Missouri Pacific R.R. Co. v. International Insurance Co.
Annotate this Case
Nos. 2--96--1080, 2--96--1081, 2--96--1082 cons.
_________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
__________________________________________________________________
MISSOURI PACIFIC RAILROAD ) Appeal from the Circuit Court
COMPANY, on its own Behalf and ) of Du Page County.
as Successor in Interest to )
Chicago And Eastern Illinois )
Railroad Company and to Texas ) No. 94--MR--0198
And Pacific Railway Company and )
Their Subsidiary and )
Affiliated Companies, )
)
Plaintiff-Appellee, )
)
v. )
)
INTERNATIONAL INSURANCE )
COMPANY, Indiv., and as )
Successor to International )
Surplus Lines Insurance )
Company, North River Insurance )
Company, and United States )
Fire Insurance Company, )
)
Defendant-Appellant )
)
(Admiral Insurance Company, )
et al., Defendants). )
__________________________________
MISSOURI PACIFIC RAILROAD )
COMPANY, on its own Behalf and )
as Successor in Interest to )
Chicago And Eastern Illinois )
Railroad Company and to Texas )
And Pacific Railway Company and )
Their Subsidiary and )
Affiliated Companies, )
)
Plaintiff-Appellee, )
)
v. )
)
FEDERAL INSURANCE COMPANY; and )
COMMERCIAL UNION INSURANCE )
COMPANY, on Behalf of C.E. )
Heath Compensation And )
Liability Insurance Company, )
as Successor to Certain )
Interests of Employers' Surplus )
Lines Insurance Company, )
)
Defendants-Appellants )
)
(Admiral Insurance Company, )
et al., Defendants). )
__________________________________
)
MISSOURI PACIFIC RAILROAD )
COMPANY, on its own Behalf and )
as Successor in Interest to )
Chicago And Eastern Illinois )
Railroad Company and to Texas )
And Pacific Railway Company and )
Their Subsidiary and )
Affiliated Companies, )
)
Plaintiff-Appellee, )
)
v. )
)
CENTURY INDEMNITY COMPANY, )
as Successor to Cigna )
Specialty Insurance Company, )
f/k/a California Union )
Insurance Company, and Central )
National Insurance Company of )
Omaha, ) Honorable
) Bonnie M. Wheaton,
Defendant-Appellant. ) Judge, Presiding.
__________________________________________________________________
JUSTICE BOWMAN delivered the opinion of the court:
This appeal involves an insurance coverage dispute between
plaintiff, Missouri Pacific Railroad Company (Missouri Pacific),
and four of its excess general liability insurance carriers,
Commercial Union Insurance Company (Commercial Union), Federal
Insurance Company (Federal), International Insurance Company
(International), and Century Indemnity Company (Century Indemnity)
(collectively, the insurers).
The following facts are taken from the record. Additional
relevant facts will be discussed as they relate to the issues on
appeal.
Thousands of current and former Missouri Pacific employees
have brought claims against Missouri Pacific seeking damages for
hearing loss allegedly caused by continuous and repeated on-the-job
exposure to unsafe levels of noise. In addition, hundreds of
current and former Missouri Pacific employees have brought claims
against Missouri Pacific seeking damages for asbestos-related
injuries allegedly caused by continuous and repeated exposure to
unsafe levels of asbestos over the course of their employment. The
underlying claimants' work histories span over 73 years, starting
in the 1920s.
Between 1934 and 1986, Missouri Pacific maintained self-
insured retentions (SIRs). Missouri Pacific apparently carried no
insurance prior to 1934. Between 1957 and 1986, Missouri Pacific
purchased certain insurance policies from the insurers (the
policies). The total SIRs underlying the policies at issue is over
$67 million.
The policies at issue are identical in most respects and
warrant the same interpretation. Under the policies, the insurers
agreed to indemnify Missouri Pacific for "all sums" caused by an
"occurrence":
"[The Insurer] will indemnify [Missouri Pacific] for all sums
which [Missouri Pacific] shall become legally obligated to pay
as damages and expenses (all as hereinafter defined as
included within the term 'Ultimate Net Loss') because of
personal injury or property damage, caused by an occurrence
and arising out of operations necessary to the conduct of the
business of the Insured."
"All sums" are further defined as "damages" in the "ultimate net
loss" provision:
" 'Ultimate net loss' means the total of all damages and
expenses, as defined below, with respect to each occurrence;
(a) 'damages' means all sums which [Missouri Pacific] becomes
legally obligated to pay as damages, whether by reason of
adjudication or settlement, because of personal injury or
property damage *** (B) 'expenses' means all reasonable
expenses incurred by [Missouri Pacific] in the investigation,
settlement, and defense of any claim or suit seeking such
damages, including hospital, medical, and funeral charges paid
as a consequence of any occurrence hereunder *** and legal
expense (including attorney's fees and court costs) ***."
The policies also define the term "occurrence":
" 'Occurrence' means (a) an accident, or (b) a continuous or
repeated exposure to conditions which result in personal
injury or property damage which is neither expected nor
intended from the stand point of [Missouri Pacific], if such
accident or such personal injury or property damage occurs
while this policy is in force."
The other relevant provision in the policies is the "Retained
Limit-Other Insurance" clause:
"Retained Limit--Other Insurance. Underwriters shall be
liable only for that amount of ultimate net loss resulting
from any one occurrence which is in excess of
(A) the amount stated in the Schedule as the 'Retained
Limit', or
(B) the amount of the applicable limit or limits of liability
of other insurance against liability as insured hereby carried
by the Assured or on its behalf, if the amount of such limit
or limits or the aggregate thereof is greater than the
applicable retained limit."
Missouri Pacific filed a declaratory judgment and contract
action against the insurers. Missouri Pacific sought a declaration
that it was entitled to indemnification from the insurers for the
noise-induced hearing loss (NIHL) and asbestos-exposure claims
brought against it. Missouri Pacific alleged that the NIHL claims
and asbestos-exposure claims each arose from one proximate,
uninterrupted, and continuing cause. Missouri Pacific alleged that
some amount of damage occurred in each policy between 1957 and
1986; thus, it was entitled to select the policy period that would
provide full indemnification for "all sums" incurred as a result of
the claims. Missouri Pacific also alleged that reimbursement of
the claims was subject to the payment of only one SIR per claim
type. Missouri Pacific alleged that it paid over $79 million in
connection with the NIHL claims and $7.2 million in connection with
the asbestos-exposure claims.
On April 29, 1996, Missouri Pacific moved for summary judgment
asserting, inter alia, that the NIHL claims and asbestos-exposure
claims each arose from a single occurrence for purposes of
insurance coverage and thus that it need satisfy only one SIR prior
to seeking reimbursement for each claim type. Missouri Pacific
also moved for summary judgment on the basis that the insurers were
fully liable (up to the policies' limits of liability) for "all
sums" incurred as indemnity in defense costs arising from the
underlying NIHL and asbestos-exposure claims. The insurers'
response to Missouri Pacific's motion for summary judgment was
twofold. First, they argued that the NIHL claims could be
allocated with a reasonable degree of scientific certainty; as a
result, the policies were only responsible for the amount of
hearing loss which occurred during the particular policy period.
Second, they argued that, even if Missouri Pacific could not
demonstrate with scientific certainty the amount of damage in each
policy period, a pro rata, time-on-the-risk allocation method was
proper because it was the only approach consistent with the
language in the policies and Illinois law.
The insurers also moved for summary judgment on the ground
that Missouri Pacific could not implicate the policies unless
Missouri Pacific exhausted all applicable SIRs. The insurers
maintained that horizontal exhaustion was appropriate when the
policyholder was in effect self-insured over several policy
periods. In response, Missouri Pacific argued that self insurance
did not constitute "other insurance" and therefore that the
principles of horizontal exhaustion did not apply.
On July 18, 1996, the trial court granted Missouri Pacific's
motion for summary judgment. The court found as a matter of law
that all NIHL claims arose from a single occurrence, that all
asbestos-exposure claims arose from a single occurrence, and that
Missouri Pacific must only satisfy one SIR for each occurrence.
The trial court also declared that the policies were fully liable
for the entire loss subject only to the policies' limits of
liability.
