North River Ins. Co. v. Grinnell Mut.

• Decision Date: 08 December 2006
• Docket Number: No. 1-05-0606.,1-05-0606.
• Citation: 860 N.E.2d 460,307 Ill.Dec. 806
• Parties: The NORTH RIVER INSURANCE COMPANY, United States Fire Insurance Company and Shelco Steel Works, Inc., Plaintiffs-Appellees (United States Fire Insurance Company, Plaintiff-Appellee and Cross-Appellant), v. GRINNELL MUTUAL REINSURANCE COMPANY, The Tokio Marine and Fire Insurance Company, Limited, American Miscellaneous Steel, Inc., Kajima Construction Services, Inc., and Beverly Knauer, d/b/a, Knauer Insurance Specialists, f/k/a Potter & Knauer Insurance Agency, Defendants-Appellees (Tokio Marine ane Fire Insurance Company, Limited, and Kajima Construction Services, Inc., Defendants-Appellants and Cross-Appellees).
• Court: United States Appellate Court of Illinois

860 N.E.2d 460

307 Ill.Dec. 806

The NORTH RIVER INSURANCE COMPANY, United States Fire Insurance Company and Shelco Steel Works, Inc., Plaintiffs-Appellees (United States Fire Insurance Company, Plaintiff-Appellee and Cross-Appellant), v. GRINNELL MUTUAL REINSURANCE COMPANY, The Tokio Marine and Fire Insurance Company, Limited, American Miscellaneous Steel, Inc., Kajima Construction Services, Inc., and Beverly Knauer, d/b/a, Knauer Insurance Specialists, f/k/a Potter & Knauer Insurance Agency, Defendants-Appellees (Tokio Marine ane Fire Insurance Company, Limited, and Kajima Construction Services, Inc., Defendants-Appellants and Cross-Appellees).

No. 1-05-0606.

Appellate Court of Illinois, First District, Sixth Division.

December 8, 2006.

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Prusik, Selby, Daley & Kezelis, P.C., Terence R. Selby, of counsel, Chicago, for Appellant.

Cremer, Kopon, Shaughnessy & Spina, LLC, Brian A. O'Gallagher, of counsel, Chicago, for Appellee.

Justice O'MALLEY delivered the opinion of the court:

Plaintiff-appellee and cross-appellant United States Fire Insurance Company (U.S. Fire) brought a declaratory judgment action against defendant-appellant and cross-appellee Tokio Marine and Fire Insurance Company (Tokio) seeking reimbursement of funds from Tokio's primary insurance policy which were paid from U.S. Fire's excess policy to fund a settlement in an underlying personal injury lawsuit.¹ US Fire also sought equitable contribution from Tokio's excess policy for funds paid by U.S. Fire's excess policy toward the settlement for which Tokio was allegedly responsible. The parties filed motions and cross-motions for summary judgment. The circuit court granted summary judgment in favor of U.S. Fire and against Tokio on U.S. Fire's reimbursement claim and granted summary judgment in favor of Tokio and against U.S. Fire on its claim for equitable contribution from Tokio's excess policy.

For the reasons that follow, we affirm the judgment of the circuit court.

BACKGROUND

In 1996, general contractor Kajima Construction Services, Inc. (Kajima), commenced a building project in Bolingbrook, Illinois. Kajima entered into a subcontract with Shelco Steel Works, Inc. (Shelco), to perform certain construction work on the project. Shelco, in turn, subcontracted its obligation with Kajima to American Miscellaneous Steel, Inc. (AMS). During construction of the Bolingbrook project, Michael Farkas, an employee of AMS, sustained serious and permanent injury when an iron bar joist fell on him while he was performing his duties. In 1997, Farkas filed suit against Kajima, Shelco and others alleging negligence on their part which resulted in his injury.

On the date of Farkas's injury, Kajima was insured under a primary commercial general liability (CGL) insurance policy and an excess umbrella policy, both of which were issued by Tokio. Shelco was covered by a primary CGL insurance policy issued by the North River Insurance Company (North River) and an excess umbrella policy issued by U.S. Fire. AMS was covered by a CGL primary policy and an umbrella policy, both of which were issued by Grinnell Mutual Reinsurance Company (Grinnell). Kajima, Shelco and AMS had primary limits of $1 million on their respective primary CGL policies and limits in excess of $2 million in coverage for each umbrella policy.

On July 1, 1997, after receiving notice of the Farkas lawsuit, Kajima immediately tendered its defense and indemnity to North River and Grinnell, the primary insurers for Shelco and AMS, respectively. The tender also indicated that Kajima was seeking an exclusive defense and indemnity from Shelco's and AMS's insurers without the benefit of Tokio's assistance. Kajima also notified Tokio of the lawsuit and its selective tender to Shelco and AMS's insurers by sending a copy of the July 1, 1997, letter to Tokio for reference purposes. Both North River and Grinnell ultimately accepted Kajima's tender and shared the costs of Kajima's defense. Attorney David Nani was assigned to Kajima as defense counsel and paid by North River to undertake Kajima's defense.

