The Journal of The DuPage County Bar Association

Back Issues > Vol. 13 (2000-01)

Insurance Coverage: Not the Last Word on Tenders of Defense
By Nick Alexander

By now, most of you have heard about the Illinois Supreme Court’s decision in the John Burns1 case. This article will discuss the John Burns decision, the cases which preceded it and the issues which remain relative to the tenders of defense and additional insured coverage, i.e., the always important issue of money allocation.

The "party seeking coverage" (additional insured under the targeted insurer’s policy) has two (or more) sources for insurance coverage. This party can select one (or more) insurer for the purpose of triggering their coverages for defense and indemnity, while excluding other potential insurers from participating in the party’s defense and indemnity. It is often economically beneficial for the party seeking coverage to trigger the insurer’s policy for which the party is not paying a premium. The party seeking coverage may also wish to avoid deductibles, self insured receptions or reported losses by "deselecting" its own insurance carrier from the process.

Who wants to be an additional insured?

Simply, everybody. It is to a party’s benefit to have the option available to seek coverage for a loss. But additional insureds beware - there may be instances where one insurance policy will not provide adequate coverage or the policy may contain policy language or exclusions which do not exist under the party’s own policy. The moral to the story is to be careful what you ask for - you just may get it.

How does the party seeking coverage seek coverage?

To borrow an old phrase, just do it. First, the party seeking coverage should determine which carriers provide potential coverages (and good investigation here is crucial). The party should determine what limits of coverage are available, what exclusions may apply, and the party may actually be able to get the insurer’s coverage decision before the party makes its decision. (Good deal if you can get it.) Second, the party selects which insurer it wants to defend and indemnify it and notifies the insurer in clear and unequivocal terms. Third, the party must "deselect" the other potential insurers by telling them that they have no duty to defend or indemnify the party seeking coverage. In essence, the party is "untriggering" coverage which would otherwise exist. This last step is important so that there is no risk of "other insurance" claims by the targeted insurer back against one of the other potential coverages.

The rules regarding tenders of defense have changed.

The threshold for tenders of defense has changed. Absent the selection/deselection process by the party seeking coverage, it is this author’s opinion that the burden has shifted to require the insurers to determine whether the insured wants coverage, not the other way around. This concept dovetails with the third step in the above process.

The Illinois Supreme Court decided the Cincinnati2 case in 1998. The court there held that an insurer’s insurance policy was triggered when it had "actual notice" of the lawsuit, which was defined as "notice sufficient to permit the insurer to locate and defend the lawsuit." This means that the insurer can receive "actual notice" from any source; it is not necessary for the insured to formally "tender" the case to the insurer. Once the insurer receives "actual notice" its policy is triggered and a defense obligation may be present - unless the additional insured party does not want the insurer to be a targeted insurer.

For example, in a construction accident lawsuit, the defendants may include the owner, contractor, architect, and subcontractors. The owner (our party seeking coverage) may be an additional insured under several policies issued to the other defendants. Once the defendants are served with process, it is arguable that the insurers for those other defendants have "actual notice" of the potential coverage for the owner. Those insurers would have to provide a defense to the owner, thus creating concurrent primary coverages for the owner. However, under John Burns, the owner may select which of the insurers it wants for defense and indemnity. The owner may "deselect" some of the insurers in favor of one (or more) targeted carrier. Therefore, while the insurance policies are triggered by "actual notice" of the lawsuit, the insured can trump the trigger by "deselecting" the insurers. It is in the insurer’s best interest, once it has actual notice, to contact the additional insured to determine whether the insured wants the coverage, or otherwise the insurer will have a duty to defend the additional insured and be subject to the usual rules if it does not defend.

Equitable contribution and the "other insurance" clause.

The John Burns decision has apparently put to rest the efforts of the targeted insurer to trigger the non-targeted insurer’s policy by way of the "other insurance" provisions of the policies. The concept was that once the targeted policy was triggered, it would seek out "other insurance" from other potential insurers. This was an attempt to override the insured’s selection process. The Illinois Supreme Court held that once an insurance policy was "deselected" by the party seeking coverage, that policy did not exist as potential coverage; therefore, the "other insurance" clause of the targeted insurer would not apply (since there was no other collectible insurance under the deselected policy). The Court upheld the right of the insured, not the insurer, to seek coverage. Some litigants have argued that the courts have rewritten the insurance policy language; these arguments have routinely failed.

In the Institute of London Underwriters3 decision, the appellate court held that the selection process foreclosed the targeted insurer from obtaining contribution from the deselected insurer (nonsettling insurer). The Institute case is notable because it is considered the seminal case on this subject. This case is also worthy of consideration because the deselected insurer’s policy did not contain an "other insurance" clause. This policy language distinction is of no consequence because the deselected insurer’s policy is not triggered. See, McHugh4 and Bituminous5 (losses allocated between triggered policies).

Why this article is not the last word.