The trial court also denied the insurers' motions for summary
judgment. The court found that SIRs were not the equivalent of
primary insurance coverage or "other insurance" and, thus, that
horizontal exhaustion principles did not apply.
On July 26, 1996, this court issued its decision in Outboard
Marine Corp. v. Liberty Mutual Insurance Co., 283 Ill. App. 3d 630
(1996). On August 5, 1996, the insurers filed a motion for
clarification and, in the alternative, for reconsideration of the
trial court's July 18, 1996, rulings. The insurers sought
clarification of the court's determination of the appropriate
method of allocation. The insurers also asked the court to
reconsider its ruling in light of our decision in Outboard Marine.
Based on their reading of Outboard Marine, the insurers maintained
that the trial court should apply a pro rata, time-on-the-risk
allocation method.
On August 12, 1996, the trial court denied the motion for
clarification and reconsideration and entered a written order which
granted Missouri Pacific's motion for summary judgment on the
"occurrence" and "all sums" issues and denied the insurers'
motions for summary judgment based on horizontal exhaustion.
However, the court certified two questions relating to the "all
sums" and horizontal exhaustion issues pursuant to Supreme Court
Rule 308(a) (155 Ill. 2d R. 308(a)). Defendants filed separate
applications for leave to appeal to this court pursuant to Supreme
Court Rule 308(b) (155 Ill. 2d R. 308(b)). We granted the
applications and consolidated all appeals.
Discussion
The two questions certified by the trial court are:
"1. Whether the 'all sums' rule set forth by the
Illinois Supreme Court in Zurich Ins. Co. v. Raymark
Industries, Inc., 118 Ill. 2d 23 (1987) or the pro-rata by
time-on-the-risk theory articulated in Outboard Marine Corp.
v. Liberty Mutual Insurance Co., No. 2-95-0950 (Ill. App. 2d
Dist. July 26, 1996) governs allocation of coverage where
the Circuit Court has found that noise-induced hearing loss
claims constitute a single occurrence, and further has found
that asbestos-exposure claims constitute a single
occurrence, and
2. Whether the insured must exhaust all self-insured
retention amounts for each period of insurance coverage
before looking to the insurer for coverage where the noise-
induced hearing loss claims and the asbestos-exposure claims
span several different periods of coverage with different
self-insured retention amounts."
Procedurally, these questions originate from both the denial
and grant of the parties' respective motions for summary judgment.
Summary judgment is appropriate when there is no genuine issue of
material fact and the moving party's right to judgment is clear and
free from doubt. Espinoza v. Elgin, Joliet & Eastern Ry. Co., 165 Ill. 2d 107, 113 (1995). All evidence is construed in the light
most favorable to the nonmoving party and strictly against the
moving party. Letsos v. Century 21-New West Realty, 285 Ill. App.
3d 1056, 1062 (1996). In cases involving summary judgment, we
conduct a de novo review of the evidence in the record. Espinoza,
165 Ill. 2d at 113. With this in mind, we now turn to the
questions before this court.
I
The first question we must address is whether the "all-sums"
allocation rule in Zurich Insurance Co. v. Raymark Industries,
Inc., 118 Ill. 2d 23 (1987), or the pro rata, time-on-the-risk
theory articulated in Outboard Marine Corp. v. Liberty Mutual
Insurance Co., 283 Ill. App. 3d 630 (1996), governs the allocation
of coverage in the present case. In doing so, we are to accept the
trial court's finding that the NIHL and asbestos-exposure claims
each constitute a single occurrence.
The trial court granted Missouri Pacific's motion for summary
judgment on this question. Relying on Zurich, 118 Ill. 2d 23, the
court ruled that the insurers were liable for all sums, up to the
limits of their individual policies, for all injuries related to
each occurrence that were triggered during the relevant policy
period.
The policies state:
"[The Insurer] will indemnify [Missouri Pacific] for all
sums which [Missouri Pacific] shall become legally obligated
to pay as damages and expenses (all as hereinafter defined
as included within the term 'Ultimate Net Loss') because of
personal injury or property damage, caused by an occurrence
and arising out of operations necessary to the conduct of
the business of the Insured." (Emphasis added.)
The policies also define the term "occurrence":
" 'Occurrence' means (a) an accident, or (b) a continuous or
repeated exposure to conditions which result in personal
injury or property damage which is neither expected nor
intended from the stand point of [Missouri Pacific], if such
accident or such personal injury or property damage occurs
while this policy is in force." (Emphasis added.)
The insurers argue that the foregoing provisions promise to
indemnify Missouri Pacific for all sums arising from personal
injuries that occur during the policy period. According to the
insurers, a genuine issue of material fact exists regarding whether
NIHL can be measured and allocated to particular policy periods,
and thus whether Missouri Pacific's damages can be allocated among
the insurers. The insurers therefore argue that the trial court
erred in holding that they were liable for all sums, up to the
limits of their individual policies, for all injuries related to
each occurrence that were triggered during the relevant policy
period. The insurers further argue that, in the event that
Missouri Pacific's total NIHL damages cannot be allocated to
specific policy periods, then the trial court should apply the pro
rata, time-on-the-risk allocation method adopted in Outboard
Marine.
In response, Missouri Pacific argues that, under the "all
sums" provisions of the policies, each insurer is fully liable for
Missouri Pacific's losses without proration. According to Missouri
Pacific, the insurers must indemnify it, up to each triggered
policy's limit of liability, for "all sums" of damages which it
becomes obligated to pay because of NIHL or asbestos injury caused
by an occurrence. Missouri Pacific urges this court to impose
joint and several liability on the insurers, regardless of the
specific policy periods during which the insurers actually provided
coverage.
The construction of an insurance policy's provisions is a
question of law. Outboard Marine, 283 Ill. App. 3d at 649. To
ascertain the meaning of the policy's words and the intent of the
parties, the court must construe the policy as a whole with due
regard to the risk undertaken, the subject matter that is insured,
and the purposes of the entire policy. Outboard Marine, 283 Ill.
App. 3d at 649; see Western Casualty & Surety Co. v. Brochu, 105 Ill. 2d 486, 493 (1985). The terms of an insurance policy must be
read according to their plain and ordinary meaning, and a court
should not search for an ambiguity where there is none. Allstate
Insurance Co. v. Smiley, 276 Ill. App. 3d 971, 977 (1995). If the
words in a policy are susceptible to more than one reasonable
interpretation, they are ambiguous and will be construed in favor
of the insured and against the insurer that drafted the policy.
United States Fidelity & Guaranty Co. v. Wilkin Insulation Co.,
144 Ill. 2d 64, 74 (1991).
Applying these principles to the case at bar, we conclude
that the policies only indemnify Missouri Pacific for personal
injuries that occur during the policy period. The insurers agreed
to indemnify Missouri Pacific "for all sums which [Missouri
Pacific] shall become legally obligated to pay as damages and
expenses *** because of personal injury *** caused by an
occurrence." An occurrence is "an accident, or *** a continuous
or repeated exposure to conditions which result in personal injury
*** if such accident or such personal injury *** occurs while this
policy is in force." (Emphasis added.) We read this language as
providing that the sums the insurers are obligated to pay must be
on account of personal injuries that occur during the policy
period.
Missouri Pacific would have us read the policies as requiring
the insurers to indemnify it for all NIHL damages, regardless of
when the damages occurred. This reading, however, fails to give
effect to the plain and ordinary meaning of the policies' language
when read in context. By focusing on the "all sums" language,
Missouri Pacific ignores the limitation that the sums the insurers
agreed to pay must be on account of personal injuries arising from
an occurrence, which is defined as an accident or personal injury
which occurs while the policy is in force.
Our recent decision in Outboard Marine is instructive on this
point. In that case, we construed policy language similar to the
language in this case. Like Missouri Pacific, the insured in that
case argued that the insurers agreed to pay "all sums," regardless
of when the injuries occurred. As in this case, we disagreed with
the insured and held that "the sums the insurer is obligated to
pay must be on account of property damage arising out of an
occurrence during the policy period." See Outboard Marine, 283
Ill. App. 3d at 642.
