Insurance Targeted Tenders as Applied to Car Insurance
Court Holds That A Targeted Tender Is Not Available To An Insured Under An Automobile Policy
Pekin Insurance Company v. Fidelity & Guarantee Insurance Co.
In Pekin Insurance Company v. Fidelity & Guarantee Insurance Co., 357 Ill.App.3d 891, 830 N.E.2d 10, 294 Ill. Dec. 10 (Ill.App. 4 Dist., 2005), a delivery van insured by Fidelity & Guarantee Insurance Co. (“Fidelity”) broke down. The driver called Brown’s Vehicle Inspection, a towing service (“Brown’s Towing”) in order to have the delivery van transported to another location. Brown’s Towing was insured by Pekin Insurance Company (“Pekin”). While Brown’s Towing was transporting the van, it broke free, crossed into oncoming traffic, and injured the driver and occupant of an oncoming vehicle. The injured parties sued Brown’s Towing, the owner of Brown’s Towing, the tow truck driver, the delivery van owner and the delivery van driver.
Pekin, the insurer of Brown’s Towing, brought a declaratory judgment action against Fidelity, the insurer of the delivery van, alleging that Fidelity owed a duty to defend Brown’s Towing and its driver.
The underlying tort complaint contained allegations of negligence against Brown’s Towing and its driver for failing to properly secure the van to the tow truck. The Complaint also contained allegations against the van’s driver alleging that he failed to set up the towing connections in a proper manner and that he engaged in a towing operation when he knew, or should have known, that the towing procedure was improper. Several years after suit was filed, Brown’s Towing and its driver “deselected” their coverage under the Pekin policy and issued a targeted tender to Fidelity, seeking sole coverage from Fidelity.
The appellate court reviewed which policy was primary for the defense of the insureds. The tow truck owner and driver were insureds under their own policy as well as the delivery van’s policy. Likewise, the delivery van driver was an insured under both his policy as well as the tow truck business’s policy.
Both the Pekin policy and the Fidelity policy contained “other insurance” clauses purporting to make their coverage excess in situations where the named insured did not own the vehicle being used. The general rule in Illinois, as stated in State Farm Mutual Insurance Co. v. Hertz Claim Management Corp., 338 Ill. App. 3d 712, 717, 789 N.E.2d 407, 411 (2003) is that where two policies exist and each purport to offer only excess coverage, the insurance of the vehicle’s owner is primary while that of the driver is secondary. However, the Illinois Vehicle Code (625 ILCS 5/12-606) (West 2002) mandates liability coverage for tow trucks. The court found that allowing Pekin to become secondarily liable for the towing of the delivery van would violate the public policy reflected in the Illinois Vehicle Code. The court held that, in light of the mandatory insurance and the fact that Brown’s Towing was engaged in the business of towing vehicles which it did not own, the Brown’s Towing policy with Pekin was required to provide primary coverage for the delivery van use by Brown’s Towing and primary coverage for the delivery van driver. Fidelity’s coverage for the delivery van use was found to be secondary and excess to that of Pekin.
The court returned to the issue of whether Brown’s Towing held the right to selectively target the delivery van’s policy and forgo coverage under its own policy. The court in John Burns Construction Company v. Indiana Insurance Company, 198 Ill. 2d 570, 727 N.E.2d. 211 (2000) followed the decision in Institute of London Underwriters v. Hartford Fire Ins. Co., 234 Ill. App.3d 70, 599 N.E.2d 1311, 175 Ill. Dec. 297 (1st Dist. 1992) which adopted the rule that an insured has the right to elect which of a multitude of insurance policies must defend and indemnify a claim by tendering its defense to only one of the insurers. Pursuant to the holding in John Burns, an insured may target its tender to a selected insurance policy for its defense and indemnification and foreclose the selected insurer from obtaining contribution from a non-selected insurer.
