Trial court holds that all primary policies must exhaust before excess or umbrella can be reached – but declines to adopt a blanket rule above the primary layer.

An Illinois circuit court, applying Illinois law, declined to rule whether “horizontal” exhaustion applies to umbrella and excess policies, and instead held that each secondary policy dictates the proper method. Policyholder, John Crane, Inc. argued that it should be allowed access to umbrella and excess policies, where the immediately underlying primary insurance was exhausted. However, the court granted partial summary judgment for umbrella and excess policy insurers, Allianz Underwriters Insurance (“Allianz”) and TIG Insurance Company (“TIG”), respectively, finding that the “other insurance” clauses in those policies required that all underlying primary coverage – not just immediately underlying coverage – must be exhausted before the umbrella/excess policies were triggered.

John Crane manufactures and sells engineered sealing products and systems, and has been a named defendant for multiple asbestos-related bodily injury claims since 1979.  It first filed the coverage action in May 2004.  In June 2013, the Appellate Court affirmed a previous holding that the “horizontal” exhaustion doctrine requires John Crane to prove that all primary limits were exhausted before the umbrella or excess carriers would be required to contribute to any settlement or judgment, and held that where coverage for asbestos–related injury claims is triggered, all triggered excess or umbrella policies are jointly and severally liable for all sums that the insured becomes legally obligated to pay.   John Crane Inc. v. Admiral Ins. Co., 991 N.E.2d 474 (1st Dist. 2013).  The Appellate Court remanded the case to the circuit court for a determination of exhaustion.  On remand, the Circuit Court clarified that John Crane must exhaust all of its triggered primary policies before allocating any claims to the next layer of insurance; i.e. that “horizontal” exhaustion was to be applied at the primary level.  The parties each moved for summary judgment on several issues.

The court addressed many issues, including whether Illinois law allows the application of “vertical” exhaustion above the primary layer of coverage.  The court found it was inappropriate to enter a blanket ruling on whether “horizontal” or “vertical” exhaustion is required at the umbrella and excess policy levels. Rather, the court determined that the language of each policy must be scrutinized individually.

The court looked to the policy language of the TIG excess policy which stated that it applies “to indemnify the insured for the amount of loss which exceeds the amount of loss payable by underlying policies described in the Declarations.”  The Declarations of the TIG policy specifically only address the Allianz policy.  The court found that by the plain language of the policy, the TIG excess policy is only triggered after the specific underlying Allianz policy is exhausted.  Therefore, the court found that because the policy language only required John Crane to exhaust the specific underlying policy and not all umbrella policies “vertical” exhaustion may be proper.  However, according to the court, the policies needed to be considered as a whole.

Next the court examined the “other insurance” and “maintenance of underlying insurance” provisions in the Allianz and TIG policies to determine whether those clauses bar vertical exhaustion.  In contrast to the insurers’ arguments that the language of the policies bans “vertical” exhaustion, John Crane contended that the policy language does not explicitly require horizontal exhaustion and therefore any ambiguity should be resolved in its favor.

In relevant part, the “other insurance” clauses stated:

If other valid and collectible insurance with any other insurer is available to the insured covering a loss also covered by this policy, other than insurance that is in excess of insurance afforded by this policy, the insurance afforded by this policy shall be in excess of and shall not contribute with such other insurance.

The court stated that there are commonly three types of “other insurance” clauses: pro rata clauses, excess clauses, and escape clauses.  The plain language of the Allianz and TIG “other insurance” clauses indicates that the insurers will not contribute to covering losses where there is other valid and collectible insurance for the same loss.  Illinois law supports the finding that the “other insurance” clause found in both the Allianz and TIG policies be interpreted as requiring “horizontal” exhaustion.  The court stated that the “other insurance” clauses clearly identify the policies as excess policies and as ones that exist to provide coverage only after all underlying coverage is exhausted.  The court noted that pro rata “other insurance” clauses do not typically address when a policy attaches at all.

Next, the court found that the plain language of the “maintenance of underlying insurance” clauses did not address exhaustion at all.  According to the court, “[b]y the plain language of the clauses, the clauses’ purpose is to require the insured to maintain certain policy limits on underlying coverage, except when the limits are reduced by covered claims.”  Therefore, the “maintenance of underlying insurance” clauses did not bar vertical exhaustion above the primary layer.

Ultimately, the court granted TIG and Allianz’s motions finding that the “other insurance clauses” bar unrestricted vertical exhaustion, but denied the motions with respect to finding that as a matter of law, vertical exhaustion cannot be applied to the umbrella and excess policies.  John Crane Inc. v. Admiral Ins. Co., No. 04-CH-08266 (Ill Cir. Ct. July 21, 2016).