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Kajima Construction Services, Inc. v. St. Paul Fire and Marine Insurance Co.

November 29, 2007

KAJIMA CONSTRUCTION SERVICES, INC., ET AL., APPELLANTS,
v.
ST. PAUL FIRE AND MARINE INSURANCE COMPANY, APPELLEE.



CHIEF JUSTICE THOMAS delivered the judgment of the court, with opinion.

Justices Freeman, Fitzgerald, Kilbride, Garman, Karmeier, and Burke concurred in the judgment and opinion.

OPINION

Plaintiffs, Kajima Construction Services, Inc. (Kajima), a general contractor, and its insurer, Tokio Marine and Fire Insurance Company (Tokio), filed a declaratory judgment action in the circuit court of Cook County against St. Paul Fire and Marine Insurance Company (St. Paul) seeking reimbursement of funds that Tokio had paid to settle an underlying personal injury lawsuit. The parties filed cross-motions for summary judgment. The circuit court granted summary judgment in favor of St. Paul and against plaintiffs. The appellate court affirmed. 368 Ill. App. 3d 665. We subsequently allowed plaintiffs' petition for leave to appeal. 210 Ill. 2d R. 315. We also allowed Complex Insurance Claims Litigation Association to file an amicus brief in support of St. Paul. For the reasons that follow, we affirm the judgment of the appellate court.

BACKGROUND

In December 1997, Kajima entered into a subcontract with Midwestern Steel Fabricators, Inc. (Midwestern), for a construction project. Pursuant to the subcontract, Midwestern was required to maintain commercial general liability (CGL) coverage for Kajima as an additional insured. Midwestern therefore provided Kajima with a certificate of insurance from St. Paul naming Kajima as an additional insured and providing Kajima with $2 million in general liability coverage and $5 million in umbrella coverage. Kajima also had its own primary CGL insurance policy with Tokio with limits of $1 million per occurrence.

Midwestern subcontracted a portion of its contract with Kajima to Up-Rite Steel Company (Up-Rite). On or around December 20, 1997, Thomas Jones, an employee of Up-Rite, was injured while working on the construction project. On February 2, 1998, Jones filed a personal injury lawsuit against Kajima and Midwestern. On March 3, 1998, Kajima made a "targeted tender" to Midwestern and St. Paul for its defense and indemnity in the Jones lawsuit. Pursuant to the "targeted tender," Kajima stated that it was exercising its right to elect St. Paul to provide Kajima with the exclusive defense and indemnification in the Jones case. Kajima renewed its tender to Midwestern and St. Paul on May 11, 1998, and on June 4, 1998. When St. Paul did not accept the tender, Kajima requested that Tokio handle the matter and pursue the defense and indemnity owed to Kajima. On August 15, 2000, St. Paul finally accepted Kajima's targeted tender under a reservation of rights.

Prior to trial of the Jones case, Tokio demanded that St. Paul settle the Jones lawsuit for $3 million from its primary and umbrella insurance policies. St. Paul refused to do so. In June 2001, during trial, the case settled for $3 million, with St. Paul paying its primary limits of $2 million, and Tokio contributing its primary limits of $1 million. Kajima and Tokio then filed the declaratory judgment action against St. Paul seeking reimbursement of the $1 million that Tokio had contributed to the settlement.

The parties filed cross-motions for summary judgment. Kajima and Tokio argued that based upon the targeted tender rule, St. Paul was solely responsible for the defense and indemnification of Kajima without contribution from Tokio. St. Paul responded that although the targeted tender rule allowed Kajima to tender its defense and indemnification to one of several insurers that potentially cover the same risk, Illinois law also provides that all primary policies must be exhausted prior to reaching an excess policy. On March 14, 2005, the circuit court of Cook County granted St. Paul's motion for summary judgment and denied plaintiffs' motion for summary judgment.

The appellate court affirmed the circuit court. 368 Ill. App. 3d 665. The appellate court noted that an insured has the right to selectively tender its defense and indemnification to one of several common carriers. 368 Ill. App. 3d at 669. However, Illinois courts also apply horizontal exhaustion, which requires an insured who has multiple primary and excess policies covering a common risk to exhaust all primary policy limits before invoking excess coverage. 368 Ill. App. 3d at 669. The appellate court rejected plaintiffs' argument that because Kajima selectively tendered its defense and indemnification to St. Paul, St. Paul must respond with both its primary and excess coverage before Tokio's primary limits are invoked. The appellate court held that "the selective tender rule should be applied to circumstances where concurrent insurance coverage exists for additional insureds." 368 Ill. App. 3d at 672. However, "[t]o the extent that defense and indemnity costs exceed the primary limits of the selected insurer, the deselected insurer or insurers' primary policies must answer for the loss prior to invoking coverage under an excess policy." 368 Ill. App. 3d at 672. The appellate court therefore affirmed the circuit court's order granting St. Paul's motion for summary judgment and denying plaintiffs' motion for summary judgment.

ANALYSIS

Summary judgment is appropriate where the pleadings, depositions, admissions and affidavits on file, viewed in the light most favorable to the nonmoving party, reveal that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. 735 ILCS 5/2--1005(c) (West 2006); Hall v. Henn, 208 Ill. 2d 325, 328 (2003). This court conducts a de novo review of an order granting summary judgment. Hall, 208 Ill. 2d at 328.

The appellate court characterized the issue in this case as "whether the selective tender rule supersedes well-settled principles of Illinois law regarding horizontal exhaustion." 368 Ill. App. 3d at 668. Consequently, our analysis begins with a discussion of horizontal exhaustion and the selective or targeted tender rule.

Our appellate court first addressed whether an insured must exhaust all available primary insurance before seeking coverage from any excess policy in United States Gypsum Co. v. Admiral Insurance Co., 268 Ill. App. 3d 598 (1994). In that case, Gypsum, the insured, argued that an excess insurer was required to provide coverage once the primary policy underlying its excess policy was exhausted, regardless of whether there were concurrent primary or excess insurance policies. Gypsum, 268 Ill. App. 3d at 653. The appellate court disagreed, noting that allowing Gypsum to pursue such "vertical exhaustion" would allow it to:

"effectively manipulate the source of its recovery, avoiding difficulties encountered as the result of its purchase of fronting insurance and the liquidation of some of its insurers. This would permit Gypsum to pursue coverage from certain excess insurers at the exclusion of others. Such a practice would blur the distinction between primary and excess insurance [citation], and would allow certain primary insurers to escape unscathed ...


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