As the Farkas case proceeded through the various stages of trial, North River and Grinnell attempted to negotiate a settlement. In October 2000, it became apparent that a settlement within the limits of North River's and Grinnell's primary insurance policies was not possible. North River informed Tokio that Kajima's liability in the lawsuit could exceed North River and Grinnell's combined primary limits and suggested that Tokio contribute $500,000 toward a settlement package. Tokio refused to contribute. On November 13, 2000, North River and Grinnell advised Tokio that each insurer was tendering its full primary policy limits in an attempt to settle the Farkas lawsuit and that Tokio should do the same. Tokio again refused to contribute any amount on Kajima's behalf to the settle the case.

The Farkas lawsuit was settled for $4 million after the jury began deliberating, but before a verdict was reached. The settlement was funded as follows: North River and Grinnell each contributed $1 million and U.S. Fire contributed $2 million from Shelco's umbrella policy. Tokio did not contribute to the Farkas settlement. US Fire, Shelco and North River subsequently sought declaratory relief in the circuit court against Grinnell and Tokio, among others.² In its fifth amended complaint, U.S. Fire alleged that Tokio was obligated to exhaust its primary insurance policy to indemnify Kajima before the U.S. Fire umbrella policy would be obligated to contribute on Kajima's behalf.

Motions and cross-motions for summary judgment were filed by the parties. Tokio argued that it was not obligated to contribute to Kajima's defense and indemnity because its policy was not an available policy since Kajima had selectively tendered its defense and indemnity to Shelco and AMS and their respective insurers. As a result, the Tokio primary policy was not an available policy for Kajima's defense and indemnity. US Fire responded that the selective tender rule does not apply to the excess layer of insurance and despite the rule's applicability to concurrent primary insurance policies, U.S. Fire was not obligated to indemnify Kajima until all primary insurance policies were exhausted. In addition, U.S. Fire asserted that Kajima's and AMS's excess insurers were obligated to equally contribute to the loss at the excess level due to the policies' mutually repugnant "other insurance" clauses. In other words, the selective tender rule should not apply to the excess policies issued by Grinnell, Tokio and U.S. Fire because each policy purported to be excess to any other insurance. Grinnell subsequently settled with U.S. Fire by paying $500,000 from its excess policy in reimbursement to U.S. Fire.

The circuit court granted summary judgment in favor of U.S. Fire and against Tokio relative to U.S. Fire's claim that the horizontal exhaustion doctrine preempts the selective tender rule. On the issue of whether the selective tender rule applies to multiple excess policies, the circuit court ruled that the selective tender rule applies to multiple excess policies and because Kajima selectively tendered its defense and indemnity to its subcontractor's insurers, Tokio's excess policy was not available for indemnity until the targeted insurers had exhausted their policy limits. Tokio appealed and U.S. Fire cross-appealed the judgment of the circuit court.

ANALYSIS

I. STANDARD OF REVIEW

Summary judgment is appropriate where "the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." 735 ILCS 5/2-1005(c) (West 2004); General Casualty Insurance Co. v. Lacey, 199 Ill.2d 281, 284, 263 Ill. Dec. 816, 769 N.E.2d 18 (2002). We review an order granting summary judgment de novo. General Casualty Insurance Co., 199 Ill.2d at 284, 263 Ill.Dec. 816, 769 N.E.2d 18; Travelers Indemnity Co. v. American Casualty Co. of Reading, 337 Ill.App.3d 435, 439, 272 Ill.Dec. 43, 786 N.E.2d 582 (2003).

II. VERTICAL EXHAUSTION AND THE SELECTIVE TENDER RULE

On appeal, Tokio contends that vertical exhaustion of Shelco's primary and excess policies was proper because Tokio's policy was not "triggered" pursuant to the selective tender rule. Tokio's bases for application of vertical exhaustion are: (1) Kajima notified Shelco's insurers that it would not seek indemnification from Tokio; (2) the contract between Kajima and Shelco required vertical exhaustion by Shelco's insurers; (3) U.S. Fire waived any policy defenses with regard to vertical exhaustion; and (4) Tokio received late notice that it would be required to indemnify Kajima. We disagree.

This court has recently ruled that the selective tender rule does not entitle an insured to vertically exhaust consecutive insurance policies and deselected primary insurers must answer for a loss before an excess insurance policy will be activated. Kajima Construction Services, Inc. v. St. Paul Fire & Marine Insurance Co., 368 Ill.App.3d 665, 673-74, 305 Ill.Dec. 647, 856 N.E.2d 452, 460 (2006). In Kajima, we held that the selective tender rule, which allows an insured covered by multiple concurrent policies the right to choose which insurer will defend and indemnify it with respect to a specific claim, applies to concurrent insurance coverage. Kajima, 368 Ill.App.3d at 668-69, 305 Ill.Dec. 647, 856 N.E.2d at 456. See also John Burns Construction Co. v. Indiana Insurance Co., 189 Ill.2d 570, 574, 244 Ill.Dec. 912, 727 N.E.2d 211 (2000); Cincinnati Cos. v. West American Insurance Co., 183 Ill.2d 317, 326, 233 Ill.Dec. 649, 701 N.E.2d 499 (1998); Institute of London Underwriters v. Hartford Fire Insurance Co., 234 Ill. App.3d 70, 78-79, 175 Ill.Dec. 297, 599 N.E.2d 1311 (1992).

We also explained the distinction between the...