Given that the policies provide that the sums the insurers
are obligated to pay must be on account of personal injuries that
occur during the policy period, the question becomes whether the
NIHL damages can be allocated to particular policy periods. At
this stage of the litigation, we believe it is premature for us to
decide whether they can or cannot. We agree with the insurers
that a genuine issue of material fact exists as to whether
Missouri Pacific's NIHL damages can be measured and allocated to
specific time periods within a reasonable degree of scientific
certainty. For instance, in its memorandum in opposition to
Missouri Pacific's motion for summary judgment, International
submitted the affidavit of Dr. William Clark, who stated that NIHL
occurs only during active exposure to excessive noise in the
workplace. In the same memorandum, International attached the
expert witness disclosure statement of Dr. Robert Dobie, who
stated that NIHL injuries can be measured to specific periods of
time. Also, in their motion for clarification and, in the
alternative, for reconsideration of the trial court's ruling
granting Missouri Pacific's motion for summary judgment, the
insurers repeated that NIHL damages could be apportioned among
policy periods, and they directed the court's attention to the
expert witnesses who would testify as such. In that same motion,
the insurers also attached the American National Standard
Institute's model upon which the allocation of NIHL is based.
Collectively, this evidence creates a genuine issue of material
fact as to whether NIHL damages can be measured and allocated to
specific periods of time.
Parenthetically, we note and dismiss as meritless Missouri
Pacific's argument that evidence concerning the allocation of NIHL
damages to particular policy periods was never presented to the
trial court. Our review of the record, as explained in the
preceding paragraph, reveals that this evidence was before the
trial court when it made its rulings and is currently part of the
record on appeal.
We therefore hold that the trial court erred in granting
Missouri Pacific summary judgment on the issue of allocation, and
we remand the matter for proceedings consistent with the decision
we reach today. On remand, the parties should be given the
opportunity to present evidence that NIHL may (or may not) be
measured and allocated, within a reasonable degree of medical and
scientific certainty, to particular policy periods.
In the event that NIHL cannot be measured and allocated to
particular policy periods, the trial court should apply the pro
rata, time-on-the-risk allocation of damages approach used in
Outboard Marine. See Outboard Marine, 283 Ill. App. 3d at 645.
In Outboard Marine, the insured maintained excess insurance
policies which contained language nearly identical to that in the
present case. The trial court found that a single continuous
occurrence--the insured's contamination of a lake over a 23-year
period--resulted in an unallocable loss which implicated
successive policy periods. We held that in such a situation the
best method of damage allocation is a pro rata, time-on-the-risk
allocation. See Outboard Marine, 283 Ill. App. 3d at 642-45.
Similarly, this case involves a single continuous occurrence
which may result in an unallocable loss implicating successive
policy periods. If it is determined on remand that the NIHL
damages are unallocable, then the best method of damage
allocation, as in Outboard Marine, is a pro rata, time-on-the-risk
allocation. Outboard Marine, 283 Ill. App. 3d at 643-45.
Moreover, we note that Missouri Pacific's reliance on Zurich,
118 Ill. 2d 23, is misplaced. In Zurich, the court applied a
"triple trigger" theory to determine which primary insurance
policies were implicated by asbestos-related personal injuries.
The court held that such policies were triggered at the initial
exposure, when the disease manifested itself, and at any interim
time when the claimant manifested some sickness. Zurich, 118 Ill. 2d at 44; see Outboard Marine, 283 Ill. App. 3d at 641. The
insurer then urged the court to adopt the pro rata approach in
Insurance Co. of North America v. Forty-Eight Insulations, Inc.,
633 F.2d 1212 (6th Cir. 1980), aff'd on reh'g 657 F.2d 814 (6th
Cir. 1981), to allocate the indemnity and defense costs of each
claim among the triggered policies. In Forty-Eight Insulations,
"the court held that the insurers' obligations under
their respective policies were triggered only by a
claimant's exposure to asbestos during a policy period.
From this premise, that court concluded that the exposure
theory provided a reasonable means of allocating the costs
of defense and indemnification among the triggered policies
based on the number of years of exposure." Zurich, 118 Ill. 2d at 57.
However, the court in Zurich had already held that a policy was
triggered if the claimant suffered bodily injury or sickness or
disease. Accordingly, having rejected the premise underlying the
pro rata allocation approach in Forty-Eight Insulations, Zurich
concluded that the appellate court did not err "insofar as it
declined to order a pro rata allocation of defense and indemnity
obligations among the triggered policies." Zurich, 118 Ill. 2d at
57.
We read nothing in Zurich as precluding the application of the
pro rata, time-on-the-risk allocation method announced in Outboard
Marine to the case at bar. Zurich's rejection of a pro rata
approach was based on the narrow facts of the case before it,
namely, that it had rejected the trigger analysis set forth in
Forty-Eight Insulations. The court did not adopt a general rule
forever precluding the application of a pro rata approach. As we
explained in Outboard Marine, such an approach is appropriate
where, as here, a single continuous occurrence results in an
unallocable loss implicating successive policy periods.
Our answer, then, to the first certified question is twofold.
First, the parties should be given the opportunity to present
evidence that NIHL may (or may not) be measured and allocated,
within a reasonable degree of medical and scientific certainty, to
particular policy periods. If NIHL cannot be allocated, then the
court should apply the pro rata, time-on-the-risk allocation method
adopted in Outboard Marine.
Finally, we add that the parties' arguments regarding the
first certified question almost exclusively focused on the NIHL
claims. Our consideration of the first question tracts this
approach. However, our reasoning applies equally to the NIHL
claims and the asbestos-exposure claims.
II
The second question we must address is whether Missouri
Pacific must exhaust all its SIRs for each period of insurance
coverage before looking to the insurers for coverage, where the
NIHL claims and the asbestos-exposure claims span several different
periods of coverage with different SIR amounts. This question has
its origins in the insurers' motions for summary judgment, wherein
the insurers asserted that Missouri Pacific could not implicate the
policies until it exhausted all SIRs. The trial court denied the
motions. Relying on USX Corp. v. Liberty Mutual Insurance Co., 269
Ill. App. 3d 233 (1994), the court reasoned that Missouri Pacific's
SIRs did not equal "other insurance" and, thus, that the principles
of horizontal exhaustion did not apply. The court accordingly held
that Missouri Pacific must exhaust only one SIR per occurrence.
The insurers maintain that the trial court erred in denying
their motions for summary judgment. Relying principally on United
States Gypsum Co. v. Admiral Insurance Co., 268 Ill. App. 3d 598
(1994), they assert that Missouri Pacific must horizontally exhaust
all available underlying coverage, including SIRs, before it may
look to coverage under the policies. The insurers base their
argument on two general grounds: (1) the distinct and unique nature
of excess insurance coverage; and (2) the plain language of the
policies. According to the insurers, each ground constitutes an
independent basis on which to apply the principles of horizontal
exhaustion.
A
The insurers first argue that the principles of horizontal
exhaustion apply because of the distinct and unique nature of
excess insurance coverage. According to the insurers, horizontal
exhaustion applies in all cases in which the insured maintains
excess insurance, and it is irrelevant if the underlying coverage
is primary insurance, fronting policies, or SIRs. The insurers
reason that to hold otherwise would blur the distinction between
primary and excess coverage and permit policyholders like Missouri
Pacific to manipulate the source of their recovery.
This court recently explained the nature of excess coverage in
Outboard Marine:
" 'Excess or secondary coverage is coverage whereby, under
the terms of the policy, liability attaches only after a
predetermined amount of primary coverage has been exhausted.
A second insurer thus greatly reduces his risk of loss.
This reduced risk is reflected in the cost of the policy.' "
(Emphasis in original.) Outboard Marine, 283 Ill. App. 3d
at 652, quoting Whitehead v. Fleet Towing Co., 110 Ill. App.
3d 759, 764 (1982).
Under Illinois law, all underlying coverage must be exhausted
before excess coverage may be reached. United States Gypsum Co.,
268 Ill. App. 3d at 653-54; Illinois Emcasco Insurance Co. v.
Continental Casualty Co., 139 Ill. App. 3d 130, 133 (1985). This
principle, commonly referred to as "horizontal exhaustion," is
required because excess coverage carries a smaller premium than
primary coverage due to the lesser risk insured. Illinois Emcasco
Insurance Co., 139 Ill. App. 3d at 133.