There are many unanswered questions which remain from the John Burns decision. Some of these questions are as follows:

1. Can the party seeking coverage "retrigger" an insurance policy after a target insurer was selected?

This may be an important decision-making process for the party seeking coverage. Without the proper investigation, the party may select a target insurer which may have low or insufficient limits and/or restricted coverage available to the party seeking coverage from it. The party seeking coverage does not want to be left uninsured where it once had two or more policies available to it. The John Burns case does not address this issue. This author submits that if a "retrigger" is made, the insurer(s) may attempt to raise a late notice defense or claim other exclusions under the policies, including prejudice. This scenario can be avoided if the party seeking coverage is able to obtain a coverage position from the targeted insurer before the party actually makes the selection process. In Alcan6, the reverse situation occurred. There, the party seeking coverage triggered its own insurer for defense obligations. Much later in time, the targeted insurer agreed to provide sole coverage because the party selected it and ultimately deselected its own insurer who had been previously defending the party. The court there held that the party seeking coverage had the paramount right to select and deselect coverage. "This should be true, particularly, when the deactivation occurs upon the discovery of other coverage not known to have been in existence at the time the first tender took place." 707 N.E.2d at 695.

2. What happens in the case of continuous losses and multiple policies?

Using the John Burns decision as a model, we can predict that a party seeking coverage can select carriers and deselect others, perhaps even on an excess level. As sophisticated as a party may be in the insurance arena, this area is fertile ground for mistakes. See, Dearborn7, where the court determined that the party seeking coverage did not properly deselect one insurer, thereby causing it to contribute with another insurer in the loss.

3. Can a potential insurer contract itself out of coverage?

The Kraemer8, Cline9, and Great American10 cases are of interest here. The decisions represent aberrations from the usual situations because of the particular policy language involved in the cases.

In Kraemer, the targeted insurer’s policy contained language that the coverage for the party seeking coverage was only for "imputed" liability and the policy contained a cooperation clause requiring the insured to tender defense to any insurer with applicable coverage. The court upheld the cooperation clause, finding it was enforceable and not against public policy. The John Burns case dealt with standard "other insurance" language which was different from the language in Kraemer. The John Burns opinion does not mention the Kraemer case.

In Cline, the insurer was also American Country with the same policy language. The Cline court followed the Kraemer decision.

Great American, a Second District opinion, reversed a summary judgment granted to the target insurer. Similar policy language was involved here as was found in the prior two cases. The appellate court left open the possibility of coverage if the facts determined there was imputed negligence on the part of the party seeking coverage.

This trio of cases, none of which is specifically overruled by the John Burns decision, reminds the practitioner to carefully analyze the insurance policy language.

Interim Conclusion

Since this is not the last word, this will be an interim conclusion. The John Burns case has settled the "Institute" tender issue to the extent that the insured has the right to select the target insurer and deselect other potential insurers. The John Burns case has also settled the "equitable apportionment" issue between potential insurers by holding that there is no coverage unless a policy has been triggered but the reader should be aware of the policy language which may provide an exception to the rule.

But the party seeking coverage must beware - it must know the nature and extent of coverage it is seeking before it is too late and the party faces the undesirable situation of being uninsured.

1. John Burns Const. Co. v. Indiana Ins. Co., 189 Ill.2d 570, 727 N.E.2d 211, 244 Ill.Dec. 912 (2000).

2. Cincinnati Companies v. West American Ins. Co., 183 Ill.2d 317, 701 N.E.2d 499, 233 Ill.Dec. 649 (1998).

3. Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill.App.3d 70, 599 N.E.2d 1311, 175 Ill.Dec. 297 (1st Dist. 1992).

4. Employers Ins. of Wausau v. James McHugh Const. Co., 144 F.3d 1097 (7th Cir. (Ill.) 1998).

5. Bituminous Cas. Corp. v. Royal Ins. Co. of America, 301 Ill.App.3d 720, 704 N.E.2d 74, 234 Ill.Dec. 916 (1st Dist. 1998).

6. Alcan United, Inc. v. West Bend Mut. Ins. Co., 303 Ill.App.3d 72, 707 N.E.2d 687, 236 Ill.Dec. 560 (1st Dist. 1999).

7. Dearborn Ins. Co. v. International Surplus Lines Ins. Co., 308 Ill.App.3d 368, 719 N.E.2d 1092, 241 Ill.Dec. 689 (1st Dist. 1999).

8. American Country Ins. Co. v. Kraemer Bros., Inc., 298 Ill.App.3d 805, 699 N.E.2d 1056, 232 Ill.Dec. 871 (1st Dist. 1998).

9. American Country Ins. Co. v. Cline, 309 Ill.App.3d 501, 722 N.E.2d 755, 242 Ill.Dec. 971 (1st Dist. 1999).

10. Great American Ins. Co. v. West Bend Mut. Ins. Co., 311 Ill.App.3d 534, 723 N.E.2d 1174, 243 Ill.Dec. 573 (1st Dist. 1999).

Nick Alexander is an attorney with Clausen Miller PC who concentrates his practice in the fields of casualty, medical negligence defense and insurance coverage. He received his Law Degree in 1980 from The John Marshall Law School in Chicago and his Undergraduate Degree from the University of Illinois at Urbana-Champaign.

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