Targeted Tenders in Illinois - A Sticky Situation

Attorneys: Guolee, Terrence F.

June 5, 2014
Chicago, Illinois
Illinois is one of only a few states that recognize “targeted tenders.” Illinois’ targeted tender doctrine allows a defendant insured to “deselect” one of its available insurance policies and “select” another available policy to respond to a claim. This occurs mostly in construction accident cases were a contractor will deselect its own coverage and target coverage from subcontractors or other “downstream” contractors that are required to name the contractor as an additional insured on their respective policy of insurance.
Often contested, is the issue regarding to what extent a “selected” insurance carrier can seek contribution for the loss from other “deselected” carriers. A recent decision of the Illinois First District Appellate Court (covering Chicago and Cook County, Illinois) resolves this question in a manner that should strengthen and support an insured’s right to perform a targeted tender and prevent the selected carrier from demanding an assignment from the insured in order to seek contribution from a deselected carrier.
In the case, AMCO Insurance Co. v. Cincinnati Insurance Co., 2014 IL App(1st) 122856 (decided May 5, 2014), the CGL policies of insurance carriers AMCO Insurance (AMCO), Erie Insurance (Erie) and Cincinnati Insurance (Cincinnati) were all triggered by an injured subcontractor employee’s construction injury claim against a general contractor (General Contractor). Cincinnati insured the General Contractor. AMCO and Erie each covered subcontractors that owed the General Contractor covered as an “additional insured” on their policies (referred to as Subcontractors “1” and “2”). In particular, AMCO had both a primary and an excess policy triggered by the loss.
Following filing of the suit, counsel for the General Contractor made a targeted tender to AMCO, as follows:
On behalf of [General Contractor] we are hereby tendering to [Subcontractor] and [AMCO] its defense in the [lawsuit] currently pending in the Circuit Court of Cook County Illinois. This tender is being made pursuant to [the General Contractor’s] status as an additional insured under [the AMCO policy] issued to [the Subcontractor].
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This tender is made to [AMCO] without recourse to [General Contractor’s] own policy of insurance with [Cincinnati] except as standby coverage should [Subcontractor 1] not fulfill its obligations pursuant to its insurance coverage. It is the expressed intention of [General Contractor] that it be provided with insurance coverage for the [lawsuit] solely though the insurance policy issued to [Subcontractor 1] by [AMCO].
AMCO accepted the General Contractor's defense tender subject to a reservation of rights.
The General Contractor also tendered its defense of the lawsuit to Erie, as an additional insured under the Erie policy. The General Contractor’s defense tender to Erie stated:
On behalf of [General Contractor] we hereby request all benefits available to [General Contractor] from [Erie] including the right to a defense and indemnity in the [lawsuit] currently pending in the Circuit Court of Cook County Illinois. This request/tender is being made pursuant to [General Contractor's] status as an additional insured under [the Erie policy];
[General Contractor] is currently being defended under a reservation of rights by [AMCO], [Subcontractor 1’s] carrier. The purpose of this letter is to obtain the additional benefits of a defense and indemnity from Erie in addition to the defense and indemnity being provided by [AMCO]. This request/tender is made to [Erie] without recourse to [General Contractor's] own policy of insurance with [Cincinnati] except as standby coverage should [Subcontractor 1] or [Subcontractor 2] not fulfill their obligations pursuant to its insurance coverage.
Erie also accepted the General Contractor's defense tender subject to a reservation of rights.
Subsequently, the parties attempted to settle the lawsuit. Following Plaintiff’s demand of $3.9 million, a mediator expressed that he believed the matter could be settled for $1.5 million. AMCO then stated that it would be willing to contribute $500,000 toward the settlement provided that Cincinnati and Erie agreed to contribute equal amounts.
Cincinnati refused to contribute any money toward the settlement, asserting that the General Contractor made a "targeted tender" to AMCO and Erie and both AMCO's and Erie's primary policy limits would have to be exhausted before Cincinnati would be required to respond. Later, Erie stated that it would be willing to contribute $50,000 toward the settlement.
