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Horizontal vs. Vertical Exhaustion of
Insurance: Priority of Coverage and
Settlement for Less Than Policy Limits
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THURSDAY, FEBRUARY 1, 2018
Presenting a live 90-minute webinar with interactive Q&A
K. Alexandra Byrd, Attorney, Saxe Doernberger & Vita, Trumbull, Conn.
Celia B. Waters, Attorney, Saxe Doernberger & Vita, Trumbull, Conn.
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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
Risk Transfer Methods
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Contractual Indemnity: Downstream party agrees to indemnify upstream party from project-related losses
Insurance: Downstream party agrees to purchase insurance which covers upstream party as an “additional insured”
Contractor Sub’s
Indemnity Claim Owner
Sub’s Insurance
Contractor’s
Insurance
Priority of Coverage
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General Contractor
(“GC”)
Owner
Owner’s Corporate
Primary Insurance
Owner’s Corporate
Excess Insurance
GC’s Primary Insurance
(Owner’s AI Carrier)
GC’s Excess Insurance
(Owner’s AI Excess Insurance)
Promise to
Indemnify
Promise to Procure
Insurance
Which Policy Responds Second?
Sharing
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Priority of Coverage: State by State
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Vertical Exhaustion:
4th Cir. (Virginia)
5th Cir. (Texas)
8th Cir. (Arkansas)
Kentucky
Missouri
Horizontal Exhaustion:
California
Illinois
New Jersey
New York
Vertical Exhaustion
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(2) $5M Excess
(1) $1M Primary
(4) $5M Excess
(3) $1M Primary
General Contractor Subcontractor
GC tenders to AI primary and
AI excess
General Contractor sued
AI primary pays first, then AI
excess carrier pays
Vertical Exhaustion Example: Wal-Mart Stores, Inc. v. RLI Ins. Co., 292 F.3d 583 (8th 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
Indemnity
National Union
$10M Primary
Wal-Mart Stores, Inc. Retailer
Cheyenne Supplier
(1) St. Paul
$1M Primary
(2) RLI
$10M Excess
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Avoiding Circuity of Litigation
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Horizonal Exhaustion
All available primary policies must exhaust first
Focus on policy language, not underlying contract
Excess policy is a payer of last resort
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Horizontal Exhaustion: The Bovis Case
Elevator Sub. (AJ MCNULTY)
Great American
Decedent
Const. Mgr. (BOVIS)
Illinois $1M Primary Policy
Gen. Ctr.
(STONEWALL)
Liberty $1M Primary
Policy
Westchester $10M
Umbrella
Concrete Sub. (J&A)
QBE $1M Primary
United $5M Umbrella
Steel Ctr. (SMI-OWEN)
Owner
(DASNY)
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Bovis: Trial Court Apportionment
QBE $1,000,000
J&A Primary
ILLINOIS $1,000,000
BOVIS Primary
WESTCHESTER $10,000,000
Stonewall Umbrella
UNITED $5,000,000
J&A Umbrella
LIBERTY $1,000,000
Stonewall Primary
1
2
3
4
5 15
QBE
$1,000,000
J&A Primary
LIBERTY
$1,000,000
Stonewall Primary
ILLINOIS
$1,000,000
BOVIS Primary
UNITED
$5,000,000
J&A Umbrella
WESTCHESTER
$10,000,000
Stonewall Umbrella Sharing pro rata
Bovis: Appellate Court Apportionment
1
2
3
4
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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)
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HDI-Gerling Am. Ins. Co. v Zurich Am. Ins. Co., 2017 NY Slip Op 01955 [1st Dept Mar. 16, 2017]
Zurich Policy
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Anti-Indemnity Statutes & Priority of Coverage
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+/- 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!
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 anti-
indemnity 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
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Anti-Indemnity Statutes: Insurance Implications
ISO’s First Attempt at Solution Primary CGL - CG 20 01 04 13
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CG 20 01 04 13
ISO’s Second Attempt at Solution Excess - CX 24 33 11 16
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CX 24 33 11 16
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CU 24 78 11 16
ISO’s Second Attempt at Solution Umbrella - CU 24 78 11 16
Horizontal Exhaustion: Two-Part Solution
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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
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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.
Sample Excess Policy Endorsement
What happens when the insured settles with the primary carrier for less than policy
limits?
It depends on your jurisdiction and policy language . . .
26
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
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
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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
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
Thank You
K. Alexandra Byrd
Saxe Doernberger & Vita
Celia B. Waters
Saxe Doernberger & Vita
31
