of targeted tender."⁷⁹ Although the rule has been firmly endorsed by the Illinois Supreme Court, one Illinois Appellate Court Justice has repeatedly written against it, concluding:

Whether courts outside of Illinois will accept or reject that view, and how far the rule will ultimately be held to extend in Illinois, remain to be seen.

Stan Nardoni is a Counsel in the Insurance and Reinsurance Practice Group of the Chicago office of Mayer, Brown, Rowe & Maw LLP. He is a frequent writer on insurance topics. His articles about Illinois insurance law have been relied on by federal and state courts, including the Supreme Courts of Illinois and Kansas. This article first appeared in the American Bar Association Litigation Section’s newsletter Coverage, Volume 15, Number 2, March/April 2005. Reprinted with Permission.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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