Horizontal vs. Vertical Exhaustion of

Insurance: Priority of Coverage and

Settlement for Less Than Policy Limits

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

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.

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-927-5568 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail sound@straffordpub.com immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

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

6

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

7

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

8

Priority of Coverage: State by State

9

Vertical Exhaustion:

4th Cir. (Virginia)

5th Cir. (Texas)

8th Cir. (Arkansas)

Kentucky

Missouri

Horizontal Exhaustion:

California

Illinois

New Jersey

New York

Vertical Exhaustion

10

(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

11

Avoiding Circuity of Litigation

12

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

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)

14

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

16

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

HDI-Gerling Am. Ins. Co. v Zurich Am. Ins. Co., 2017 NY Slip Op 01955 [1st Dept Mar. 16, 2017]

Zurich Policy

18

Anti-Indemnity Statutes & Priority of Coverage

19

+/- 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

20

Anti-Indemnity Statutes: Insurance Implications

ISO’s First Attempt at Solution Primary CGL - CG 20 01 04 13

21

CG 20 01 04 13

ISO’s Second Attempt at Solution Excess - CX 24 33 11 16

22

CX 24 33 11 16

23

CU 24 78 11 16

ISO’s Second Attempt at Solution Umbrella - CU 24 78 11 16

Horizontal Exhaustion: Two-Part Solution

24

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

25

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

28

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

kab@sdvlaw.com

Celia B. Waters

Saxe Doernberger & Vita

cbw@sdvlaw.com

31