In United States Gypsum Co., 268 Ill. App. 3d 598, Gypsum
filed a declaratory judgment action seeking coverage for asbestos
claims under 35 years of excess insurance policies. At issue was
whether Gypsum was required to exhaust all available primary
coverage before seeking coverage from any policy that provided
excess coverage to any particular primary policy which was
triggered. Some of this primary coverage included fronting
policies which effectively rendered Gypsum self-insured over
several excess policy periods. United States Gypsum, 268 Ill. App.
3d at 651-52. Because Gypsum was effectively self-insured over
several excess policy periods, the court stated that "the decision
on the primary exhaustion issue will determine whether Gypsum will
have to absorb only the amount of one triggered policy period
before seeking excess coverage or whether it must absorb multiple
periods, i.e., exhaust all triggered primary insurance, before
seeking coverage." United States Gypsum, 268 Ill. App. 3d at 652.
The court held that Gypsum was required to exhaust all
applicable underlying coverage, including the fronting policies,
before reaching any excess insurance. The court observed that
Gypsum was attempting to manipulate its coverage to "avoid
absorbing the cost resulting from its position as a self-insurer."
United States Gypsum, 268 Ill. App. 3d at 653. The court refused
to permit Gypsum to do so:
"Adopting Gypsum's position permitting 'vertical exhaustion'
would allow Gypsum 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 (see
Illinois Emcasco Insurance Co., 139 Ill. App. 3d at 133),
and would allow certain primary insurers to escape unscathed
when they would otherwise bear the initial burden of
providing indemnification." United States Gypsum, 268 Ill.
App. 3d at 654.
Our decision in Outboard Marine accords with the reasoning in
United States Gypsum. In Outboard Marine, we rejected the
policyholder's claim that it was not responsible for any damages
for the periods in which it carried no insurance. We explained:
" ' "A firm that fails to purchase insurance for a period
*** is self-insuring for all the risk incurred in that
period; otherwise it would be receiving coverage for a
period for which it paid no premium. Self-insurance is
called 'going bare' for a reason." [Citation.] Or as stated
by Judge Wald in her concurring opinion in Keene, supra, "I
just do not understand why an asbestos manufacturer, which
has consciously decided not to insure itself during
particular years of the exposure-manifestation period,
should have a reasonable expectation that it would be exempt
from any liability for injuries that were occurring during
the uninsured period." [Citations.]' " Outboard Marine, 283
Ill. App. 3d at 643-44, quoting IMCERA Group, Inc. v.
Liberty Mutual Insurance Co., 42 Cal. App. 4th 1754, 1792,
50 Cal. Rptr. 2d 583, 607 (1996).
Relying on United States Gypsum, we concluded that "[the
policyholder] cannot shift its responsibility for uninsured years
to its excess carriers." Outboard Marine, 283 Ill. App. 3d at 642.
Both United States Gypsum and Outboard Marine support the
proposition that the SIRs constitute primary coverage and thus that
Missouri Pacific must exhaust the SIRs before looking to the
insurers for coverage. Like the fronting insurance in United
States Gypsum, which effectively constituted self-insurance, and
the period of no insurance in Outboard Marine, which is the
equivalent of self-insurance, the SIRs in the present case
constitute primary coverage. To hold otherwise would allow
Missouri Pacific to manipulate the source of its recovery and avoid
the consequences of its decision to become self-insured, conduct we
found unacceptable in United States Gypsum and Outboard Marine. As
such, Missouri Pacific must exhaust the SIRs before looking to the
insurers for coverage. See United States Gypsum, 268 Ill. App. 3d
at 653-54.
B
The insurers next argue that the principles of horizontal
exhaustion apply because of the plain language of the policies.
The insurers posit that the "other insurance" provisions of the
policies require that Missouri Pacific exhaust all primary
insurance policies, regardless of whether the policies extend over
multiple policy periods. The insurers urge us to construe such
policies as encompassing SIRs. Missouri Pacific argues, and the
trial court agreed, that SIRs operate as deductibles and are not
"other insurance" within the meaning of the policies.
The policies contain the following provision, which is
typically referred to as an "other insurance" provision:
"Retained Limit--Other Insurance. Underwriters shall be
liable only for that amount of ultimate net loss resulting
from any one occurrence which is in excess of
(A) the amount stated in the Schedule as the 'Retained
Limit', or
(B) the amount of the applicable limit or limits of
liability of other insurance against liability as insured
hereby carried by the Assured or on its behalf, if the
amount of such limit or limits or the aggregate thereof is
greater than the applicable retained limit." (Emphasis
added.)
Most of the policies also contain the following provision, or one
substantially similar to it:
"It is a condition precedent to coverage granted by this
policy that in any instance in which the insured shall choose
to self insure the amount of the retained limit or the
underlying policy limits, the assured, as self-insurer has the
same duties and obligations to underwriters on this policy as
an underlying or primary insurer has to excess insureds under
the standard ISO policy forms, even though this insurance is
not on a standard ISO form."
The policies provide, therefore, that Missouri Pacific is required
to exhaust other available insurance coverage before the insurers
are required to contribute. The issue, therefore, is whether SIRs
constitute "other insurance."
In United States Gypsum, the court held that horizontal
exhaustion was required because of the "other insurance" provision
contained in the excess policies. See United States Gypsum, 268
Ill. App. 3d at 654. The court noted that the provision clearly
set 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." United States Gypsum, 268 Ill. App.
3d at 653. The court then concluded that liability under an excess
policy would not attach until all underlying coverage was
exhausted. United States Gypsum, 268 Ill. App. 3d at 653-54. This
underlying coverage included Gypsum's fronting insurance, which the
court noted was the equivalent of self-insurance. United States
Gypsum, 268 Ill. App. 3d at 652-53.
In light of United States Gypsum, we conclude that Missouri
Pacific is required to exhaust one SIR per occurrence per policy
period. For all practical purposes, Missouri Pacific's SIRs are
the equivalent of the fronting insurance involved in Gypsum. As
such, the "other insurance" provision in the policies requires
Missouri Pacific to exhaust all underlying coverage, including its
SIRs, before it can seek coverage under the policies. See United
States Gypsum, 268 Ill. App. 3d at 652-54.
Moreover, we briefly note that Missouri Pacific's reliance on
USX Corp. v. Liberty Mutual Insurance Co., 269 Ill. App. 3d 233
(1994), for the proposition that SIRs are not "other insurance," is
misplaced. USX did not address the issue of horizontal exhaustion,
and it did not concern an "other insurance" provision that
specifically included SIRs.
In summary, we answer the second certified question as
follows: Missouri Pacific must horizontally exhaust a full SIR per
occurrence per policy period before it may look to coverage under
the policies.
There is one final matter we must address. Commercial Union
also argues that it was entitled to summary judgment because there
is no justiciable controversy between it and Missouri Pacific.
Commercial Union argues that the largest possible amount of alleged
damages Missouri Pacific seeks to apply to the policy period of the
policy issued by Commercial Union is an amount lower than the
inception point of the Commercial Union policy. According to
Commercial Union, therefore, its policy can never be reached.
We decline to address this argument. This appeal comes before
us pursuant to Rule 308. Under Rule 308, the trial court certifies
certain questions to be answered by this court. We are restricted
in our review of Rule 308 appeals to the question certified (Lewis
v. Norfolk & Western Ry. Co., 269 Ill. App. 3d 483, 487 (1995)),
and we should not expand upon the certified question to answer
other issues the trial court might have included (McMichael v.
Michael Reese Health Plan Foundation, 259 Ill. App. 3d 113, 116
(1994)). Here, the parties' motions for summary judgment addressed
a variety of issues, including the issues of single occurrence, all
sums, horizontal exhaustion, and Commercial Union's justiciability
argument. The trial court only certified questions relating to the
issues of all sums and horizontal exhaustion. We therefore decline
to address the issue of justiciability, given that it is not our
position to expand the scope of the certified questions to answer
other issues that might have been included. See McMichael, 259
Ill. App. 3d at 116. Of course, if our resolution of the questions
posed to us today affects the trial court's prior ruling on the
issue of justiciability (or, for that matter, on any issue in the
case), then the parties may ask the trial court to reconsider its
prior ruling.
Conclusion
The questions have been answered, and the cause is remanded
for further proceedings consistent with this decision.
