Court Opinion

ID: 3135385
Source: CourtListenerOpinion
Date Created: 2015-10-22 17:36:37.800557+00
Date Added: 2024-06-11T11:42:16.038754
License: Public Domain

Docket No. 103588.

                             IN THE
                     SUPREME COURT
                                OF
                THE STATE OF ILLINOIS

KAJIMA CONSTRUCTION SERVICES, INC., et al., Appellants, v.
ST. PAUL FIRE AND MARINE INSURANCE COMPANY,
                    Appellee.

                 Opinion filed November 29, 2007.

   CHIEF JUSTICE THOMAS delivered the judgment of the court,
with opinion.
   Justices Freeman, Fitzgerald, Kilbride, Garman, Karmeier, and
Burke concurred in the judgment and opinion.

                             OPINION

    Plaintiffs, Kajima Construction Services, Inc. (Kajima), a general
contractor, and its insurer, Tokio Marine and Fire Insurance Company
(Tokio), filed a declaratory judgment action in the circuit court of
Cook County against St. Paul Fire and Marine Insurance Company
(St. Paul) seeking reimbursement of funds that Tokio had paid to
settle an underlying personal injury lawsuit. The parties filed cross-
motions for summary judgment. The circuit court granted summary
judgment in favor of St. Paul and against plaintiffs. The appellate
court affirmed. 368 Ill. App. 3d 665. We subsequently allowed
plaintiffs’ petition for leave to appeal. 210 Ill. 2d R. 315. We also
allowed Complex Insurance Claims Litigation Association to file an
amicus brief in support of St. Paul. For the reasons that follow, we
affirm the judgment of the appellate court.

                            BACKGROUND
     In December 1997, Kajima entered into a subcontract with
Midwestern Steel Fabricators, Inc. (Midwestern), for a construction
project. Pursuant to the subcontract, Midwestern was required to
maintain commercial general liability (CGL) coverage for Kajima as
an additional insured. Midwestern therefore provided Kajima with a
certificate of insurance from St. Paul naming Kajima as an additional
insured and providing Kajima with $2 million in general liability
coverage and $5 million in umbrella coverage. Kajima also had its own
primary CGL insurance policy with Tokio with limits of $1 million per
occurrence.
     Midwestern subcontracted a portion of its contract with Kajima to
Up-Rite Steel Company (Up-Rite). On or around December 20, 1997,
Thomas Jones, an employee of Up-Rite, was injured while working on
the construction project. On February 2, 1998, Jones filed a personal
injury lawsuit against Kajima and Midwestern. On March 3, 1998,
Kajima made a “targeted tender” to Midwestern and St. Paul for its
defense and indemnity in the Jones lawsuit. Pursuant to the “targeted
tender,” Kajima stated that it was exercising its right to elect St. Paul
to provide Kajima with the exclusive defense and indemnification in
the Jones case. Kajima renewed its tender to Midwestern and St. Paul
on May 11, 1998, and on June 4, 1998. When St. Paul did not accept
the tender, Kajima requested that Tokio handle the matter and pursue
the defense and indemnity owed to Kajima. On August 15, 2000, St.
Paul finally accepted Kajima’s targeted tender under a reservation of
rights.
     Prior to trial of the Jones case, Tokio demanded that St. Paul
settle the Jones lawsuit for $3 million from its primary and umbrella
insurance policies. St. Paul refused to do so. In June 2001, during
trial, the case settled for $3 million, with St. Paul paying its primary
limits of $2 million, and Tokio contributing its primary limits of $1
million. Kajima and Tokio then filed the declaratory judgment action
against St. Paul seeking reimbursement of the $1 million that Tokio
had contributed to the settlement.

