By Barry Zalma, Attorney and Consultant
The Illinois Court of Appeal was asked to resolve a dispute between the Illinois School District Agency (ISDA), a provider of commercial general liability insurance and St. Charles Community Unit School District 303 (District) concerning a series of lawsuits stemming from mold infestation in the District's high school building. In Illinois School District Agency v. the St. Charles Community Unit School, 2012 IL App 100088 (Ill.App. Dist.1 03/30/2012) the court recognized that Illinois is one of only three states that allow an insured to selectively tender the defense of a lawsuit to one insurer over other chronologically concurrent insurers and the District selected ISDA. The District sought approval of its attempt to select which, of consecutive insurers, was required to defend and indemnify it while contemporaneously making settlements with other insurers to the detriment of the insurer selected.
Only Montana and Washington have joined with Illinois to recognize the right of selective tender. Therefore, the court found it necessary to tread with caution applying right of selective tender which is uncommonly generous to insured parties.
Abbot & Costello could write this better but the right to selective tender places insurers in a state of confusion as to who should be on first in providing defense and indemnity to an insured. The Court of Appeal was called upon to make the question serious and humorless.
The District is a public entity that oversees St. Charles East High School, which suffered a mold infestation. The ISDA was established by certain school districts of Illinois to pool their risk. It offers for purchase by its members insurance coverage, much like ordinary commercial insurance carriers. The ISDA provided commercial general liability (CGL) insurance coverage to the District from July 1, 1995, through July 11, 2001.
Its policy provided that the ISDA "will have the right and duty to defend any 'suits' seeking *** damages." It also provided that the ISDA "will pay, with respect to any claim or 'suit' we defend: *** All reasonable expenses incurred by the [District] at our request to assist us in the investigation or defense of the claim or 'suit.' "
Prior to coverage by the ISDA, the District held CGL policies various commercial insurers from 1971 to 1995.
The Mold Lawsuits
In March 1999, the District notified the ISDA that it faced potential tort liability stemming from mold exposure to St. Charles East High School students. The ISDA reserved its rights and retained attorney Robert Smyth of the law firm of Donohue, Brown, Mathewson & Smyth to investigate and monitor mold-based claims.
Between March 2001 and March 2002, three separate lawsuits were filed against the District alleging the District's negligence caused the former students to suffer mold-related injuries. In April 2001, the District tendered the defense of the suits to the ISDA. On June 26, 2001, the ISDA accepted the defense of the suits against the District, subject to a reservation of rights; the ISDA retained attorney Smyth to represent and defend the District in the lawsuits. Later the District tendered the defense to its various past commercial insurers. Some agreed to defend subject to a reservation of rights.
As time passed the District reached settlements with its commercial insurers in separate negotiated settlements that included a release of the demand for defense and indemnity.
The Coverage Lawsuits
The ISDA sued the District seeking a declaration that the District's "secret" settlements with the other three insurers breached its insurance contract with the ISDA.
The District filed an answer and a four-count counterclaim.
The circuit court entered summary judgment for the District holding the District had the right to deactivate tender of the litigation defense as to the other three insurers, and that doing so in exchange for settlement payments did not breach its policy with the ISDA. The court granted leave to the ISDA to file an amended complaint alleging the District received a "double recovery" from its settlement with the other insurers and the unspecified insurance proceeds it received from the ISDA.
The ISDA remained the lone insurer that defended and indemnified the District in the lawsuits, which settled for $90,000 in September 2007. The ISDA alleges it paid "$550,889 in defense fees and expenses related to the Mold Lawsuits, and $90,000 to settle the Mold Lawsuits," for a total expenditure of $640,889.
The ISDA contended that the District violated the terms of its insurance policy by entering into "secret" settlements with the other insurers and tendering the defense of the mold litigation to the ISDA alone. It argued these actions constituted a breach of the District's purported fiduciary duty to the ISDA, and that the District received a "windfall" in the amount of the insurance proceeds it received that exceeded the amount of its litigation costs.
