Horizontal vs. Vertical Exhaustion of Insurance: Priority of - - PowerPoint PPT Presentation

Horizontal vs. Vertical Exhaustion of Insurance: Priority of Coverage and Settlement for Less Than Policy Limits

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THURSDAY, FEBRUARY 1, 2018

Presenting a live 90-minute webinar with interactive Q&A

• K. Alexandra Byrd, Attorney, Saxe Doernberger & Vita, Trumbull, Conn.

Celia B. Waters, Attorney, Saxe Doernberger & Vita, Trumbull, Conn.

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Today’s Agenda

• Overview of horizontal versus vertical exhaustion in

the additional insured context

• Review of relevant case law
• Strategies for resolving issues when the primary

carrier settles for less than policy limits

• Practical tips

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Risk Transfer Methods

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Contractual Indemnity: Downstream party agrees to indemnify upstream party from project-related losses Insurance: Downstream party agrees to purchase insurance which covers upstream party as an “additional insured” Contractor Sub’s Indemnity

Claim

Owner

Sub’s Insurance

Contractor’s Insurance

Priority of Coverage

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General Contractor

(“GC”)

Owner Owner’s Corporate Primary Insurance Owner’s Corporate Excess Insurance GC’s Primary Insurance

(Owner’s AI Carrier)

GC’s Excess Insurance

(Owner’s AI Excess Insurance) Promise to Indemnify Promise to Procure Insurance

Which Policy Responds Second?

Sharing

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Priority of Coverage: State by State

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Vertical Exhaustion: 4th Cir. (Virginia) 5th Cir. (Texas) 8th Cir. (Arkansas) Kentucky Missouri Horizontal Exhaustion: California Illinois New Jersey New York

Vertical Exhaustion

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(2) $5M Excess (1) $1M Primary (4) $5M Excess (3) $1M Primary

General Contractor Subcontractor

GC tenders to AI primary and AI excess General Contractor sued AI primary pays first, then AI excess carrier pays

Vertical Exhaustion Example:

Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F .3d 583 (8th Cir. 2002)

• Contract required $2M in liability insurance; Cheyenne
• btained $1M primary/$10M excess
• $11M settlement: paid by St. Paul ($1M) and RLI ($10M)
• Result: St. Paul paid first and RLI paid second; no

contribution from Wal-Mart’s insurer

Indemnity

National Union $10M Primary Wal-Mart Stores, Inc.

Retailer

Cheyenne

Supplier

(1) St. Paul $1M Primary (2) RLI $10M Excess

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Avoiding Circuity of Litigation

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Horizonal Exhaustion

• All available primary policies must exhaust first
• Focus on policy language, not underlying contract
• Excess policy is a payer of last resort

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Horizontal Exhaustion: The Bovis Case

Elevator Sub. (AJ MCNULTY) Great American Decedent

• Const. Mgr.

(BOVIS) Illinois $1M Primary Policy

• Gen. Ctr.

(STONEWALL) Liberty $1M Primary Policy Westchester $10M Umbrella Concrete Sub. (J&A) QBE $1M Primary United $5M Umbrella Steel Ctr. (SMI-OWEN) Owner (DASNY)

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Bovis: Trial Court Apportionment

QBE $1,000,000 J&A Primary ILLINOIS $1,000,000 BOVIS Primary WESTCHESTER $10,000,000 Stonewall Umbrella UNITED $5,000,000 J&A Umbrella LIBERTY $1,000,000 Stonewall Primary

1 2 3 4 5

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QBE $1,000,000 J&A Primary LIBERTY $1,000,000 Stonewall Primary ILLINOIS $1,000,000 BOVIS Primary UNITED $5,000,000 J&A Umbrella WESTCHESTER $10,000,000 Stonewall Umbrella

Bovis: Appellate Court Apportionment

1 2 3 4

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HDI-Gerling Am. Ins. Co. v Zurich Am. Ins. Co.: Manuscript Endoremsents

City of New York Skanska USA Civil Northeast Siemens Corporation

Zurich (Skanska Primary) HDI-Gerling (Siemens Primary)

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HDI-Gerling Am. Ins. Co. v Zurich Am. Ins. Co., 2017 NY Slip Op 01955 [1st Dept Mar. 16, 2017]

Zurich Policy

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Anti-Indemnity Statutes & Priority of Coverage

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• +/- 44 states recognize some form of anti-indemnity

limitation in construction contracts

• Diminish circuity of litigation argument
• Restrictions on vertical exhaustion
• Insofar as the claim against the upstream party implicates

such party’s own negligence, the argument that the sub’s excess carrier will ultimately pay whether vertical or horizontal exhaustion is applied may not be accurate!