                                  -2-
     The parties filed cross-motions for summary judgment. Kajima and
Tokio argued that based upon the targeted tender rule, St. Paul was
solely responsible for the defense and indemnification of Kajima
without contribution from Tokio. St. Paul responded that although the
targeted tender rule allowed Kajima to tender its defense and
indemnification to one of several insurers that potentially cover the
same risk, Illinois law also provides that all primary policies must be
exhausted prior to reaching an excess policy. On March 14, 2005, the
circuit court of Cook County granted St. Paul’s motion for summary
judgment and denied plaintiffs’ motion for summary judgment.
     The appellate court affirmed the circuit court. 368 Ill. App. 3d
665. The appellate court noted that an insured has the right to
selectively tender its defense and indemnification to one of several
common carriers. 368 Ill. App. 3d at 669. However, Illinois courts
also apply horizontal exhaustion, which requires an insured who has
multiple primary and excess policies covering a common risk to
exhaust all primary policy limits before invoking excess coverage. 368
Ill. App. 3d at 669. The appellate court rejected plaintiffs’ argument
that because Kajima selectively tendered its defense and
indemnification to St. Paul, St. Paul must respond with both its
primary and excess coverage before Tokio’s primary limits are
invoked. The appellate court held that “the selective tender rule
should be applied to circumstances where concurrent insurance
coverage exists for additional insureds.” 368 Ill. App. 3d at 672.
However, “[t]o the extent that defense and indemnity costs exceed the
primary limits of the selected insurer, the deselected insurer or
insurers’ primary policies must answer for the loss prior to invoking
coverage under an excess policy.” 368 Ill. App. 3d at 672. The
appellate court therefore affirmed the circuit court’s order granting St.
Paul’s motion for summary judgment and denying plaintiffs’ motion
for summary judgment.

                            ANALYSIS
    Summary judgment is appropriate where the pleadings,
depositions, admissions and affidavits on file, viewed in the light most
favorable to the nonmoving party, reveal that there is no genuine issue
as to any material fact and that the moving party is entitled to
judgment as a matter of law. 735 ILCS 5/2–1005(c) (West 2006);

                                  -3-
Hall v. Henn, 208 Ill. 2d 325, 328 (2003). This court conducts a de
novo review of an order granting summary judgment. Hall, 208 Ill. 2d
at 328.
     The appellate court characterized the issue in this case as “whether
the selective tender rule supersedes well-settled principles of Illinois
law regarding horizontal exhaustion.” 368 Ill. App. 3d at 668.
Consequently, our analysis begins with a discussion of horizontal
exhaustion and the selective or targeted tender rule.
     Our appellate court first addressed whether an insured must
exhaust all available primary insurance before seeking coverage from
any excess policy in United States Gypsum Co. v. Admiral Insurance
Co., 268 Ill. App. 3d 598 (1994). In that case, Gypsum, the insured,
argued that an excess insurer was required to provide coverage once
the primary policy underlying its excess policy was exhausted,
regardless of whether there were concurrent primary or excess
insurance policies. Gypsum, 268 Ill. App. 3d at 653. The appellate
court disagreed, noting that allowing Gypsum to pursue such “vertical
exhaustion” would allow it to:
         “effectively manipulate the source of its recovery, avoiding
         difficulties encountered as the result of its purchase of fronting
         insurance and the liquidation of some of its insurers. This
         would permit Gypsum to pursue coverage from certain excess
         insurers at the exclusion of others. Such a practice would blur
         the distinction between primary and excess insurance
         [citation], and would allow certain primary insurers to escape
         unscathed when they would otherwise bear the initial burden
         of providing indemnification.” Gypsum, 268 Ill. App. 3d at
         654.
The appellate court therefore held that “horizontal exhaustion” was
required, and that Gypsum must exhaust all available primary
coverage before proceeding against an excess insurer. Gypsum, 268
Ill. App. 3d at 654.
     Following the decision in Gypsum, the appellate court continued
to apply horizontal exhaustion to require an insured to first exhaust all
available primary insurance coverage, including self-insured periods,
before an excess policy can be reached. See AAA Disposal Systems,
Inc. v. Aetna Casualty & Surety Co., 355 Ill. App. 3d 275 (2005);

