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

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Horizontal vs. Vertical Exhaustion of Insurance: Priority of Coverage and Settlement for Less Than Policy Limits THURSDAY, FEBRUARY 1, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: K. Alexandra Byrd, Attorney, Saxe Doernberger & Vita, Trumbull, Conn. Celia B. Waters, Attorney, Saxe Doernberger & Vita, Trumbull, Conn. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

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5 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 5

6 Risk Transfer Methods Contractual Indemnity: Downstream party agrees to indemnify upstream party from project-related losses Sub s Insurance Owner Claim Contractor Sub s Indemnity Insurance: Downstream party agrees to purchase insurance which covers upstream party as an additional insured Contractor s Insurance 6

7 Priority of Coverage Owner s Corporate Excess Insurance GC s Excess Insurance (Owner s AI Excess Insurance) Owner s Corporate Primary Insurance GC s Primary Insurance (Owner s AI Carrier) Owner Promise to Indemnify Promise to Procure Insurance General Contractor ( GC ) 7

8 Which Policy Responds Second? Sharing 8

9 Priority of Coverage: State by State Horizontal Exhaustion: California Illinois New Jersey New York Vertical Exhaustion: 4 th Cir. (Virginia) 5 th Cir. (Texas) 8 th Cir. (Arkansas) Kentucky Missouri 9

10 Vertical Exhaustion General Contractor sued (4) $5M Excess GC tenders to AI primary and AI excess (2) $5M Excess AI primary pays first, then AI excess carrier pays (3) $1M Primary (1) $1M Primary General Contractor Subcontractor 10

11 Vertical Exhaustion Example: Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8 th Cir. 2002) Contract required $2M in liability insurance; Cheyenne obtained $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 (2) RLI $10M Excess National Union $10M Primary (1) St. Paul $1M Primary Wal-Mart Stores, Inc. Retailer Indemnity Cheyenne Supplier 11

12 Avoiding Circuity of Litigation 12

13 Horizonal Exhaustion All available primary policies must exhaust first Focus on policy language, not underlying contract Excess policy is a payer of last resort 13

14 Horizontal Exhaustion: The Bovis Case Owner (DASNY) Const. Mgr. (BOVIS) Illinois $1M Primary Policy Gen. Ctr. (STONEWALL) Liberty $1M Primary Policy Westchester $10M Umbrella Steel Ctr. (SMI-OWEN) Elevator Sub. (AJ MCNULTY) Great American Concrete Sub. (J&A) QBE $1M Primary United $5M Umbrella 14 Decedent

15 Bovis: Trial Court Apportionment QBE $1,000,000 J&A Primary UNITED $5,000,000 J&A Umbrella LIBERTY $1,000,000 Stonewall Primary WESTCHESTER $10,000,000 Stonewall Umbrella ILLINOIS $1,000,000 BOVIS Primary 15

16 Bovis: Appellate Court Apportionment 1 QBE $1,000,000 J&A Primary 2 LIBERTY $1,000,000 Stonewall Primary 3 ILLINOIS $1,000,000 BOVIS Primary 4 UNITED $5,000,000 J&A Umbrella Sharing pro rata WESTCHESTER $10,000,000 Stonewall Umbrella 16

17 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) 17

18 HDI-Gerling Am. Ins. Co. v Zurich Am. Ins. Co., 2017 NY Slip Op [1st Dept Mar. 16, 2017] Zurich Policy 18

19 Anti-Indemnity Statutes & Priority of Coverage +/- 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! 19

20 Anti-Indemnity Statutes: Insurance Implications 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 antiindemnity 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 20

21 ISO s First Attempt at Solution Primary CGL - CG CG

22 ISO s Second Attempt at Solution Excess - CX CX

23 ISO s Second Attempt at Solution Umbrella - CU CU

24 Horizontal Exhaustion: Two-Part Solution 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 24

25 Sample Excess Policy Endorsement 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 other 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. 25

26 What happens when the insured settles with the primary carrier for less than policy limits? It depends on your jurisdiction and policy language... 26

27 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... 27

28 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 28

29 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 29

30 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 30

31 Thank You K. Alexandra Byrd Saxe Doernberger & Vita Celia B. Waters Saxe Doernberger & Vita 31