Premcor Usa, Inc. v. American Home Assurance Co., 04-2549.

• Decision Date: 09 March 2005
• Docket Number: No. 04-2549.,04-2549.
• Citation: 400 F.3d 523
• Parties: PREMCOR USA, INC., and The Premcor Refining Group, Inc., Plaintiffs-Appellants, v. AMERICAN HOME ASSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

400 F.3d 523

PREMCOR USA, INC., and The Premcor Refining Group, Inc., Plaintiffs-Appellants, v. AMERICAN HOME ASSURANCE COMPANY, Defendant-Appellee.

No. 04-2549.

United States Court of Appeals, Seventh Circuit.

Argued December 10, 2004.

Decided March 9, 2005.

Mary R. Alexander (argued), Latham & Watkins, Chicago, IL, for Plaintiff-Appellant.

Perry M. Shorris (argued), Bollinger, Ruberry & Garvey, Chicago, IL, for Defendant-Appellee.

Before RIPPLE, MANION, and WOOD, Circuit Judges.

MANION, Circuit Judge.

Premcor USA, Inc., and The Premcor Refining Group, Inc. (together, "Premcor") sued American Home Assurance Company ("AHA") for coverage of litigation defense costs under an "umbrella" insurance policy (the "AHA policy"). Premcor argued that the AHA policy required AHA to pay more than two million dollars in costs that Premcor incurred while defending itself in an Illinois state court case. The parties filed cross-motions for summary judgment. The district court granted judgment in favor of AHA. Premcor appeals.

I

In 1995, two Premcor employees were fatally injured while working at a Premcor facility in Blue Island, Illinois. Subsequently, their estates initiated negligence actions in Illinois state court to recover damages under the Illinois Wrongful Death and Survival Act, 740 ILCS §§ 180.01 et seq. The state trial court granted summary judgment to Premcor in January 2004, but the case presently continues on appeal. To date, Premcor has spent over two million dollars defending this action.

At the time of the accident, Premcor was covered by several insurance policies. The initial layer of insurance was composed primarily of a two million dollar commercial general liability policy (the "Reliance policy") from Reliance National Indemnity Company ("Reliance"). In addition, Premcor had several other insurance policies covering discrete areas such as employers' liability and automobiles. Premcor also contracted with AHA for an umbrella insurance policy that would provide ten million dollars in excess coverage. An umbrella policy is a type of policy that acts both as an excess insurance policy and, in certain circumstances, as a primary insurance policy. Regarding the latter aspect, an umbrella policy provides coverage for those incidents left uncovered by other insurance policies, filling gaps in underlying insurance.

When the accident occurred, Premcor filed a claim with Reliance. The Reliance policy contained a "duty to defend" provision, which provided that Reliance would pay defense costs for any actions covered by the Reliance policy. Reliance, however, subsequently became insolvent, which left Premcor itself to pay the defense costs in the Illinois state court action. After Reliance became insolvent, Premcor filed a declaratory judgment action against AHA in the Northern District of Illinois, arguing that, under the AHA policy, AHA had to "drop down" and pay all defense costs above the amount Premcor received from Reliance, which because of the insolvency was zero.

As this case turns on the precise coverage of the AHA policy, we examine the applicable provisions in some detail. The AHA policy begins with a broad description of its coverage: "[t]o pay on behalf of [Premcor] that portion of the ultimate net loss in excess of the retained limit as hereinafter defined...." Several provisions of the AHA policy add specific contours to this general description. The Declarations page sets forth the Limit of Liability of the AHA policy. This Limit of Liability states that AHA will provide ten million dollars in coverage for any loss in excess of either:

(1) the amount recoverable under the underlying insurance as set out in the attached Schedule A

or

(2) $25,000 US ultimate net loss in respect of each occurrence not covered by underlying insurance.

A second provision in AHA's policy further explains AHA's obligation to provide coverage. Specifically, the AHA policy's "retained limit" clause states:

A. [AHA] shall be liable only for that portion of the ultimate net loss excess of [Premcor's] retained limited defined as either:

1. the total of the applicable limits of the underlying policies listed in the Schedule of Underlying Insurance hereof, and the applicable limits of any other underlying insurance providing coverage to [Premcor]; or

2. the amount stated in Item 3(A-2) of the Declarations as the result of any one occurrence not covered by such underlying policies or insurance and then up to an amount not exceeding the amount as stated in Item 3(A) of the Declarations as the result of any one occurrence.