Following this, Plaintiff, the General Contractor, both Subcontractors and AMCO ended the lawsuit by executing a settlement agreement where AMCO paid Plaintiff $1,450,000 on behalf of the General Contractor and one of the Subcontractors. AMCO allocated $550,000 to the AMCO policy on behalf of the General Contractor; $450,000 to the AMCO umbrella policy on behalf of the General Contractor; and $450,000 to the AMCO policy on behalf of Subcontractor 1. The settlement agreement also contained an assignment of rights by the General Contractor and Subcontractor 1, which gave AMCO the right to seek contribution towards the settlement from carriers Cincinnati and Erie.
AMCO then filed a declaratory judgment action against Cincinnati and Erie, seeking equitable contribution and a claim for “other insurance.” In response, Cincinnati filed a motion to dismiss under section 2-615 of the Illinois Code of Civil Procedure, asserting that AMCO had no valid claims against it under Illinois’ “targeted tender” doctrine. Cincinnati also argued that any claims under AMCO’s umbrella policy would require that the Erie policy, as another available primary policy, be exhausted before Cincinnati could be required to respond.
The Cook County Chancery Court agreed with Cincinnati’s arguments and dismissed AMCO’s claim against Cincinnati. The Court also entered a Supreme Court Rule 304(a) finding that the ruling was final and appealable. In so doing, the Chancery Court judge found that the claims against Cincinnati in the equitable subrogation and equitable contribution counts must be dismissed because:
[O]nce the insured here, [the General Contractor], made its targeted tender to AMCO, the targeted carrier as assignee of the insured post settlement cannot pursue a deselected carrier for [equitable subrogation and equitable contribution]. 
Also, the court found that those counts were defective because AMCO and Cincinnati insured different risks. Further, as to the "other insurance" count, the court found that the Cincinnati policy was never triggered, and to trigger the Cincinnati policy post settlement would be an improper extension of the targeted tender doctrine.
On appeal, the First District Appellate Court started its analysis with an overview of Illinois’ targeted tender doctrine. Here, the Court stated:
[T]he 'targeted' or 'selective' tender doctrine allows an insured covered by multiple insurance policies to select or target which insurer will defend and indemnify it with regard to a specific claim." Illinois courts have consistently held that an insured has a paramount right to choose or knowingly forego an insurer's participation in a claim. Richard Marker Associates v. Pekin Insurance Co., 318 Ill. App. 3d 1137, 1141 (2001). There are many reasons why an insured may choose to forego a certain insurer's coverage, such as the insured's fear that premiums would increase or the policy would be cancelled in the future. Id. When an insured designates one of the insurers to defend, the duty to defend falls solely on the selected insurer. Cincinnati Cos. v. West American Insurance Co., 183 Ill. 2d 317, 324 (1998). "That insurer may not in turn seek equitable contribution from the other insurers who were not designated by the insured. [Citation.] This rule is intended to protect the insured's right to knowingly forgo an insurer's involvement." Id. (citing Institute of London Underwriters v. Hartford Fire Insurance Co., 234 Ill. App. 3d 70, 79 (1992)). The insured's right to choose encompasses the right to deactivate coverage from an insurer that was previously selected. Richard Marker, 318 Ill. App. 3d at 1143. This can be done for the purpose of invoking exclusive coverage from another insurer. Id.
The Appellate Court then noted that there are some recognized limitations on the use of targeted tenders. Here, the court noted the Illinois Supreme Court’s decision in Kajima Construction Services, Inc. v. St. Paul Fire & Marine Insurance Co., 227 Ill. 2d 102, 107 (2007), where the Court rejected an insured’s effort to target its excess carriers in lieu of its primary coverage as, doing so, would eviscerate the distinction between primary and excess policies. 
It also noted the First District Appellate Court’s decision in Illinois School District Agency v. St. Charles Community Unit School District 303, 2012 IL App (1st) 100088, ¶37, where the court rejected a school district’s attempt in a mold remediation case to target a later policy from among several consecutive insurance policies covering the contamination (as opposed to the concurrent policies discussed above), finding that this would be an unsupportable extension of the doctrine.
