Hudson Ins. Co. v. Gelman Sciences, Inc.

• Decision Date: 18 September 1990
• Docket Number: No. 89-2893.,89-2893.
• Citation: 921 F.2d 92
• Parties: HUDSON INSURANCE COMPANY, a corporation, Plaintiff-Appellee, v. GELMAN SCIENCES, INCORPORATED, a corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

921 F.2d 92

HUDSON INSURANCE COMPANY, a corporation, Plaintiff-Appellee, v. GELMAN SCIENCES, INCORPORATED, a corporation, Defendant-Appellant.

No. 89-2893.

United States Court of Appeals, Seventh Circuit.

Argued June 12, 1990.

Decided September 18, 1990.^*

Opinion December 7, 1990.

Jeffrey T. Kraus (argued), John W. Morrison, Charles A. Valente, Altheimer & Gray, Chicago, Ill., for plaintiff-appellee.

Gary L. Starkman, Thomas F. Sax, Brian D. Vandenburg, Arvey, Hodes, Costello & Burman, Chicago, Ill., Michael L. Caldwell, David H. Fink, Cooper, Fink & Zausmer, Farmington Hills, Mich., for defendant-appellant.

Before POSNER, EASTERBROOK, and MANION, Circuit Judges.

MANION, Circuit Judge.

Hudson Insurance Company (Hudson) contracted with Gelman Sciences, Inc. (Gelman) to provide $4 million in excess umbrella liability coverage. Gelman's primary insurer, Central National Insurance Company (Central), provided Gelman with an initial one million dollars of liability coverage. Mission National Insurance Company (Mission) insured Gelman for the next $20 million in liability. Thus Hudson covered any liability between $21 and $25 million.

Mission became insolvent and was placed in liquidation, leaving Gelman exposed for liability coverage between $1 and $21 million. Gelman, the defendant in four lawsuits, notified Hudson that it expected Hudson to "drop down" and indemnify Gelman for any liability between $1 and $5 million.¹ Gelman also requested that Hudson defend it in the four lawsuits.² Hudson declined both requests, and instead sought a declaratory judgment from the district court clarifying its rights and obligations. The district court, in Hudson Ins. Co. v. Gelman Sciences, Inc., 706 F.Supp. 25 (N.D.Ill.1989), held that the contract was unambiguous in limiting Hudson's coverage to Gelman's liability between $21 and $25 million, and therefore granted summary judgment for Hudson. We affirm.

Gelman first argues that the language of the insurance contract is ambiguous as to whether Hudson must "drop down." Therefore Hudson should lose because under Illinois law³ any ambiguity must be construed in favor of the insured. Gelman also contends that even if the contract is clear that Hudson need not "drop down," public policy in Illinois compels excess liability insurers to bear the risk any time an underlying carrier becomes insolvent. Neither argument has merit.

The relevant provisions of the insurance contract speak clearly as to the agreement between Hudson and Gelman. Clause 2, the "Limit of Liability" section, states:

Hudson shall be liable for the Limit of Liability stated in Item 3 of the Declarations $4 million which is in excess of the Total Underlying Insurance Limit of Liability stated in Item 4 of the Declarations $20 million plus $1 million of primary coverage, provided that Hudson's liability shall be limited to the amount stated in Item 3 as applicable to "each occurrence," "each person" or "each claim," and further limited to the amount stated in Item 3 as "aggregate" with respect to each annual period while this policy is in force.

Liability of Hudson under this policy shall not attach unless and until the Insured or the Insured's Underlying Insurance has paid or has been held liable to pay the Total Underlying Insurance Limit of Liability, as stated in Item 4 of the Declarations.

Gelman points to Clause 3, "Maintenance of Underlying Insurance," and contends this clause creates an ambiguity. Clause 3 provides:

It is a condition of this policy that the policy or policies referred to in Declaration 5, and any renewal or replacement thereof not more restrictive, shall be maintained in full effect during the currency of this Policy without alteration of terms or conditions except for any reduction or exhaustion of the aggregate limit contained therein solely by reason of losses arising out of occurrences that take place during the period of this policy. Failure of the Insured to comply with the foregoing shall not invalidate this Policy, but in the event of such failure Hudson shall be liable hereunder only to the extent that it would have been liable had the Insured complied therewith.

Gelman argues that it "maintained in full effect" the underlying coverage and should not be held responsible for Mission's insolvency. It contends Clause 3 indicates that Hudson will "drop down" and assume the liabilities of an insolvent underlying carrier so long as Gelman maintained the underlying policies during the Hudson policy period.

We disagree. Illinois law of contract interpretation provides that "words in the policy should be given their plain and ordinary meaning, and the court should not search for an ambiguity where there is none." United States Fire Ins. v. Schnackenberg, 88 Ill.2d 1, 57 Ill.Dec. 840, 842, 429 N.E.2d 1203, 1205 (1981). Because Mission has not paid or been held liable to pay its $20 million underlying limit of liability, Hudson's liability does not attach. The district court was correct that Clause 2 "plainly states that Hudson is not liable to Gelman until the underlying insurers have paid or are held liable." Hudson, 706 F.Supp. at 27.

Clause 3 not only does not create any ambiguities, it further clarifies the agreement between the parties. The final sentence — "Failure of the Insured to comply with the foregoing shall not invalidate this Policy, but in the event of such failure Hudson shall be liable hereunder only to the extent that it would have been liable had the Insured complied therewith" (emphasis added) — can only mean that whether Gelman maintains a collectible underlying policy or not is irrelevant to Hudson, because Hudson's liability remains limited to Gelman's losses between $21 and $25 million. Further, Gelman attempts to rely on supposedly ambiguous language in Clause 3 at the expense of the rest of the agreement between the parties. But the "intent of parties to a contract must be determined with reference to the contract as a whole, not by reference to particular words or isolated phrases, but by viewing each part in light of the others." United Equitable Ins. v. Reinsurance Co., 157 Ill.App.3d 724, 109 Ill.Dec. 846, 850, 510 N.E.2d 914, 918 (1987) (citation...