Questions answered; cause remanded.
INGLIS and RATHJE, JJ., concur.
_________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
__________________________________________________________________
MISSOURI PACIFIC RAILROAD ) Appeal from the Circuit Court
COMPANY, on its own Behalf and ) of Du Page County.
as Successor in Interest to )
Chicago And Eastern Illinois )
Railroad Company and to Texas ) No. 94--MR--0198
And Pacific Railway Company and )
Their Subsidiary and )
Affiliated Companies, )
)
Plaintiff-Appellee, )
)
v. )
)
INTERNATIONAL INSURANCE )
COMPANY, Indiv., and as )
Successor to International )
Surplus Lines Insurance )
Company, North River Insurance )
Company, and United States )
Fire Insurance Company, )
)
Defendant-Appellant )
)
(Admiral Insurance Company, )
et al., Defendants). )
__________________________________
MISSOURI PACIFIC RAILROAD )
COMPANY, on its own Behalf and )
as Successor in Interest to )
Chicago And Eastern Illinois )
Railroad Company and to Texas )
And Pacific Railway Company and )
Their Subsidiary and )
Affiliated Companies, )
)
Plaintiff-Appellee, )
)
v. )
)
FEDERAL INSURANCE COMPANY; and )
COMMERCIAL UNION INSURANCE )
COMPANY, on Behalf of C.E. )
Heath Compensation And )
Liability Insurance Company, )
as Successor to Certain )
Interests of Employers' Surplus )
Lines Insurance Company, )
)
Defendants-Appellants )
)
(Admiral Insurance Company, )
et al., Defendants). )
__________________________________
)
MISSOURI PACIFIC RAILROAD )
COMPANY, on its own Behalf and )
as Successor in Interest to )
Chicago And Eastern Illinois )
Railroad Company and to Texas )
And Pacific Railway Company and )
Their Subsidiary and )
Affiliated Companies, )
)
Plaintiff-Appellee, )
)
v. )
)
CENTURY INDEMNITY COMPANY, )
as Successor to Cigna )
Specialty Insurance Company, )
f/k/a California Union )
Insurance Company, and Central )
National Insurance Company of )
Omaha, ) Honorable
) Bonnie M. Wheaton,
Defendant-Appellant. ) Judge, Presiding.
__________________________________________________________________
JUSTICE BOWMAN delivered the opinion of the court:
This appeal involves an insurance coverage dispute between
plaintiff, Missouri Pacific Railroad Company (Missouri Pacific),
and four of its excess general liability insurance carriers,
Commercial Union Insurance Company (Commercial Union), Federal
Insurance Company (Federal), International Insurance Company
(International), and Century Indemnity Company (Century Indemnity)
(collectively, the insurers).
The following facts are taken from the record. Additional
relevant facts will be discussed as they relate to the issues on
appeal.
Thousands of current and former Missouri Pacific employees
have brought claims against Missouri Pacific seeking damages for
hearing loss allegedly caused by continuous and repeated on-the-job
exposure to unsafe levels of noise. In addition, hundreds of
current and former Missouri Pacific employees have brought claims
against Missouri Pacific seeking damages for asbestos-related
injuries allegedly caused by continuous and repeated exposure to
unsafe levels of asbestos over the course of their employment. The
underlying claimants' work histories span over 73 years, starting
in the 1920s.
Between 1934 and 1986, Missouri Pacific maintained self-
insured retentions (SIRs). Missouri Pacific apparently carried no
insurance prior to 1934. Between 1957 and 1986, Missouri Pacific
purchased certain insurance policies from the insurers (the
policies). The total SIRs underlying the policies at issue is over
$67 million.
The policies at issue are identical in most respects and
warrant the same interpretation. Under the policies, the insurers
agreed to indemnify Missouri Pacific for "all sums" caused by an
"occurrence":
"[The Insurer] will indemnify [Missouri Pacific] for all sums
which [Missouri Pacific] shall become legally obligated to pay
as damages and expenses (all as hereinafter defined as
included within the term 'Ultimate Net Loss') because of
personal injury or property damage, caused by an occurrence
and arising out of operations necessary to the conduct of the
business of the Insured."
"All sums" are further defined as "damages" in the "ultimate net
loss" provision:
" 'Ultimate net loss' means the total of all damages and
expenses, as defined below, with respect to each occurrence;
(a) 'damages' means all sums which [Missouri Pacific] becomes
legally obligated to pay as damages, whether by reason of
adjudication or settlement, because of personal injury or
property damage *** (B) 'expenses' means all reasonable
expenses incurred by [Missouri Pacific] in the investigation,
settlement, and defense of any claim or suit seeking such
damages, including hospital, medical, and funeral charges paid
as a consequence of any occurrence hereunder *** and legal
expense (including attorney's fees and court costs) ***."
The policies also define the term "occurrence":
" 'Occurrence' means (a) an accident, or (b) a continuous or
repeated exposure to conditions which result in personal
injury or property damage which is neither expected nor
intended from the stand point of [Missouri Pacific], if such
accident or such personal injury or property damage occurs
while this policy is in force."
The other relevant provision in the policies is the "Retained
Limit-Other Insurance" clause:
"Retained Limit--Other Insurance. Underwriters shall be
liable only for that amount of ultimate net loss resulting
from any one occurrence which is in excess of
(A) the amount stated in the Schedule as the 'Retained
Limit', or
(B) the amount of the applicable limit or limits of liability
of other insurance against liability as insured hereby carried
by the Assured or on its behalf, if the amount of such limit
or limits or the aggregate thereof is greater than the
applicable retained limit."
Missouri Pacific filed a declaratory judgment and contract
action against the insurers. Missouri Pacific sought a declaration
that it was entitled to indemnification from the insurers for the
noise-induced hearing loss (NIHL) and asbestos-exposure claims
brought against it. Missouri Pacific alleged that the NIHL claims
and asbestos-exposure claims each arose from one proximate,
uninterrupted, and continuing cause. Missouri Pacific alleged that
some amount of damage occurred in each policy between 1957 and
1986; thus, it was entitled to select the policy period that would
provide full indemnification for "all sums" incurred as a result of
the claims. Missouri Pacific also alleged that reimbursement of
the claims was subject to the payment of only one SIR per claim
type. Missouri Pacific alleged that it paid over $79 million in
connection with the NIHL claims and $7.2 million in connection with
the asbestos-exposure claims.
On April 29, 1996, Missouri Pacific moved for summary judgment
asserting, inter alia, that the NIHL claims and asbestos-exposure
claims each arose from a single occurrence for purposes of
insurance coverage and thus that it need satisfy only one SIR prior
to seeking reimbursement for each claim type. Missouri Pacific
also moved for summary judgment on the basis that the insurers were
fully liable (up to the policies' limits of liability) for "all
sums" incurred as indemnity in defense costs arising from the
underlying NIHL and asbestos-exposure claims. The insurers'
response to Missouri Pacific's motion for summary judgment was
twofold. First, they argued that the NIHL claims could be
allocated with a reasonable degree of scientific certainty; as a
result, the policies were only responsible for the amount of
hearing loss which occurred during the particular policy period.
Second, they argued that, even if Missouri Pacific could not
demonstrate with scientific certainty the amount of damage in each
policy period, a pro rata, time-on-the-risk allocation method was
proper because it was the only approach consistent with the
language in the policies and Illinois law.
The insurers also moved for summary judgment on the ground
that Missouri Pacific could not implicate the policies unless
Missouri Pacific exhausted all applicable SIRs. The insurers
maintained that horizontal exhaustion was appropriate when the
policyholder was in effect self-insured over several policy
periods. In response, Missouri Pacific argued that self insurance
did not constitute "other insurance" and therefore that the
principles of horizontal exhaustion did not apply.
On July 18, 1996, the trial court granted Missouri Pacific's
motion for summary judgment. The court found as a matter of law
that all NIHL claims arose from a single occurrence, that all
asbestos-exposure claims arose from a single occurrence, and that
Missouri Pacific must only satisfy one SIR for each occurrence.
The trial court also declared that the policies were fully liable
for the entire loss subject only to the policies' limits of
liability.
The trial court also denied the insurers' motions for summary
judgment. The court found that SIRs were not the equivalent of
primary insurance coverage or "other insurance" and, thus, that
horizontal exhaustion principles did not apply.
