Excess-primary insurer obligations and the rights of the insured: one area that needs clarification is the tension between the principle of horizontal exhaustion and the doctrine of targeted tender.

• Author: Hamilton, Thomas M.

THE relationship between excess and primary insurers is based on well-established principles of contract law. The obligations excess insurers, primary insurers and insureds owe to one another generally are founded on the language of the insurance policy and case law interpreting policies. One area in which courts are creating new obligations, however, relates to the duty of the insured to tender the defense of a claim or suit to the appropriate insurers. In fact, a number of U.S. states have even held an insurer has no duty to defend a suit absent a specific request by the insured. Recent decisions regarding the act of tender, however, have thrown into question the relationships among primary insurers, excess insurers and insureds.

Defense counsel should be aware of these changing obligations and analyze how the new theory of "targeted tender" impacts the relationships. One must begin by examining common policy provisions used to establish the respective duties of primary insurers, excess insurers and insureds. After that, an analysis should turn to the threshold decision by the California Court of Appeal, Transit Casualty Co. v. Spink Co., (1) which first set forth the existence of reciprocal duties between excess and primary insurers. Next, one should examine the law as it has developed since Transit Casualty, including the law of horizontal exhaustion and the impact of the increased use of targeted tenders on the excess-primary relationship. Finally, this article will suggest a possible resolution to the inherent tension between the duties excess and primary insurers owe to one another and the concepts of horizontal exhaustion and targeted tenders.

TYPICAL EXCESS-PRIMARY RELATIONSHIP

In a typical excess-primary relationship, both the excess and primary carrier contract independently with the policyholder to perform the obligations of their insuring agreements. In so doing, the insured usually sets up "layers" of primary and excess insurance coverage for a particular time period or business risk.

With respect to the primary carrier, the insuring agreement typically provides:

We will pay those sums the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result. But: The amount we will pay for damages is limited as described in LIMITS OF INSURANCE (SECTION III); and Our right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C. Excess insurance polices generally contain the following insuring agreement:

COVERAGE. The company will indemnify the insured for ultimate net loss in excess of the applicable underlying limit which the insured shall become legally obligated to pay as damages because of Personal Injury, Property Damage, or Advertising Offenses to which this policy applies, caused by an occurrence anywhere in the world ... The primary insurer may or may not be scheduled in the excess insurer's declarations, so the relationship between the excess and primary carriers may arise either by accident (other insurance clauses) or by design (schedule of insurance). The majority of this article concerns "excess by accident" and therefore assumes the importance of the following primary and excess provisions.

Primary insurance policies, with respect to other insurance, normally provide:

Other Insurance

If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows:

1. Primary Insurance

   This insurance is primary except when b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in c. below.

2. Excess Insurance

   This insurance is excess over any of the other insurance, whether primary, excess, contingent or on any other basis:

   (1) That is fire, extended coverage, builder's risk, installation risk, or similar coverage for "your work";

   (2) That is fire insurance for premises rented by you; or

   (3) If the loss arises out of the maintenance or use of aircraft, "autos" or watercraft to the extent not subject to Exclusion g. of Coverage A (Section I).

   (4) That is valid and collectible insurance including but not limited to coverage as an additional insured under another policy against such losses as may be covered by this policy.

   When this insurance is excess, we will have no duty under Coverage A or B to defend any claim or "suit" that any other insurer has a duty to defend. If no other insurer defends, we will undertake to do so, but we will be entitled to the insured's rights against all those insurers.

   When this insurance is excess over other insurance, we will pay only our share of the amount of the loss, if any, that exceeds the sum of:

   (1) The total amount that all such other insurance would pay for the loss in the absence of this insurance; and

   (2) The total of all deductible and self-insured amounts under all that other insurance.

   We will share the remaining loss, if any, with any other insurance that is not described in this excess insurance provision and was not bought specifically to apply in excess of the limits of insurance shown in the declarations of this coverage part.

   Excess policies typically provide as follows:

   Other Insurance. The insurance afforded by this policy shall be excess insurance over any other valid and collectible insurance available to the insured and applicable to any part of the ultimate net loss, whether such other insurance is stated to be primary, contributing, excess, contingent or otherwise, unless such other insurance specifically applies as excess insurance over the limits of liability provided in this policy. The effect of these provisions among insurers at the same risk level (primary-primary) is to force those insurers to share the cost associated with a particular loss. These provisions do not affect the insured's right to recovery under any particular policy, but they do define the relationship between various "available" insurance policies. (2)

   When applied to insurers at different levels, these policy provisions demonstrate the unique nature of excess-primary relationships. Although there is no contractual privity between the excess and primary insurers, each assumes obligations to the policyholder that give rise to expectations among the parties involved.

   The policyholder expects to be defended by its insurers whenever a covered suit or claim is initiated against it, and it expects to be indemnified for a covered liability up to the collective limits of the applicable primary and excess policies. The primary carrier assumes it will have to defend the insured against all covered claims and suits and indemnify the insured, up to its policy limits, for any liability arising out of those claims and suits. On the other hand, the excess carrier does not anticipate having to cover the insured's defense costs, assuming the underlying coverage limits have not been exhausted, but it does anticipate having to cover monetary liability in excess of the insured's primary limits.

   Certain situations, however, can throw these assumptions into doubt, and recent cases have called into question the traditional methods by which primary and excess insurers structure their relationships with each other and with the insured.

   TRANSIT CASUALTY AND ITS PROGENY

   One can see from the above provisions how insurers might assume they do not owe any duties to the insured's other insurers. Generally, the insurance contract, whether excess or primary, creates obligations only between the insured and the insurer. When entering into these policies, the insurer typically does not assume any duties to third parties. Some courts, however, have imposed such duties on insurers. One example of a court-imposed, non-contractual duty is a result of the decision in the Transit Casualty case, decided in 1979 and cited above.

   Transit Casualty, an excess insurance carrier, sued Spink Corp., its insured, and American Motorists Insurance Co., the primary carrier. The suit sought damages for an unjustified refusal to settle the underlying wrongful death claim, which arose from a construction accident. The insured rejected a settlement against the advice of American, in part because a settlement might impair its future insurability. At trial, a verdict was returned in excess of Spink's primary coverage. As a result, Transit contributed toward the settlement and then sought reimbursement from Spink and American.

   American defended on the basis that equitable subrogation should limit Transit's right to recover. American alleged that Transit's rights, as the subrogee of Spink, were defeated by the insured's bad faith. In other words, because Spink refused to settle within the limits of its primary policy, Transit could not recover.

   The California Court of Appeal, Third District, disagreed, holding Transit's right of recovery was not limited by the doctrine of equitable subrogation to Spink's rights under the covenant of good faith and fair dealing Spink had with American. In fact, the court determined Transit could recover on a theory of negligence based on a triangular reciprocal duty of care existing by and between the insured, the primary carrier and the excess carrier. Thus, Transit Casualty became the first...