In holding that Brown’s Towing did not retain this right in the present case, the court distinguished the decision in John Burns finding that in John Burns, the contractor was named as an insured under both potentially applicable policies and therefore both insurers where primary carriers. In addition, John Burns was included as an insured under a subcontractor’s policy as part of a negotiated construction contract with the subcontractor. In contrast, Brown’s Towing and its driver were not named as insureds through a separate agreement or endorsement under the delivery van policy issued by Fidelity. They were insured due to the omnibus clause within the Fidelity policy. Brown’s Towing status in relation to Fidelity was not part of a contract negotiated between Brown’s Towing and the delivery van’s owner. The court also found that the targeted tender doctrine has been limited primarily to the context of construction contracts involving a named additional insured. Consequently, the court found that the decision in John Burns did not require that Brown’s Towing and its driver be allowed to “deselect” coverage under their own policy in favor of coverage under the vans owner’s Fidelity policy.
As a result, the policies were enforced by the court as mandated by the public policy found within the Illinois Vehicle Code such that the tow truck company’s policy remained primary for the defense of the tow truck operator, owner and delivery van driver. The Pekin policy insuring the delivery van provided coverage excess to the Fidelity policy.
With this holding, the Court has issued one of the most restrictive decisions to date regarding a John Burns targeted tender. It was the appellate court’s opinion that an insured that was an insured under two policies of insurance by coincidence is somehow different than an insured that enters into a contractual agreement with a subcontractor requiring that it be named as an additional insured under the subcontractor’s policy. As an insured in both situations, the insured is entitled to the full benefits of a policy. But, according to the court in Pekin v. Fidelity, one who is an “insured by coincidence” retains fewer rights than one who is an “insured by agreement.” In addition, the court stated that a targeted tender has been limited “primarily to the context of construction contracts. . .”
In fact, the targeted tender rule, as first announced in Institute of London Underwriters v. Hartford Fire Insurance Company, 234 Ill. App. 3d. 70, 599 N.E.2d. 1311, 175 Ill. Dec. 297 (1st Dist., 1992) and affirmed by the court in John Burns, has been applied beyond the context of construction contracts to coverage including professional liability policies, Chicago Hospital Risk Pooling Program v. Illinois State Medical Inter-Insurance Exchange, 325 Ill. App. 3d. 970, 758 N.E.2d. 353, 259 Ill. Dec. 230 (Ill. App. 1st Dist., 2001); Aetna Casualty and Surety Co. v. Chicago Insurance Co., 994 F. 2d 1254 (7th Cir. 1993) as well as umbrella policies, id., see also W.E. O’Neil v. Aetna, Case No. 1-99-3748 (Ill. App. 1st Dist. 1999) (settled prior to appellate court ruling), trial court opinion 97 CH 1298, (Circuit Court Cook County, Illinois, June 10, 1999). Targeted tenders have also arisen in the automobile setting in relation to the selection of coverage in a rental contract. 26 S. Ill. U.L.J. 686 (2002), citing Farm Bureau Mutual Insurance Co., Inc. v. Alamo Rent-A-Car, Inc., 319 Ill. App. 3d 382, 744 N.E. 2d 300 (1st Dist., 2000). See also Update on Legal Developments for the General Practitioner, ISBA 2005 Annual Meeting: Illinois Vehicle Insurance Coverage, Rental Car Coverage Issues.
Although it is understandable that a court may not wish to extend the John Burns targeted tender rule to a particular fact situation, the Pekin Court did not provide cite case law supporting the restriction of the targeted tender right when a party is an “insured by coincidence” vs. being an “insured by agreement.” The rights and obligations of an insured and insurer are created by the insurance agreement. Once a party is determined to be an insured under a policy, there is no distinction as to the rights available to one party vs. another depending on how they became an insured under the policy. There is a possibility that the pendulum of targeted tenders has completed its path to one extreme and is returning to a prior position. The targeted tender rule has come under criticism from Justice Quinn in opinions including American National Fire Ins. Co. v. National Union Fire Ins. Co. Of Pittsburgh, PA, 343 Ill.App.3d 93, 796 N.E.2d 1133, 277 Ill. Dec. 767 (2003). Justice Quinn offered a specially concurring opinion significantly criticizing the insured’s right to use a targeted tender. This may signal the beginning of restrictions on the targeted tender rule. In American National, the court held that the targeted tender rule continues to exist but required that the additional insured satisfy a policy condition in order to obtain coverage.
