Policy above SIR is primary insurance and horizontal exhaustion not required before policy is triggered

An Illinois appellate court for the First District, applying Illinois law, affirmed the circuit court’s ruling and held that an insured’s policy above a self-insured retention (“SIR”) constituted primary insurance.  The appellate court made this determination based on the following facts: (1) the policies imposed a duty to notify for every occurrence; (2) the policies established a duty to defend claims that appeared likely to exceed the SIR; and (3) the policies had premiums far greater than premiums for related umbrella coverage.  The court examined extrinsic evidence and determined that the parties intended the policies at issue to provide primary insurance.  Thus, by determining that the policies at issue subject to SIRs were primary policies, horizontal exhaustion of all other triggered primary policies was not required before they could be triggered.

A former employee, John Nichol, sued Kone, Inc. (“Kone”) for injuries due to exposure to asbestos.  Kone notified each of its applicable insurance carriers based on the alleged asbestos exposure dates – the early 1960s to the late 1980s.  Kone’s insurer, Lamorak Insurance Company (“Lamorak”), agreed to defend Kone, subject to a full reservation of rights.  Lamorak issued policies to Kone from June 30, 1971 through June 30, 1985.  The Lamorak policies from 1977 to 1985 were subject to SIRs.  Lamorak sought a judgment declaring that it had no duty to defend Kone under the policies subject to the SIRs because Kone had not exhausted all of its applicable primary insurance.  According to Lamorak, its policies were excess, and therefore, Liberty Mutual Insurance Company (“Liberty Mutual”), as a primary insurer for a part of the relevant time frame, had to provide a defense and indemnity to Kone for Nichol’s claim before the Lamorak policies subject to SIRs were triggered.  The circuit court granted Kone’s motion for summary judgment.

The appellate court questioned jurisdiction of the appeal because the circuit court’s ruling did not dispose of any count from any complaint or counterclaim, and it did not make a final determination of the rights of any party to the case.  The appellate court ruled that it had jurisdiction because the circuit court’s order resolved a claim separate from the other claims for relief which could affect the liability of all insurers involved not only in the case at hand, but also in all other cases involving claims against Kone for injury due to asbestos exposure.

On appeal, Lamorak argued that the circuit court’s ruling conflicted with the holding of Missouri Pacific R.R. Co. v. International Insurance Co., 288 Ill. App. 3d 69 (Ill. App. Ct. 2nd 1997).  In Missouri Pacific, the court held that “Missouri Pacific must exhaust the SIRs before looking to the insurers for coverage. *** [T]he SIRs in the present case constitute primary coverage.”  According to Lamorak, SIRs always count as primary insurance and any policy that refers to an underlying SIR is an excess policy.  The appellate court disagreed with Lamorak and found that Missouri Pacific was not be read so broadly.  According to the appellate court, Lamorak’s interpretation conflicted with insurance practice in Illinois.

The Lamorak policies at issue required Kone to notify Lamorak of any occurrence regardless of the amount of potential liability.  The policies also imposed a duty to defend if the liability appeared likely to exceed the SIR, a determination that was based on Lamorak’s discretion.  Lastly, the premiums for the policies at issue greatly exceeded the premiums for the umbrella policies issued by Lamorak to Kone.  According to the appellate court, “[t]he three most notable characteristics of primary insurance all indicate that the policies at issue constitute primary insurance.”

Lamorak’s position relied heavily on its policy language that expressly made the policies “excess insurance, applicable excess of the retained limit.”  The appellate court found that the policy language created ambiguity, and thus, it looked to extrinsic evidence.  The extrinsic evidence, a private communication dated June 29, 1977 from an insurance agent to an employee of Kone and two coverage charts from Lamorak, supported the court’s interpretation that the Lamorak policies were intended by the parties to provide primary coverage subject to a SIR.  Lamorak Ins. Co. v. Kone, Inc., 2018 IL App (1^st) 163398 (May 15, 2018).