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(Article from Insurance Law Alert, January 2016)

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An Illinois appellate court ruled that umbrella coverage was excess to pooled self-insurance and therefore that umbrella coverage did not apply until underlying self-insurance limits had been exhausted.  Ill. Mun. League Risk Mgmt. Assoc. v. State Farm Fire & Cas. Co., 2015 WL 9393506 (Ill. App. Ct. Dec. 22, 2015).

The Village of Lynwood belongs to the Illinois Municipal League Risk Management Association, a municipal risk-pooling organization.  When a car owned by the municipality and driven by a municipal employee was involved in an accident, the Association defended and ultimately settled the suit.  Thereafter, the Association, as subrogee for the municipality and employee, sued State Farm, seeking coverage under an umbrella policy issued to the employee.  State Farm refused to contribute, citing an “other insurance” clause that made its coverage “excess over all other insurance and self-insurance.”  An Illinois trial court ruled in favor of State Farm, finding that the Association was obligated to provide indemnity up to its contract limit of $8 million.  Because the underlying suit was settled for approximately $5.8 million, the court concluded that State Farm had no duty to contribute to the settlement.  The appellate court affirmed.

The appellate court ruled that although the Association’s contract was not technically an insurance policy (it was an arrangement of publicly-funded pooled self-insurance among municipalities), it nonetheless qualified as underlying “insurance” for the purposes of enforcing the “other insurance” clause in State Farm’s umbrella policy.  In so ruling, the court rejected the argument that self-insurance should be limited to privately-funded risk pools.  The court stated, “We see no grounds to limit the reach of the other insurance clause in the manner the Association suggests.  We construe the umbrella policy to provide insurance coverage only when the loss exceeded available limits of insurance and self-insurance, including pooled self-insurance.”