                                   -4-
Maremont Corp. v. Continental Casualty Co., 326 Ill. App. 3d 272
(2001); New Hampshire Insurance Co. v. Hanover Insurance Co.,
296 Ill. App. 3d 701 (1998); Missouri Pacific R.R. Co. v.
International Insurance Co., 288 Ill. App. 3d 69 (1997); Outboard
Marine Corp. v. Liberty Mutual Insurance Co., 283 Ill. App. 3d 630
(1996).
    In contrast to horizontal exhaustion, the “targeted” or “selective”
tender doctrine allows an insured covered by multiple insurance
policies to select or target which insurer will defend and indemnify it
with regard to a specific claim. The appellate court first addressed
targeted tender in Institute of London Underwriters v. Hartford Fire
Insurance Co., 234 Ill. App. 3d 70 (1992).
    In that case, the Great Lakes Towing Company had a primary
policy with Hartford Fire Insurance Company and was an additional
insured under a policy issued by the Institute of London Underwriters.
Great Lakes was sued for wrongful death and tendered defense of the
suit to London Underwriters. Great Lakes notified Hartford of the
suit, but requested that Hartford not participate in the suit. London
Underwriters settled the case, then filed a declaratory judgment
seeking a declaration that Hartford was obligated to pay 50% of the
settlement.
    The London Underwriters court first held that because the insured
told Hartford that it did not want Hartford to respond to the claim,
Hartford’s knowledge of the wrongful-death claim did not constitute
a tender. London Underwriters, 234 Ill. App. 3d at 75. The appellate
court rejected the argument that London Underwriter’s “other
insurance” clause required Hartford to contribute to the settlement,
holding that if the Hartford policy was never triggered, “the issue of
liability under the ‘other insurance’ clause does not arise.” London
Underwriters, 234 Ill. App. 3d at 77. The court explained that:
         “Great Lakes may well have feared that if the loss were
         attributed to its policy with Hartford the result might be a rise
         in premiums or cancellation of its policy. This factor alone
         suggests the insured ought to have the right to seek or not to
         seek an insurer’s participation in a claim as the insured
         chooses when more than one carrier’s policy covers the loss.”
         London Underwriters, 234 Ill. App. 3d at 78-79.

                                   -5-
The court recognized that an “insured’s actions after a loss may
foreclose his right to coverage under a policy and, thus, defeat a claim
for equitable contribution by another insurance carrier.” London
Underwriters, 234 Ill. App. 3d at 78.
     This court cited London Underwriters’ discussion of targeted
tender with approval in Cincinnati Cos. v. West American Insurance
Co., 183 Ill. 2d 317 (1998). Although targeted tender was not at issue
in the case, this court discussed targeted tender in addressing whether
an insurer’s duty to defend its insured arose upon receipt of actual
notice of the suit against the insured, or whether the duty to defend
was triggered only upon the insured’s tender of its defense to the
insurer. Defendant West American argued that allowing actual notice
of an underlying suit to trigger an insurer’s duty to defend would
deprive an insured of the right to forgo coverage under a policy. In
rejecting that argument, this court cited London Underwriters and
held that an insured may forgo an insurer’s assistance for various
reasons, such as a fear that its premiums would be increased or the
policy cancelled in the future. Cincinnati Cos., 183 Ill. 2d at 326. This
court also held that an insured’s ability to forgo an insurer’s assistance
should be protected, and concluded that an insured may knowingly
forgo an insurer’s assistance by instructing the insurer not to involve
itself in the litigation. Cincinnati Cos., 183 Ill. 2d at 326. At that
point, the insurer would be relieved of its obligation to the insured
with regard to that claim. Cincinnati Cos., 183 Ill. 2d at 326.
     Following our decision in Cincinnati Cos., the appellate court
again addressed the issue of targeted tender. In Bituminous Casualty
Corp. v. Royal Insurance Co. of America, 301 Ill. App. 3d 720
(1998), the appellate court held that general contractor Johnson
Construction was entitled to request exclusive coverage as an
additional insured with its subcontractor’s insurer, Bituminous
Casualty Corp., and to knowingly forgo assistance from its CGL
insurer, Royal Insurance Company of America. The appellate court
rejected Bituminous Casualty’s argument that Royal was required to
provide coverage pursuant to the “other insurance” clauses found in
both insurers’ policies. Bituminous Casualty, 301 Ill. App. 3d at 725.
The appellate court held:
             “It is only when an insurer’s policy is triggered that the
         insurer becomes liable for the defense and indemnity costs of