• Many states preclude GC from requiring Sub to obtain AI

coverage that protects GC from its own negligence

• e.g., California, Colorado, Kansas, Louisiana, Michigan,

Montana, New Mexico, Oklahoma, Oregon and Texas

• A few states have given some indication that the anti-

indemnity prohibition extends to insurance

• e.g., Delaware, Georgia and Ohio
• To the extent claims against the additional insured implicate

its own negligence, the AI coverage and GC’s own coverage may both be required to provide indemnity

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Anti-Indemnity Statutes: Insurance Implications

ISO’s First Attempt at Solution

Primary CGL - CG 20 01 04 13

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CG 20 01 04 13

ISO’s Second Attempt at Solution

Excess - CX 24 33 11 16

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CX 24 33 11 16

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CU 24 78 11 16

ISO’s Second Attempt at Solution

Umbrella - CU 24 78 11 16

Horizontal Exhaustion: Two-Part Solution

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1. Fix the trade contract 2. Fix the policies

• Ensure subcontractor’s primary policy provides

primary/non-contributory coverage for GC

• Modify subcontractor’s excess policy to provide

primary/non-contributory coverage for GC

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Endorsement – Excess Liability Policy Priority of Coverage

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY. Any entity qualifying as an additional insured on the insurance stated in the Schedule of Underlying Insurance shall be an additional insured on this policy. This insurance shall apply immediately upon exhaustion of the insurance stated in the Schedule of Underlying Insurance as respects the coverage afforded to any additional insured. This insurance shall apply before any

• ther insurance available to the additional insured, on which the additional insured is a named insured,

whether such other insurance is primary, excess, contingent, or on any other basis, and we will not seek contribution from such insurance for defense or indemnity. Where an entity qualifies as an additional insured on insurance stated in the Schedule of Underlying Insurance based on a written agreement to provide liability insurance, the limits of insurance provided by this policy shall not exceed the limits of insurance required by such written agreement.

Sample Excess Policy Endorsement

What happens when the insured settles with the primary carrier for less than policy limits? It depends on your jurisdiction and policy language . . .

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Zeig v. Massachusetts Bonding & Ins. Co.,

23 F.2d 665 (2d Cir. 1928)

• Settlement by insured with primary carrier did not eliminate

excess coverage

• Excess carrier – no rational interest in whether insured

collected full primary limits

• Public policy: delay, promotion of litigation, chilling effect on

settlements

• But, parties could impose conditions precedent if they chose to

do so . . .

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Comercia Inc. v. Zurich American Insurance Co., 498

F.Supp.2d 1019 (E.D. Mich. 2007)

• Distinguished Zeig – lack of specificity in excess policy

language

• Public policy favors settlements, but can’t supersede

unambiguous policy language

• Policy required “actual payment of losses” by the underlying

insurer

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Horizontal/Vertical Exhaustion Checklist

Risk Management/Pre-Litigation  Check applicable state’s law regarding horizontal/vertical exhaustion  Require vertical exhaustion of all AI policies in contracts  Check AI policies’ “other insurance” provisions and endorsements regarding horizontal exhaustion (i.e., primary, non-contributory coverage)  Ensure that indemnity agreement is broad and enforceable

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Practical Tips

• Review all relevant polices to assess scope, limits, and “other

insurance” provisions

• Determine applicable state/jurisdictional that may govern the

policies and trade contract(s)

• Upstream parties (i.e., GCs/Owners) should insist upon “primary

and non-contributory” language in downstream parties’ insurance policies

• Consider whether a consolidated insurance (aka “wrap-up”)

program is cost-effective and otherwise appropriate for your project

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Thank You

• K. Alexandra Byrd

Saxe Doernberger & Vita kab@sdvlaw.com Celia B. Waters Saxe Doernberger & Vita cbw@sdvlaw.com

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