On July 26, 1996, this court issued its decision in Outboard
Marine Corp. v. Liberty Mutual Insurance Co., 283 Ill. App. 3d 630
(1996). On August 5, 1996, the insurers filed a motion for
clarification and, in the alternative, for reconsideration of the
trial court's July 18, 1996, rulings. The insurers sought
clarification of the court's determination of the appropriate
method of allocation. The insurers also asked the court to
reconsider its ruling in light of our decision in Outboard Marine.
Based on their reading of Outboard Marine, the insurers maintained
that the trial court should apply a pro rata, time-on-the-risk
allocation method.
On August 12, 1996, the trial court denied the motion for
clarification and reconsideration and entered a written order which
granted Missouri Pacific's motion for summary judgment on the
"occurrence" and "all sums" issues and denied the insurers'
motions for summary judgment based on horizontal exhaustion.
However, the court certified two questions relating to the "all
sums" and horizontal exhaustion issues pursuant to Supreme Court
Rule 308(a) (155 Ill. 2d R. 308(a)). Defendants filed separate
applications for leave to appeal to this court pursuant to Supreme
Court Rule 308(b) (155 Ill. 2d R. 308(b)). We granted the
applications and consolidated all appeals.
Discussion
The two questions certified by the trial court are:
"1. Whether the 'all sums' rule set forth by the
Illinois Supreme Court in Zurich Ins. Co. v. Raymark
Industries, Inc., 118 Ill. 2d 23 (1987) or the pro-rata by
time-on-the-risk theory articulated in Outboard Marine Corp.
v. Liberty Mutual Insurance Co., No. 2-95-0950 (Ill. App. 2d
Dist. July 26, 1996) governs allocation of coverage where
the Circuit Court has found that noise-induced hearing loss
claims constitute a single occurrence, and further has found
that asbestos-exposure claims constitute a single
occurrence, and
2. Whether the insured must exhaust all self-insured
retention amounts for each period of insurance coverage
before looking to the insurer for coverage where the noise-
induced hearing loss claims and the asbestos-exposure claims
span several different periods of coverage with different
self-insured retention amounts."
Procedurally, these questions originate from both the denial
and grant of the parties' respective motions for summary judgment.
Summary judgment is appropriate when there is no genuine issue of
material fact and the moving party's right to judgment is clear and
free from doubt. Espinoza v. Elgin, Joliet & Eastern Ry. Co., 165 Ill. 2d 107, 113 (1995). All evidence is construed in the light
most favorable to the nonmoving party and strictly against the
moving party. Letsos v. Century 21-New West Realty, 285 Ill. App.
3d 1056, 1062 (1996). In cases involving summary judgment, we
conduct a de novo review of the evidence in the record. Espinoza,
165 Ill. 2d at 113. With this in mind, we now turn to the
questions before this court.
I
The first question we must address is whether the "all-sums"
allocation rule in Zurich Insurance Co. v. Raymark Industries,
Inc., 118 Ill. 2d 23 (1987), or the pro rata, time-on-the-risk
theory articulated in Outboard Marine Corp. v. Liberty Mutual
Insurance Co., 283 Ill. App. 3d 630 (1996), governs the allocation
of coverage in the present case. In doing so, we are to accept the
trial court's finding that the NIHL and asbestos-exposure claims
each constitute a single occurrence.
The trial court granted Missouri Pacific's motion for summary
judgment on this question. Relying on Zurich, 118 Ill. 2d 23, the
court ruled that the insurers were liable for all sums, up to the
limits of their individual policies, for all injuries related to
each occurrence that were triggered during the relevant policy
period.
The policies state:
"[The Insurer] will indemnify [Missouri Pacific] for all
sums which [Missouri Pacific] shall become legally obligated
to pay as damages and expenses (all as hereinafter defined
as included within the term 'Ultimate Net Loss') because of
personal injury or property damage, caused by an occurrence
and arising out of operations necessary to the conduct of
the business of the Insured." (Emphasis added.)
The policies also define the term "occurrence":
" 'Occurrence' means (a) an accident, or (b) a continuous or
repeated exposure to conditions which result in personal
injury or property damage which is neither expected nor
intended from the stand point of [Missouri Pacific], if such
accident or such personal injury or property damage occurs
while this policy is in force." (Emphasis added.)
The insurers argue that the foregoing provisions promise to
indemnify Missouri Pacific for all sums arising from personal
injuries that occur during the policy period. According to the
insurers, a genuine issue of material fact exists regarding whether
NIHL can be measured and allocated to particular policy periods,
and thus whether Missouri Pacific's damages can be allocated among
the insurers. The insurers therefore argue that the trial court
erred in holding that they were liable for all sums, up to the
limits of their individual policies, for all injuries related to
each occurrence that were triggered during the relevant policy
period. The insurers further argue that, in the event that
Missouri Pacific's total NIHL damages cannot be allocated to
specific policy periods, then the trial court should apply the pro
rata, time-on-the-risk allocation method adopted in Outboard
Marine.
In response, Missouri Pacific argues that, under the "all
sums" provisions of the policies, each insurer is fully liable for
Missouri Pacific's losses without proration. According to Missouri
Pacific, the insurers must indemnify it, up to each triggered
policy's limit of liability, for "all sums" of damages which it
becomes obligated to pay because of NIHL or asbestos injury caused
by an occurrence. Missouri Pacific urges this court to impose
joint and several liability on the insurers, regardless of the
specific policy periods during which the insurers actually provided
coverage.
The construction of an insurance policy's provisions is a
question of law. Outboard Marine, 283 Ill. App. 3d at 649. To
ascertain the meaning of the policy's words and the intent of the
parties, the court must construe the policy as a whole with due
regard to the risk undertaken, the subject matter that is insured,
and the purposes of the entire policy. Outboard Marine, 283 Ill.
App. 3d at 649; see Western Casualty & Surety Co. v. Brochu, 105 Ill. 2d 486, 493 (1985). The terms of an insurance policy must be
read according to their plain and ordinary meaning, and a court
should not search for an ambiguity where there is none. Allstate
Insurance Co. v. Smiley, 276 Ill. App. 3d 971, 977 (1995). If the
words in a policy are susceptible to more than one reasonable
interpretation, they are ambiguous and will be construed in favor
of the insured and against the insurer that drafted the policy.
United States Fidelity & Guaranty Co. v. Wilkin Insulation Co.,
144 Ill. 2d 64, 74 (1991).
Applying these principles to the case at bar, we conclude
that the policies only indemnify Missouri Pacific for personal
injuries that occur during the policy period. The insurers agreed
to indemnify Missouri Pacific "for all sums which [Missouri
Pacific] shall become legally obligated to pay as damages and
expenses *** because of personal injury *** caused by an
occurrence." An occurrence is "an accident, or *** a continuous
or repeated exposure to conditions which result in personal injury
*** if such accident or such personal injury *** occurs while this
policy is in force." (Emphasis added.) We read this language as
providing that the sums the insurers are obligated to pay must be
on account of personal injuries that occur during the policy
period.
Missouri Pacific would have us read the policies as requiring
the insurers to indemnify it for all NIHL damages, regardless of
when the damages occurred. This reading, however, fails to give
effect to the plain and ordinary meaning of the policies' language
when read in context. By focusing on the "all sums" language,
Missouri Pacific ignores the limitation that the sums the insurers
agreed to pay must be on account of personal injuries arising from
an occurrence, which is defined as an accident or personal injury
which occurs while the policy is in force.
Our recent decision in Outboard Marine is instructive on this
point. In that case, we construed policy language similar to the
language in this case. Like Missouri Pacific, the insured in that
case argued that the insurers agreed to pay "all sums," regardless
of when the injuries occurred. As in this case, we disagreed with
the insured and held that "the sums the insurer is obligated to
pay must be on account of property damage arising out of an
occurrence during the policy period." See Outboard Marine, 283
Ill. App. 3d at 642.