The AHA policy defines "ultimate" net loss as:

the total sum which [Premcor], or any company as its insurer, or both become obligated to pay be [sic] reason of personal injury, property damage, ... and shall also include ... expenses for doctors, nurses, and investigators and other persons, and for settlement, adjustment, investigation and defense of claims.... [AHA] shall not be liable for expenses as aforesaid when such are covered by underlying policies of insurance whether collectible or not.

In short, by defining ultimate net loss, the AHA policy restricts its coverage to situations where either damages or costs exceed the total of the applicable limits of the underlying policies.

Another relevant portion of the AHA policy addresses AHA's liability in instances of insolvency by any underlying insurers. Endorsement 10 provides:

The liability of [AHA] shall not be increased by the refusal or inability of [Premcor] to pay its Self-Insured Retention (or retained limit) or by the refusal or inability of any underlying insurer to pay, whether by Reasons of Insolvency, Bankruptcy, or otherwise.

This endorsement indicates that insolvency by an underlying insurance provider has no effect on the amount of AHA's liability.

In addition to these provisions regarding excess insurance, the AHA policy, as an umbrella insurance policy, also supplies primary coverage in some circumstances. Under a section designated "Defense, Settlement, Supplementary Payments," the AHA policy provides primary coverage "to occurrences covered under this policy but not covered by any underlying policies...." The primary coverage aspect of the AHA policy therefore only exists where there is a hole in the coverage of the underlying insurance.

Notwithstanding the policy language that seems to address insolvency of underlying insurers, Premcor argued in its declaratory judgment action that AHA was required to pay all defense costs because Reliance was insolvent. Premcor maintained that the amount recoverable language in the AHA policy meant that AHA was responsible for all amounts above that which was actually recovered from the underlying insurance. As the underlying insurance paid nothing in this case, Premcor argued that AHA should be responsible for the entire two million dollars.

The parties filed cross-motions for summary judgment and the district court decided in favor of AHA. The district court found that the amount recoverable language in the AHA policy was ambiguous as a matter of Illinois law, but that Endorsement 10 expressly forbade increased liability because of the insolvency of underlying insurance. This appeal followed.

II

We review de novo the district court's decision involving cross-motions for summary judgment. See Huntzinger v. Hastings Mut. Ins. Co., 143 F.3d 302, 307 (7th Cir.1998). Summary judgment is proper when the "pleadings, depositions, answers to interrogatories, 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 matter of law." Fed.R.Civ.P. 56(c). With cross-motions, we construe the evidence and all reasonable inferences in favor of the party against whom the motion under consideration is made. See Metrop. Life Ins. Co. v Johnson, 297 F.3d 558, 561-62 (7th Cir.2002).

The law of Illinois applies to the interpretation of these contracts. The construction of the provisions of an insurance policy is a question of law, subject to de novo review. See Am. States Ins. Co. v. Koloms, 177 Ill.2d 473, 227 Ill.Dec. 149, 687 N.E.2d 72, 75 (1997). "In order to ascertain the meaning of the policy's language and the parties' intent, the court must construe the policy as a whole and take into account the type of insurance purchased, the nature of the risks involved, and the overall purpose of the contract." Emerson Elec. Co. v. Aetna Sur. & Cas. Co., 352 Ill.App.3d 399, 287 Ill.Dec. 280, 815 N.E.2d 924, 937 (2004); see also Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill.2d 90, 180 Ill.Dec. 691, 607 N.E.2d 1204, 1212 (1992); Transamerica Ins. Co. v. South, 975 F.2d 321, 327 (7th Cir.1992) (applying Illinois law) ("All the provisions of the insurance contract, rather than an isolated part, should be read together to interpret it and to determine whether an ambiguity exists."). If the language of the policy is susceptible to more than one meaning, it is considered ambiguous and will be construed strictly against the insurer who drafted the policy and in favor of the insured. See Maremont Corp. v. Cont'l Cas. Co., 326 Ill.App.3d 272, 260 Ill.Dec. 133, 760 N.E.2d 550, 554 (2001). "However, [a] court `will not strain to find ambiguity in an insurance policy where none exists.'" Travelers Ins. Co. v. Eljer Mfg. Inc., 197 Ill.2d 278, 258 Ill.Dec. 792, 757 N.E.2d 481, 491 (2001) (quoting McKinney v. Allstate Ins. Co., 188 Ill.2d 493, 243 Ill.Dec. 56, 722 N.E.2d 1125, 1127 (1999)).

A

The parties' dispute over the scope of coverage of the AHA policy focuses on the interpretation of the "amount recoverable" language. This language is critical to determine when AHA's obligation to provide excess coverage begins. In the past, Illinois courts have interpreted such amount recoverable language, considered alone, to be ambiguous. See Donald B. MacNeal, Inc. v. Interstate Fire &...