                                   -6-
         a claim and it becomes necessary to allocate the loss among
         co-insurers. The loss will be allocated according to the terms
         of the ‘other insurance’ clauses, if any, in the policies that have
         been triggered.” Bituminous Casualty, 301 Ill. App. 3d at 726.
     In Alcan United, Inc. v. West Bend Mutual Insurance Co., 303 Ill.
App. 3d 72 (1999), the appellate court held that an insured could
“deactivate” coverage with an insurer it had previously selected in
order to invoke exclusive coverage with another insurer. In that case,
the insured, Alcan, tendered its defense in a personal injury case to its
insurer, Reliance National Insurance Company (Reliance). Reliance
later tendered the claim to West Bend Mutual Insurance Company
(West Bend), which insured Alcan as an additional insured on a policy
with Alcan’s subcontractor. West Bend did not respond to the tender.
In cross-motions for summary judgment filed in Alcan’s complaint for
declaratory judgment, West Bend argued that Reliance was jointly
liable with West Bend because Alcan had tendered the personal injury
lawsuit to Reliance; Reliance had assumed Alcan’s defense following
that tender; and, once activated, Reliance’s policy remained operative.
Alcan United, 303 Ill. App. 3d at 76.
     The Alcan United court rejected West Bend’s argument. The
court noted that when Alcan first tendered the personal injury lawsuit
to Reliance, Alcan did not know of the existence of simultaneous
coverage through West Bend’s policy. Alcan United, 303 Ill. App. 3d
at 82. Consequently, it could not be said that Alcan made a knowing
choice when it tendered the claim to Reliance. Alcan United, 303 Ill.
App. 3d at 82. Upon discovering West Bend’s policy, Alcan tendered
the suit to West Bend, seeking exclusive coverage from West Bend
and deactivating its tender to Reliance. Alcan United, 303 Ill. App. 3d
at 82. The appellate court held that an “insured has a paramount right
to choose or not to choose an insurer’s participation in a claim.”
Alcan United, 303 Ill. App. 3d at 83. Because an insured has the
option to choose coverage, it follows that an insured should also “be
permitted to deactivate coverage with a carrier previously selected for
purposes of invoking exclusive coverage with another carrier,”
particularly when the deactivation is based upon the discovery of other
coverage. Alcan United, 303 Ill. App. 3d at 83.
     This court ratified the appellate court decisions in Bituminous
Casualty and Alcan United in John Burns Construction Co. v.

                                    -7-
Indiana Insurance Co., 189 Ill. 2d 570 (2000). In Burns
Construction, this court directly addressed the targeted tender
doctrine. In that case, John Burns Construction Company entered into
a subcontract with Sal Barba Asphalt Paving, Inc., to pave a parking
lot at a railroad station. Pursuant to the subcontract, Barba arranged
for Burns Construction to be added to Barba’s policy with defendant
Indiana Insurance Company as an additional insured. After
construction work was completed, Sidney Gault slipped and fell in the
railroad station parking lot, and sued Burns Construction for his
injuries.
     Burns Construction thereafter notified Barba of the suit and asked
that Barba’s insurer, Indiana, defend and indemnify Burns
Construction in the Gault action. The letter stated that Burns
Construction looked solely to Indiana for defense and indemnification,
and explained that it did not want its own insurer, Royal Insurance
Company, to become involved in the suit. Indiana refused to defend
Burns Construction, so Burns Construction then sought defense from
Royal Insurance. Burns Construction and Royal filed an action for
declaratory judgment seeking a declaration that Indiana alone had the
duty to defend and indemnify Burns Construction. The circuit court
held that both Royal and Indiana were required to contribute equally
to Burns Construction’s defense and indemnification, concluding that
Royal’s duty to defend was triggered when Burns tendered the case
to Royal following Indiana’s refusal to defend. Burns Construction,
189 Ill. 2d at 573. The appellate court affirmed the circuit court, but
held that Burns Construction’s initial tender to Indiana triggered the
“other insurance” provision in Indiana’s policy, which in turn activated
Royal’s duty to defend Burns Construction. Burns Construction, 189
Ill. 2d at 573.
     This court reversed the lower courts, holding that Burns
Construction had the right to choose which insurer would be required
to defend and indemnify it in the Gault case, and that nothing in the
Indiana policy limited Burns Construction’s right to select which
insurer would be required to defend. Burns Construction, 189 Ill. 2d
at 574. Agreeing with the appellate court decisions in Bituminous
Casualty and Alcan United, this court held that an “other insurance”
provision does not in itself overcome an insured’s right to tender
defense of an action to one insurer alone. Burns Construction, 189 Ill.

