Lexington Insurance Company v. RLI Insurance Company
| Decision Date | 27 January 2020 |
| Docket Number | No. 19-1426,19-1426 |
| Citation | 949 F.3d 1015 |
| Parties | LEXINGTON INSURANCE COMPANY and National Union Fire Insurance Company of Pittsburgh, PA, Plaintiffs-Appellants, v. RLI INSURANCE COMPANY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Mark John Sobczak, Attorney, Nicolaides Fink Thorpe Michaelides Sullivan LLP, Chicago, IL, for Plaintiffs-Appellants.
Todd S. Schenk, Attorney, Tressler LLP, Chicago, IL, for Defendant-Appellee.
Before Hamilton, Scudder, and St. Eve, Circuit Judges.
In this contract dispute, two insurers of New Prime, Inc., a trucking company, accuse a third insurer of not paying its share toward two multimillion-dollar personal injury settlements. Plaintiffs Lexington Insurance Company and National Union Fire Insurance Company contend that defendant RLI Insurance Company underpaid according to the policy it sold to New Prime, leaving National Union to make up the difference.
In the district court, Lexington and National Union sought a declaratory judgment as to the meaning of the RLI Policy and equitable contribution of $2.5 million from RLI toward the settlements in question. Both sides moved for summary judgment. Both based their motions on the language of the RLI Policy and on extrinsic evidence of the parties’ intent. The district court granted summary judgment to RLI, relying exclusively on contract language that it found unambiguous. We affirm. The text of the RLI Policy is not as clear to us as it was to the district court, but undisputed extrinsic evidence shows that RLI’s position is correct.
As a large commercial trucking company, New Prime faces substantial risks of tort liability. In the relevant years, New Prime managed and covered its own liability without insurance for the first $3 million of exposure per occurrence. But to protect itself from unusually large claims, New Prime bought excess liability insurance from three different companies: RLI, Lexington, and National Union. (Lexington and National Union are both wholly owned subsidiaries of the American International Group, Inc., and for most purposes we can refer to them together as AIG.) In contracting with several different insurers, New Prime followed a common industry practice to stack policies into sequential "layers" of excess insurance coverage.1 This case concerns the threshold of liability at which RLI’s responsibility ended and AIG’s began.
The facts of the layers’ sequential ordering are undisputed. New Prime, through its insurance agent Cottingham & Butler, contacted RLI in October 2011 and purchased a $2 million policy largely overlapping with the calendar year 2012. New Prime renewed the $2 million RLI Policy, with one relevant change we discuss later, for the years 2013, 2014, and 2015. Not until May 1, 2014 did New Prime, this time through the agents AmWINS and Regions, obtain a $5 million policy from Lexington to sit above RLI’s layer. New Prime already had a $25 million "umbrella" policy from National Union to sit above Lexington’s layer, and New Prime renewed that policy for the year starting May 1, 2014 as well. Both AIG policies were then renewed without changes for the year beginning on May 1, 2015.2
The two tragic accidents that led to this lawsuit occurred in 2015, when New Prime was covered by the RLI, Lexington, and National Union policies. On March 4, 2015, a New Prime tractor-trailer drifted into the median of Interstate 80 in Mercer County, Pennsylvania. The truck struck and severely injured Daniel Montini, who was changing a flat tire. See Memorandum Order, Montini v. New Prime, Inc. , No. 2:15-cv-1591, slip op. at 1 (W.D. Pa. Nov. 15, 2017). In February 2018, Montini settled his lawsuit against New Prime for $16 million. On December 28, 2015, near Santa Rosa, New Mexico, a New Prime tractor-trailer rear-ended a sedan driven by Katherine and Samuel Herrera. Both were killed. See Complaint, Tafoya v. New Prime, Inc. , No. D412CV201600190 (N.M. Dist. May 19, 2016), 2016 WL 4411077. In March 2018, the Herreras’ estates settled their claims against New Prime for $20 million.
The dispute here is over how much RLI needed to contribute first to the Herrera settlement and then to the later Montini settlement, which were so large as to trigger the excess insurance policies. The parties agree that, starting from the first dollar, New Prime itself was required to cover $3 million of costs or losses for each occurrence because of the so-called "Self-Insured Retention" built into the RLI Policy. In effect, the Self-Insured Retention made New Prime its own primary insurer up to $3 million per occurrence, with both RLI and AIG providing forms of excess insurance. See, e.g., Kajima Const. Servs., Inc. v. St. Paul Fire & Marine Ins. Co ., 227 Ill.2d 102, 316 Ill.Dec. 238, 879 N.E.2d 305, 313 (2007) .