The ISDA noted that the insurance agreement expressly provided the ISDA's coverage is applicable only as excess over other applicable insurance. The ISDA policy provided: "Coverage provided by this Plan shall apply only as excess over other insurance and/or coverage applicable to a loss hereunder regardless of whether such other coverage provides primary, excess, umbrella or contingent coverage. When both this coverage and other insurance apply to the loss on the same basis, whether excess or contingent, the Agency shall not be liable under this Plan for a greater proportion of the loss than that stated in the [contribution by equal shares provision]."
It argued the District breached the policy's provision of "other insurance" when the District, through its settlements with the commercial insurers prevented the ISDA from seeking equitable contribution from these other insurance companies for the mold litigation. The District countered that it had the unfettered right to tender the defense of the lawsuits to any of its insurers.
"Other insurance" excess clauses are designed to override an insured's right to choose among co-insurers. Such provisions, as in this case, attempt to render otherwise primary insurance as excess over any other collectible insurance, most often with statements in the policy that declare the insurer's coverage to be excess over any other valid and collectible insurance available to the insured. An "other insurance" provision does not in itself overcome the right of an insured to tender defense of an action to one insurer alone.
The issue decided by the Court of Appeal was whether an insured's right to selective tender among chronologically concurrent policies extends to consecutive ones such as the policies at issue in this case. Finding no Illinois Supreme Court precedent the court noted that the selective tender rule is only applicable to concurrent insurance coverage and not consecutive primary or excess coverage policies where other primary coverage is available.
The Court of Appeal concluded that the District was not entitled to judgment as a matter of law. It found that the circuit court erred in granting summary judgment to the District based on its purported right to selectively tender the defense of the mold lawsuits to the ISDA as a consecutive insurer. The ISDA was correct that an insured party may not receive a double recovery for the same "harm or injury" and the case was remanded to the trial court to resolve who paid what to whom.
The Court of Appeal declined the District's invitation to extend the targeted tender rule beyond cases involving concurrent insurance policies, as the only context in which the Illinois Supreme Court has applied the rule. Because the District's insurance policies were all consecutive, the selective tender rule did not apply to compel the ISDA to defend alone, without the prospect of equitable contribution from other insurers, the mold lawsuits against the District.
This decision teaches many lessons about insurance, not the least of which is that multiple insurers for a single insured worked adverse to each other to mold special deals that had nothing to do with insurance. The underlying lawsuits for injuries allegedly resulting from mold infestation settled for only $90,000 yet the expenses and legal expenses was more than $550,889.
Insurers are professional at resolving disputes. Had the insurers and the District sat together with the plaintiffs unified against the allegedly injured persons they would have settled early, probably for less than $90,000 and certainly for less than $550,889 in expenses. Insurance claims presented by professional coverage counsel should never be considered a method for an insured to profit. Rules like the selective tender rule accepted in Illinois should not be used by an insured to profit.
The Court of Appeal saw the problem and sent the case back to the trial court to resolve the issue.
The covenant of good faith and fair dealing incorporated by law into every insurance contract is defeated by the selective tender rule because it sets the insured and the insurer adverse to each other.
Insurance claims situations should not be an adversary relationship. Courts should not be asked to waste their time dealing with insureds and insurers who - rather than treating each other with the utmost good faith - seek to profit from an ability to drag insurers whose policies have long expired into a dispute and extort money from them to avoid the cost of defense and indemnity of a lawsuit that had the parties worked together could have been resolved quickly and cheaply.
Lexis.com subscribers can access the Lexis enhanced version of the decisions with summary, headnotes, and Shepard's, Illinois School District Agency v. the St. Charles Community Unit School, 2012 Ill. App. LEXIS 242 (Ill.App. Dist.1 03/30/2012).
Reprinted with Permission from Zalma on Insurance, (c) 2011, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," "Murder and Insurance Fraud Don't Mix" and others that are available at Zalma Books.
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