                                  -8-
2d at 578. Finally, this court rejected Indiana’s claim that the Royal
policy was triggered when Burns Construction notified Royal of the
Gault action. This court held:
        “In the present case, however, Burns made clear that it did not
        want Royal to become involved in the matter and that the
        defense was being tendered solely to Indiana. Therefore,
        Indiana was foreclosed from seeking equitable contribution
        from Royal. When Burns tendered defense of the claim to
        Royal, it did so only after Indiana declined to represent Burns.
        Indiana cannot now take advantage of its own breach.” Burns
        Construction, 189 Ill. 2d at 578.
    With the preceding discussion of the targeted tender rule and the
principles of horizontal exhaustion in mind, we now address whether
the appellate court correctly held that targeted tender does not
supersede horizontal exhaustion in the context of primary and excess
insurance. At the outset we note that our prior decisions addressing
targeted tender are not entirely on point, as those cases did not
involve excess insurance policies. Kajima and Tokio (hereinafter
collectively referred to as Kajima) argue that, pursuant to the targeted
tender rule, Kajima had the absolute right to tender its defense and
indemnification in the Jones case to St. Paul. Once Kajima made a
targeted tender to Midwestern and St. Paul, Kajima’s insurer, Tokio,
became “deselected” and was relieved of its obligation to Kajima with
regard to the Jones claim. The Tokio policy thus was no longer
“available,” and St. Paul had the sole responsibility to defend and
indemnify Kajima.
    Kajima acknowledges that horizontal exhaustion requires an
insured to exhaust all available primary limits before invoking excess
coverage. Kajima states that horizontal exhaustion cannot coexist with
targeted tender in circumstances such as those presented in this case.
Kajima contends that because targeted tender is the more recent of the
two doctrines, and is the doctrine adopted by this court, this court
must hold that targeted tender prevails over horizontal exhaustion.
    St. Paul responds that this court need not resolve the alleged
conflict between horizontal exhaustion and targeted tender because
this case does not involve horizontal exhaustion. St. Paul maintains
that the doctrine of horizontal exhaustion evolved from cases
involving bodily injury or property damage spanning multiple policy

                                  -9-
periods over several years of coverage. St. Paul claims that this case
can be decided based upon the differences between primary and excess
insurance coverage. Given the fundamental purpose of an umbrella
excess insurance policy, the appellate court properly held that Kajima
must exhaust the limits of all of its concurrent primary policies before
receiving coverage under its excess policy.
    We first address St. Paul’s claim that this case does not involve
horizontal exhaustion. Although it is true that horizontal exhaustion
originated in cases involving a continuous tort or long-term
environmental and hazardous waste claims, we find no evidence that
horizontal exhaustion is limited to such claims. In fact, the Gypsum
court noted that its interpretation of the excess policy at issue clearly
sets forth the policy’s status as an excess policy “to all triggered
primary policies, regardless of whether they extend over multiple
policy periods or only one.” (Emphasis added.) Gypsum, 268 Ill. App.
3d at 653. Moreover, the Gypsum court’s rejection of vertical
exhaustion and adoption of horizontal exhaustion was based upon the
differences between primary and excess insurance. The court noted
that recognizing vertical exhaustion would “blur the distinction
between primary and excess insurance [citation], and would allow
certain primary insurers to escape unscathed when they would
otherwise bear the initial burden of providing indemnification.”
Gypsum, 268 Ill. App. 3d at 654. Given that the crux of horizontal
exhaustion is the difference between primary and excess insurance, we
see no reason to depart from horizontal exhaustion in this case.
    Accordingly, we next must address Kajima’s claim that the
targeted tender doctrine prevails over horizontal exhaustion. As
discussed, horizontal exhaustion is based on a recognition of the
difference between primary and excess insurance. With regard to
primary and excess insurance, we find Justice Freeman’s separate
writing in Roberts v. Northland Insurance Co., 185 Ill. 2d 262, 275
(1998) (Freeman, C.J., concurring in part and dissenting in part), to
be particularly instructive. Justice Freeman explained that when excess
insurance exists as part of an overall insurance package, it provides a
secondary level of coverage to protect the insured where a judgment
or settlement exceeds the primary policy’s limits of liability. Roberts,
185 Ill. 2d at 276-77 (Freeman, C.J., concurring in part and dissenting
in part, joined by Miller and McMorrow, JJ.). Excess insurance