The RLI Policy provided the next layer of coverage but came with a feature called the "Aggregate Corridor Deductible" or "ACD," which is the central focus of this lawsuit. Read alone, the main text of the RLI Policy would have provided for the first $2 million of coverage immediately above New Prime’s $3 million Self-Insured Retention. An endorsement to the Policy, however, added the Aggregate Corridor Deductible and described its function (emphasis added):
The Insured [i.e., New Prime] shall respond to, investigate, adjust, defend, and dispose of by payment or otherwise all losses and claims for losses covered by the Policy for which the total claim is greater than the $3,000,000 Self Insured Retention (SIR) until the Aggregate Corridor Deductible of $2,500,000 has been satisfied . Once the Aggregate Corridor Deductible has been exhausted by payment for one or more losses & "costs" , the Insured is only responsible for losses and "costs" up to [the] Per Occurrence Self Insured Retention.
The endorsement also specified that the ACD amounts to "$2,500,000 excess of the $3,000,000 Self Insured Retention." Although not a model of clarity, this endorsement obligated New Prime to pay out an additional $2.5 million above its Self-Insured Retention of $3 million per occurrence before RLI began to pay. But while the Self-Insured Retention applied to each covered incident, the $2.5 million ACD applied only once per year, so New Prime needed to pay that additional amount only once per policy year. On these basics RLI and AIG agree.
The dispute, however, is whether New Prime’s payments toward the Aggregate Corridor Deductible diminished the amount that RLI owed on any claims. RLI argues that the ACD sat within RLI’s $2 million layer, leaving RLI with no responsibility for making any payment on any claim until New Prime had both (a) paid $3 million per occurrence and (b) paid the year’s ACD total on losses between $3 million and $5 million per occurrence. If that is correct, then New Prime and RLI would together owe at most $5 million on any claim: the $3 million Self-Insured Retention plus the $2 million RLI Policy. In contrast, AIG argues that the ACD sat below RLI’s $2 million layer. On this view, RLI had to provide coverage whenever the loss exceeded the sum of the Self-Insured Retention and remaining ACD balance. In other words, AIG asserts, "the ACD operates ... as an additional $2.5 million self-insured retention applying per policy period." If that were correct, then AIG’s duty to pay would not have been triggered until New Prime and RLI had together paid $7.5 million for the first big occurrence(s) of the policy year. The charts below illustrate the parties’ respective views on how to allocate the first $10 million of the Herrera and Montini settlements, showing a dispute over $2.5 million.
RLI's Position AIG's Position
AIG Coverage AIG Coverage
RLI Coverage RLI Coverage
New Prime ACD New Prime ACD
New Prime SIR New Prime SIR
$2.5
$5.0 $5.0 $5.0
$2.0
$0.0
$2.0 $1.5 $2.5 $2.0
$0.5 $0.0
$3.0 $3.0 $3.0 $3.0
Herrera Montini Herrera Montini
At the time of the Herrera and Montini settlements, RLI insisted on its view of the Aggregate Corridor Deductible. It paid none of the Herrera settlement and only $1.5 million of the Montini settlement. AIG reserved its rights to recoup the alleged deficit of $2.5 million from RLI. Because the settlements exhausted Lexington’s policy layer on any view of the RLI Policy, it is National Union that seeks equitable contribution through this lawsuit.
The parties filed cross-motions for summary judgment in the district court. Both RLI and AIG attached to their motions extrinsic evidence, including email correspondence, underwriting files, and employee affidavits. Both sides referred to extrinsic evidence and disputed its significance in their summary judgment briefing. The district court declined to consider the evidence. The court found that the RLI Policy provided unequivocally that payments toward the Aggregate Corridor Deductible erode RLI’s policy layer. The court entered summary judgment for RLI on that basis, and AIG appealed.
The parties agree on appeal that Illinois law governs this contract dispute. In interpreting any insurance policy, the "primary function" of an Illinois court "is to ascertain and give effect to the intention of the parties, as expressed in the policy language." Thounsavath v. State Farm Mut. Auto. Ins. Co ., 423 Ill.Dec. 150, 104 N.E.3d 1239, 1244 (Ill. 201...
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