Taking up the arguments, the Appellate Court noted that AMCO argued that the trial court erred in granting Cincinnati's motion to dismiss, arguing that the General Contractor had relinquished its right to make a targeted tender. Here, AMCO argued that the General Contractor selectively tendered its defense to AMCO and Erie only. As such, it would arguably still possess the right to deactivate its targeted tender to AMCO and assign its rights to reverse its deselection of coverage against AMCO as part of the settlement. Doing so would allow AMCO to seek contribution from Cincinnati towards the settlement. In particular, AMCO claimed that, by assigning its rights, the General Contractor chose to forego coverage with AMCO and deactivated any previous target tenders.
Additionally, AMCO argued that if the Appellate Court were to adopt the Chancery Court and Cincinnati's interpretation of the targeted tender doctrine, the rule would be expanded beyond its intended scope. AMCO contended that the rule would be “expanded” because the court would be allowing the General Contractor's targeted tender to AMCO to survive after it assigned all of its rights to AMCO.
Further, AMCO argued that even if the General Contractor's targeted tender were to be upheld, AMCO should be allowed to pursue claims against Cincinnati. In support of this argument, AMCO noted that its settlement payment of $1,450,000 exceeded its policy limit of $1 million. AMCO also cited Kajima for the following rule: "to the extent that defense and indemnity costs exceed the primary limits of the targeted insurer, the deselected insurer or insurers' primary policy must answer for the loss before the insured can seek coverage under an excess policy." Kajima, 227 Ill. 2d at 117. Thus, AMCO argued that assuming the Cincinnati policy provides primary insurance to the General Contractor, the Cincinnati and Erie policies would be responsible to pay before any excess coverage like the AMCO umbrella policy would be triggered.
AMCO also argued that the priority of coverage between the Cincinnati and Erie policies had yet to be determined. Accordingly, AMCO contended that its claims against Cincinnati must be allowed to proceed so that the priority of coverage between Cincinnati and Erie could be determined. Therefore, AMCO argued that the trial court erred in granting Cincinnati's motion to dismiss with prejudice.
In response, Cincinnati argued that the trial court did not err in granting its motion to dismiss on several grounds. First, Cincinnati argued that the right to target an insurer should end with the resolution of the underlying claim. Cincinnati contended that AMCO's position required that an insured's right to select and deselect insurers continue past the point where the claim is completely resolved and has been paid by the targeted insurer. Cincinnati asserted that the General Contractor's assignment of rights to AMCO conveyed no rights in relation to Cincinnati because the lawsuit was completely settled when the assignment took effect.
Cincinnati also argued that AMCO’s citation to Richard Marker in support of its argument that a targeted insurer can be deselected after a claim was misplaced. On this, AMCO noted that Richard Marker involved a situation in which multiple insurers refused to defend the insured, and the insured had to defend and settle the underlying lawsuit with his own funds. Richard Marker, 318 Ill. App. 3d at 1139. The insured then deselected one insurer and decided to target another insurer. Id. This court held that the targeted tender doctrine allowed Marker to target the insurer of his choice even after the lawsuit was settled. Id. at 1143-44.
On this, the Appellate Court noted that Cincinnati argued that Richard Marker does not apply to the situation in this case where the "targeted insurer that defends the insured and pays the settlement *** then subsequently attempts to deselect itself and target another insurer."
Next, Cincinnati argued that AMCO's position would undercut the rationale of the targeted tender doctrine, as it would take away an insured’s control over which of the available insurers will defend it in a lawsuit. Cincinnati noted that once an insurer has been targeted and the case against the insured is settled, all liability should be seen as “eliminated” and the reason for the targeted tender disappears. As such, there would be no reason for an insured to continue to be able to target and deselect insurers once the underlying case is completely resolved by a targeted insurer.
Based on this, Cincinnati asserted that after AMCO paid the $1,450,000 settlement there was nothing left at stake for the General Contractor and no reason for it to continue to have any right to target and deselect insurers. 