                                  -10-
coverage “ ‘attaches only after a predetermined amount of primary
insurance or self-insured retention has been exhausted.’ ” Roberts, 185
Ill. 2d at 277 (Freeman, C.J., concurring in part and dissenting in part,
joined by Miller and McMorrow, JJ.), quoting S. Seaman & C.
Kittredge, Excess Liability Insurance: Law and Litigation, 32 Tort &
Ins. L.J. 653, 656 (1996). Consequently, until “ ‘the limits of primary
insurance coverage are exhausted, secondary coverage does not
provide any collectible insurance.’ ” Roberts, 185 Ill. 2d at 277
(Freeman, C.J., concurring in part and dissenting in part, joined by
Miller and McMorrow, JJ.), quoting Whitehead v. Fleet Towing Co.,
110 Ill. App. 3d 759, 764-65 (1982). Once an excess policy is
triggered in a case, the limits of the primary insurance must be
exhausted before the excess carrier will be required to contribute to
a settlement or judgment. Roberts, 185 Ill. 2d at 278 (Freeman, C.J.,
concurring in part and dissenting in part, joined by Miller and
McMorrow, JJ.).
     Justice Freeman further noted that the circumstances under which
excess insurance might come into play in a case might vary. Thus,
excess coverage might arise “by coincidence” when multiple primary
insurance contracts apply to the same loss. Roberts, 185 Ill. 2d at 277
(Freeman, C.J., concurring in part and dissenting in part, joined by
Miller and McMorrow, JJ.). In contrast, “true” excess insurance
coverage is purchased by the insured in separate contracts that are
written by design and are known as “following form” or “specific”
excess coverage. Roberts, 185 Ill. 2d at 277 (Freeman, C.J.,
concurring in part and dissenting in part, joined by Miller and
McMorrow, JJ.). An “umbrella” insurance policy presents yet another
form of excess coverage. An umbrella policy provides both a standard
“following form” excess coverage, and in some circumstances may
provide broader coverage than that otherwise provided by the
underlying primary carrier. Roberts, 185 Ill. 2d at 278 (Freeman, C.J.,
concurring in part and dissenting in part, joined by Miller and
McMorrow, JJ.).
     St. Paul’s excess policy in this case is entitled “Umbrella Excess
Liability Protection Coverage.” The policy provides that it will pay
damages that are covered by the policy and by the insured’s basic
insurance, which exceed the basic insurer’s payment of the limits of
coverage in the basic insurance, other than the insured’s total limits.

                                  -11-
The policy also provides that it will pay amounts any protected person
is required to pay as damages for injury or damage that is covered by
the excess policy and is not covered by the insured’s basic insurance,
limited by the amounts that are excess of the deductible or excess of
amounts payable by other insurance, whichever is greater. St. Paul’s
umbrella policy, then, is a “true” excess policy. “An examination of
the premiums generally charged for umbrella coverage *** reflects an
intent that umbrella policies serve a different function.” Illinois
Emcasco Insurance Co. v. Continental Casualty Co., 139 Ill. App. 3d
130, 133 (1985). “[E]xcess premiums are lower because excess
coverage is, by its very nature, not supposed to be triggered until the
underlying policy has been exhausted up to its limits.” Roberts, 185
Ill. 2d at 281 (Freeman, C.J., concurring in part and dissenting in part,
joined by Miller and McMorrow, JJ.).
     Given the clear distinctions between primary and excess insurance
coverage, we decline to extend the targeted tender doctrine to require
one insurer to vertically exhaust its primary and excess coverage limits
before all primary insurance available to the insured has been
exhausted. Extending the targeted tender rule to require an excess
policy to pay before a primary policy would eviscerate the distinction
between primary and excess insurance. Moreover, as has been
suggested, “if John Burns [Construction] is taken to its logical
conclusion, it seems possible for an insured to deselect all of its
primary insurers and tender only to its excess insurers.” T. Hamilton
& T. Stark, Excess-Primary Insurer Obligations and the Rights of the
Insured, 69 Def. Couns. J. 315, 324 (2002). Consequently, we find
that the better rule is that set forth by the appellate court–that targeted
tender can be applied to circumstances where concurrent primary
insurance coverage exists for additional insureds, but to the extent that
defense and indemnity costs exceed the primary limits of the targeted
insurer, the deselected insurer or insurers’ primary policy must answer
for the loss before the insured can seek coverage under an excess
policy. This holding preserves the distinction between primary and
excess insurance policies.
     We therefore find that despite Kajima’s targeted tender to St.
Paul, Kajima was required to exhaust its primary policies before
invoking St. Paul’s excess coverage. For that reason, Tokio was not

                                   -12-
entitled to reimbursement from St. Paul of the $1 million that Tokio
paid toward the Jones settlement.
    Finally, given our finding that Kajima was required to exhaust all
of its primary insurance before invoking coverage under St. Paul’s
excess policy, we need not address St. Paul’s alternative argument
that targeted tender does not apply in this case because Kajima did not
knowingly forgo coverage from Tokio.

                          CONCLUSION
     For the foregoing reasons, we find that the targeted tender rule
does not preempt horizontal exhaustion. Consequently, to the extent
that defense and indemnity costs exceed the primary limits of a
targeted insurer, the deselected insurer or insurers’ primary policy
must answer for the loss before an insured can invoke coverage under
an excess policy. The judgment of the appellate court therefore is
affirmed.

                                 Appellate court judgment affirmed.

                                 -13-