Given that the policies provide that the sums the insurers
are obligated to pay must be on account of personal injuries that
occur during the policy period, the question becomes whether the
NIHL damages can be allocated to particular policy periods. At
this stage of the litigation, we believe it is premature for us to
decide whether they can or cannot. We agree with the insurers
that a genuine issue of material fact exists as to whether
Missouri Pacific's NIHL damages can be measured and allocated to
specific time periods within a reasonable degree of scientific
certainty. For instance, in its memorandum in opposition to
Missouri Pacific's motion for summary judgment, International
submitted the affidavit of Dr. William Clark, who stated that NIHL
occurs only during active exposure to excessive noise in the
workplace. In the same memorandum, International attached the
expert witness disclosure statement of Dr. Robert Dobie, who
stated that NIHL injuries can be measured to specific periods of
time. Also, in their motion for clarification and, in the
alternative, for reconsideration of the trial court's ruling
granting Missouri Pacific's motion for summary judgment, the
insurers repeated that NIHL damages could be apportioned among
policy periods, and they directed the court's attention to the
expert witnesses who would testify as such. In that same motion,
the insurers also attached the American National Standard
Institute's model upon which the allocation of NIHL is based.
Collectively, this evidence creates a genuine issue of material
fact as to whether NIHL damages can be measured and allocated to
specific periods of time.
Parenthetically, we note and dismiss as meritless Missouri
Pacific's argument that evidence concerning the allocation of NIHL
damages to particular policy periods was never presented to the
trial court. Our review of the record, as explained in the
preceding paragraph, reveals that this evidence was before the
trial court when it made its rulings and is currently part of the
record on appeal.
We therefore hold that the trial court erred in granting
Missouri Pacific summary judgment on the issue of allocation, and
we remand the matter for proceedings consistent with the decision
we reach today. On remand, the parties should be given the
opportunity to present evidence that NIHL may (or may not) be
measured and allocated, within a reasonable degree of medical and
scientific certainty, to particular policy periods.
In the event that NIHL cannot be measured and allocated to
particular policy periods, the trial court should apply the pro
rata, time-on-the-risk allocation of damages approach used in
Outboard Marine. See Outboard Marine, 283 Ill. App. 3d at 645.
In Outboard Marine, the insured maintained excess insurance
policies which contained language nearly identical to that in the
present case. The trial court found that a single continuous
occurrence--the insured's contamination of a lake over a 23-year
period--resulted in an unallocable loss which implicated
successive policy periods. We held that in such a situation the
best method of damage allocation is a pro rata, time-on-the-risk
allocation. See Outboard Marine, 283 Ill. App. 3d at 642-45.
Similarly, this case involves a single continuous occurrence
which may result in an unallocable loss implicating successive
policy periods. If it is determined on remand that the NIHL
damages are unallocable, then the best method of damage
allocation, as in Outboard Marine, is a pro rata, time-on-the-risk
allocation. Outboard Marine, 283 Ill. App. 3d at 643-45.
Moreover, we note that Missouri Pacific's reliance on Zurich,
118 Ill. 2d 23, is misplaced. In Zurich, the court applied a
"triple trigger" theory to determine which primary insurance
policies were implicated by asbestos-related personal injuries.
The court held that such policies were triggered at the initial
exposure, when the disease manifested itself, and at any interim
time when the claimant manifested some sickness. Zurich, 118 Ill. 2d at 44; see Outboard Marine, 283 Ill. App. 3d at 641. The
insurer then urged the court to adopt the pro rata approach in
Insurance Co. of North America v. Forty-Eight Insulations, Inc.,
633 F.2d 1212 (6th Cir. 1980), aff'd on reh'g 657 F.2d 814 (6th
Cir. 1981), to allocate the indemnity and defense costs of each
claim among the triggered policies. In Forty-Eight Insulations,
"the court held that the insurers' obligations under
their respective policies were triggered only by a
claimant's exposure to asbestos during a policy period.
From this premise, that court concluded that the exposure
theory provided a reasonable means of allocating the costs
of defense and indemnification among the triggered policies
based on the number of years of exposure." Zurich, 118 Ill. 2d at 57.
However, the court in Zurich had already held that a policy was
triggered if the claimant suffered bodily injury or sickness or
disease. Accordingly, having rejected the premise underlying the
pro rata allocation approach in Forty-Eight Insulations, Zurich
concluded that the appellate court did not err "insofar as it
declined to order a pro rata allocation of defense and indemnity
obligations among the triggered policies." Zurich, 118 Ill. 2d at
57.
We read nothing in Zurich as precluding the application of the
pro rata, time-on-the-risk allocation method announced in Outboard
Marine to the case at bar. Zurich's rejection of a pro rata
approach was based on the narrow facts of the case before it,
namely, that it had rejected the trigger analysis set forth in
Forty-Eight Insulations. The court did not adopt a general rule
forever precluding the application of a pro rata approach. As we
explained in Outboard Marine, such an approach is appropriate
where, as here, a single continuous occurrence results in an
unallocable loss implicating successive policy periods.
Our answer, then, to the first certified question is twofold.
First, the parties should be given the opportunity to present
evidence that NIHL may (or may not) be measured and allocated,
within a reasonable degree of medical and scientific certainty, to
particular policy periods. If NIHL cannot be allocated, then the
court should apply the pro rata, time-on-the-risk allocation method
adopted in Outboard Marine.
Finally, we add that the parties' arguments regarding the
first certified question almost exclusively focused on the NIHL
claims. Our consideration of the first question tracts this
approach. However, our reasoning applies equally to the NIHL
claims and the asbestos-exposure claims.
II
The second question we must address is whether Missouri
Pacific must exhaust all its SIRs for each period of insurance
coverage before looking to the insurers for coverage, where the
NIHL claims and the asbestos-exposure claims span several different
periods of coverage with different SIR amounts. This question has
its origins in the insurers' motions for summary judgment, wherein
the insurers asserted that Missouri Pacific could not implicate the
policies until it exhausted all SIRs. The trial court denied the
motions. Relying on USX Corp. v. Liberty Mutual Insurance Co., 269
Ill. App. 3d 233 (1994), the court reasoned that Missouri Pacific's
SIRs did not equal "other insurance" and, thus, that the principles
of horizontal exhaustion did not apply. The court accordingly held
that Missouri Pacific must exhaust only one SIR per occurrence.
The insurers maintain that the trial court erred in denying
their motions for summary judgment. Relying principally on United
States Gypsum Co. v. Admiral Insurance Co., 268 Ill. App. 3d 598
(1994), they assert that Missouri Pacific must horizontally exhaust
all available underlying coverage, including SIRs, before it may
look to coverage under the policies. The insurers base their
argument on two general grounds: (1) the distinct and unique nature
of excess insurance coverage; and (2) the plain language of the
policies. According to the insurers, each ground constitutes an
independent basis on which to apply the principles of horizontal
exhaustion.
A
The insurers first argue that the principles of horizontal
exhaustion apply because of the distinct and unique nature of
excess insurance coverage. According to the insurers, horizontal
exhaustion applies in all cases in which the insured maintains
excess insurance, and it is irrelevant if the underlying coverage
is primary insurance, fronting policies, or SIRs. The insurers
reason that to hold otherwise would blur the distinction between
primary and excess coverage and permit policyholders like Missouri
Pacific to manipulate the source of their recovery.
This court recently explained the nature of excess coverage in
Outboard Marine:
" 'Excess or secondary coverage is coverage whereby, under
the terms of the policy, liability attaches only after a
predetermined amount of primary coverage has been exhausted.
A second insurer thus greatly reduces his risk of loss.
This reduced risk is reflected in the cost of the policy.' "
(Emphasis in original.) Outboard Marine, 283 Ill. App. 3d
at 652, quoting Whitehead v. Fleet Towing Co., 110 Ill. App.
3d 759, 764 (1982).
Under Illinois law, all underlying coverage must be exhausted
before excess coverage may be reached. United States Gypsum Co.,
268 Ill. App. 3d at 653-54; Illinois Emcasco Insurance Co. v.
Continental Casualty Co., 139 Ill. App. 3d 130, 133 (1985). This
principle, commonly referred to as "horizontal exhaustion," is
required because excess coverage carries a smaller premium than
primary coverage due to the lesser risk insured. Illinois Emcasco
Insurance Co., 139 Ill. App. 3d at 133.