Also, Cincinnati argued that if AMCO were to prevail, it would completely defeat the many reasons supporting the General Contractor's decision to target AMCO in the first place, including the fear that premiums would be increased in the future. Indeed, Cincinnati asserted that the General Contractor decided not to target Cincinnati, its own insurer, and instead decided to target AMCO in order to avoid a negative history with Cincinnati. To allow AMCO to seek contribution would defeat the General Contractor’s intent.
Further, Cincinnati argued that to adopt AMCO's interpretation of the targeted tender doctrine would act to expand the doctrine beyond its intended scope and render the concept of the targeted tender doctrine meaningless. Here, Cincinnati noted that the General Contractor specifically decided not to target Cincinnati. As such, Cincinnati was forbidden to participate in the lawsuit or settlement agreement. To allow AMCO to, effectively, “deselect” itself and place Cincinnati back on the risk would nullify the General Contractor’s actions and the targeted tender doctrine itself.
Finally, Cincinnati responded to AMCO's argument that its claims against Cincinnati should proceed in order to determine the priority of coverage between Cincinnati and Erie. Here, Cincinnati argued that AMCO's argument was flawed because AMCO overlooked the crucial facts that the General Contractor specifically targeted Erie for coverage in addition to AMCO and Erie accepted that tender. As such, primary carriers AMCO and Erie were responsible for any costs associated with the insured's underlying lawsuit. As the limit of the Erie policy was $1 million, Cincinnati asserted that AMCO should be seeking contribution for the $450,000 it paid in excess of its policy from Erie, not Cincinnati.
In considering the arguments, the Appellate Court held that the outcome of the case was determined by the resolution of one main issue: whether the targeted tender doctrine allows insurers to deselect themselves as targeted insurers following the settlement of the insured's underlying lawsuit? The Appellate Court answered this question in the negative, finding that the targeted tender doctrine cannot be interpreted in such a way and should be narrowly applied to the types of factual situations for which it was originally intended.
In discussing this intent, the Appellate Court limited the right to “deselect” a carrier and target another carrier following a settlement to be limited to the situation in Richard Marker, where an insured was forced to settle a matter alone without the assistance of potential multiple carriers that could have responded to the loss. Richard Marker, 318 Ill. App. 3d at 1143-44.
The Appellate Court also noted that AMCO’s attempt to take an assignment from the insured General Contractor and seek coverage from a deselected carrier would nullify the targeted tender doctrine, stating:
The point of the doctrine is to allow the insured to select which insurer it wants to target for defense of an underlying lawsuit. Under AMCO's interpretation, a targeted insurer could simply settle the underlying lawsuit contingent on the assignment of the insured's rights, and then seek contribution from every other insurer that was not originally targeted. The entire purpose of the targeted tender doctrine would be eviscerated.
Moreover, the Appellate Court agreed that once the claims against the General Contractor had been fully resolved, the General Contractor no longer had any remaining claim to recover money from Cincinnati. Thus, the General Contractor's assignment was “essentially meaningless.”
This decision should be seen as making targeted tenders “stick.” While AMCO was somewhat clever in seeking an assignment following settlement to attempt to place the loss back on the insured General Contractor’s primary carrier, the Appellate Court’s decision is sound in that the insured’s interests in having the loss covered by another contractor’s coverage should be respected. Contractors intentionally include additional insurance clauses in typical construction subcontracts with "downstream" contractors with the specific purpose of moving the risk of an injury down to subcontractors. To revert this risk back “upstream” would defeat the purpose of the additional insured agreement and take away an important part of the consideration included in the typical subcontract agreement.
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Terrence Guolee is a shareholder and member of the Board of Directors of Q&H. Terrence has defended general contractors, subcontractors, utilities, product and equipment manufacturers and other defendants in dozens of construction and other worksite cases involving complicated insurance coverage issues and extreme exposures – often in ranges exceeding tens of millions of dollars – over the 21+ years of his legal career. If you have any questions regarding this article, or regarding Q&H’s construction, product liability and insurance coverage practices, please contact Terrence F. Guolee or 312-725-0889.
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