In United States Gypsum Co., 268 Ill. App. 3d 598, Gypsum
filed a declaratory judgment action seeking coverage for asbestos
claims under 35 years of excess insurance policies. At issue was
whether Gypsum was required to exhaust all available primary
coverage before seeking coverage from any policy that provided
excess coverage to any particular primary policy which was
triggered. Some of this primary coverage included fronting
policies which effectively rendered Gypsum self-insured over
several excess policy periods. United States Gypsum, 268 Ill. App.
3d at 651-52. Because Gypsum was effectively self-insured over
several excess policy periods, the court stated that "the decision
on the primary exhaustion issue will determine whether Gypsum will
have to absorb only the amount of one triggered policy period
before seeking excess coverage or whether it must absorb multiple
periods, i.e., exhaust all triggered primary insurance, before
seeking coverage." United States Gypsum, 268 Ill. App. 3d at 652.
The court held that Gypsum was required to exhaust all
applicable underlying coverage, including the fronting policies,
before reaching any excess insurance. The court observed that
Gypsum was attempting to manipulate its coverage to "avoid
absorbing the cost resulting from its position as a self-insurer."
United States Gypsum, 268 Ill. App. 3d at 653. The court refused
to permit Gypsum to do so:
"Adopting Gypsum's position permitting 'vertical exhaustion'
would allow Gypsum 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 (see
Illinois Emcasco Insurance Co., 139 Ill. App. 3d at 133),
and would allow certain primary insurers to escape unscathed
when they would otherwise bear the initial burden of
providing indemnification." United States Gypsum, 268 Ill.
App. 3d at 654.
Our decision in Outboard Marine accords with the reasoning in
United States Gypsum. In Outboard Marine, we rejected the
policyholder's claim that it was not responsible for any damages
for the periods in which it carried no insurance. We explained:
" ' "A firm that fails to purchase insurance for a period
*** is self-insuring for all the risk incurred in that
period; otherwise it would be receiving coverage for a
period for which it paid no premium. Self-insurance is
called 'going bare' for a reason." [Citation.] Or as stated
by Judge Wald in her concurring opinion in Keene, supra, "I
just do not understand why an asbestos manufacturer, which
has consciously decided not to insure itself during
particular years of the exposure-manifestation period,
should have a reasonable expectation that it would be exempt
from any liability for injuries that were occurring during
the uninsured period." [Citations.]' " Outboard Marine, 283
Ill. App. 3d at 643-44, quoting IMCERA Group, Inc. v.
Liberty Mutual Insurance Co., 42 Cal. App. 4th 1754, 1792,
50 Cal. Rptr. 2d 583, 607 (1996).
Relying on United States Gypsum, we concluded that "[the
policyholder] cannot shift its responsibility for uninsured years
to its excess carriers." Outboard Marine, 283 Ill. App. 3d at 642.
Both United States Gypsum and Outboard Marine support the
proposition that the SIRs constitute primary coverage and thus that
Missouri Pacific must exhaust the SIRs before looking to the
insurers for coverage. Like the fronting insurance in United
States Gypsum, which effectively constituted self-insurance, and
the period of no insurance in Outboard Marine, which is the
equivalent of self-insurance, the SIRs in the present case
constitute primary coverage. To hold otherwise would allow
Missouri Pacific to manipulate the source of its recovery and avoid
the consequences of its decision to become self-insured, conduct we
found unacceptable in United States Gypsum and Outboard Marine. As
such, Missouri Pacific must exhaust the SIRs before looking to the
insurers for coverage. See United States Gypsum, 268 Ill. App. 3d
at 653-54.
B
The insurers next argue that the principles of horizontal
exhaustion apply because of the plain language of the policies.
The insurers posit that the "other insurance" provisions of the
policies require that Missouri Pacific exhaust all primary
insurance policies, regardless of whether the policies extend over
multiple policy periods. The insurers urge us to construe such
policies as encompassing SIRs. Missouri Pacific argues, and the
trial court agreed, that SIRs operate as deductibles and are not
"other insurance" within the meaning of the policies.
The policies contain the following provision, which is
typically referred to as an "other insurance" provision:
"Retained Limit--Other Insurance. Underwriters shall be
liable only for that amount of ultimate net loss resulting
from any one occurrence which is in excess of
(A) the amount stated in the Schedule as the 'Retained
Limit', or
(B) the amount of the applicable limit or limits of
liability of other insurance against liability as insured
hereby carried by the Assured or on its behalf, if the
amount of such limit or limits or the aggregate thereof is
greater than the applicable retained limit." (Emphasis
added.)
Most of the policies also contain the following provision, or one
substantially similar to it:
"It is a condition precedent to coverage granted by this
policy that in any instance in which the insured shall choose
to self insure the amount of the retained limit or the
underlying policy limits, the assured, as self-insurer has the
same duties and obligations to underwriters on this policy as
an underlying or primary insurer has to excess insureds under
the standard ISO policy forms, even though this insurance is
not on a standard ISO form."
The policies provide, therefore, that Missouri Pacific is required
to exhaust other available insurance coverage before the insurers
are required to contribute. The issue, therefore, is whether SIRs
constitute "other insurance."
In United States Gypsum, the court held that horizontal
exhaustion was required because of the "other insurance" provision
contained in the excess policies. See United States Gypsum, 268
Ill. App. 3d at 654. The court noted that the provision clearly
set 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." United States Gypsum, 268 Ill. App.
3d at 653. The court then concluded that liability under an excess
policy would not attach until all underlying coverage was
exhausted. United States Gypsum, 268 Ill. App. 3d at 653-54. This
underlying coverage included Gypsum's fronting insurance, which the
court noted was the equivalent of self-insurance. United States
Gypsum, 268 Ill. App. 3d at 652-53.
In light of United States Gypsum, we conclude that Missouri
Pacific is required to exhaust one SIR per occurrence per policy
period. For all practical purposes, Missouri Pacific's SIRs are
the equivalent of the fronting insurance involved in Gypsum. As
such, the "other insurance" provision in the policies requires
Missouri Pacific to exhaust all underlying coverage, including its
SIRs, before it can seek coverage under the policies. See United
States Gypsum, 268 Ill. App. 3d at 652-54.
Moreover, we briefly note that Missouri Pacific's reliance on
USX Corp. v. Liberty Mutual Insurance Co., 269 Ill. App. 3d 233
(1994), for the proposition that SIRs are not "other insurance," is
misplaced. USX did not address the issue of horizontal exhaustion,
and it did not concern an "other insurance" provision that
specifically included SIRs.
In summary, we answer the second certified question as
follows: Missouri Pacific must horizontally exhaust a full SIR per
occurrence per policy period before it may look to coverage under
the policies.
There is one final matter we must address. Commercial Union
also argues that it was entitled to summary judgment because there
is no justiciable controversy between it and Missouri Pacific.
Commercial Union argues that the largest possible amount of alleged
damages Missouri Pacific seeks to apply to the policy period of the
policy issued by Commercial Union is an amount lower than the
inception point of the Commercial Union policy. According to
Commercial Union, therefore, its policy can never be reached.
We decline to address this argument. This appeal comes before
us pursuant to Rule 308. Under Rule 308, the trial court certifies
certain questions to be answered by this court. We are restricted
in our review of Rule 308 appeals to the question certified (Lewis
v. Norfolk & Western Ry. Co., 269 Ill. App. 3d 483, 487 (1995)),
and we should not expand upon the certified question to answer
other issues the trial court might have included (McMichael v.
Michael Reese Health Plan Foundation, 259 Ill. App. 3d 113, 116
(1994)). Here, the parties' motions for summary judgment addressed
a variety of issues, including the issues of single occurrence, all
sums, horizontal exhaustion, and Commercial Union's justiciability
argument. The trial court only certified questions relating to the
issues of all sums and horizontal exhaustion. We therefore decline
to address the issue of justiciability, given that it is not our
position to expand the scope of the certified questions to answer
other issues that might have been included. See McMichael, 259
Ill. App. 3d at 116. Of course, if our resolution of the questions
posed to us today affects the trial court's prior ruling on the
issue of justiciability (or, for that matter, on any issue in the
case), then the parties may ask the trial court to reconsider its
prior ruling.
Conclusion
The questions have been answered, and the cause is remanded
for further proceedings consistent with this decision.
Questions answered; cause remanded.
INGLIS and RATHJE, JJ., concur.
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