THE ATCHISON, TOPEKA, AND  )
SANTA FE RAILWAY COMPANY,  )
                           )
            Plaintiff,     )
                           )
v.                         )    Case No. 94 CV 1464
                           )
STONEWALL INSURANCE        )
COMPANY, et al.,           )
                           )
            Defendants.    )
___________________________)

This matter comes before the court on Defendant's, Stonewall Insurance Company, et al.'s (Certain Defendants), Motion for Summary Judgment on the issue of Application of Self-Insured Retentions, and Plaintiff's, The Atchison, Topeka, and Santa Fe Railroad Company's (Santa Fe), Cross Motion for Partial Summary Judgment on the issue of "Horizontal Exhaustion". After careful consideration, the court denies Certain Defendants' Motion for Summary Judgment and grants Santa Fe's Cross-Motion for Partial Summary Judgment on the issue of horizontal exhaustion.

1. Santa Fe filed this action seeking a declaration of rights and obligations under certain insurance policies for $28,000,000 in NIHL damages (Certain Defendants' Motion for Summary Judgment, p.2).

2. Santa Fe alleges that its deductibles or retentions in no way constitute primary insurance coverage (Santa Fe's Response to Certain Defendants' Motion for Summary Judgment, p. 1).

3. Santa Fe alleges that the underlying claimants, employees, and former employees of Santa Fe, have alleged that their NIHL resulted from Santa Fe's negligent failure to implement an effective and timely hearing conservation program (Certain Defendants' Motion for Summary Judgment, p.2).

4. In November 1997, Santa Fe filed a Motion for Partial Summary Judgment on the Scope of Coverage contending, inter alia, that because the NIHL claims against Santa Fe "arose out of one occurrence, Santa Fe must pay no more than one deductible" (Certain Defendants' Motion for Summary Judgment, p.3).

5. The Lloyd's of London Policy No. 614/53930, 2Mx1M, 12/15/69 to 12/15/70 provides on page SFIP/0000283 that "in no event shall there be imposed more than one deductible as set forth in Condition 4 in respect to one occurrence" (Plaintiff's Exhibit 1). (Petition, ¶ 15) (Plaintiff's Exhibit 1: The Lloyd's of London Policy No. 614/53930, 2Mx1M, 12/15/69 to 12/15/70).

6. From at least 1945 to 1986, Santa Fe maintained a program of excess insurance coverage purchased from Certain Defendants to protect it from "liability incurred as a result of its operations." (Certain Defendants' Motion for Summary Judgment, p.3) (Santa Fe's Response to Certain Insurers' Rule 141 Statement, p.2).

7. Santa Fe's self-insured retentions underlying its excess policies ranged from $1,000,000 for the period of 11/15/56-1/15/71, to $7,000,000 for the period 3/31/84-3/31/86 (Certain Defendants' Motion for Summary Judgment, ¶ 3). In 1991, the coverage grew to $10,000,000. (Deposition of David T. Burr, p. 71) The self-insured coverage is currently $25,000,000. Id..

8. Total premiums on the International Surplus Lines Insurance Company (ISLIC) policies decrease as each successive layer of coverage is reached. For the period of March 17, 1982, to March 17, 1983, the premium ranged from $170,000 for a $1,700,000 coverage of the first $10,000,000 that exceeded Santa Fe's $5,250,000 Self-Insured Retentions, to a $5,000 premium for a $5,000,000 coverage of the $50,000,000 excess over the $150,250,000 that was covered by higher layers. (Certain Defendants' Motion for Summary Judgment, ¶ 9a).

9. Under the excess policies, Certain Defendants agree, subject to all terms and conditions of their policies, to indemnify the assured for certain losses up to the limits of the policies incurred as a result of an "occurrence." (Certain Defendants' Motion for Summary Judgment, ¶ 8).

10. The language of ISLIC at SFIP/0001111 states that Certain Defendants shall not be liable unless the Ultimate Net Loss for any one occurrence is $3,000,000, subject to an overall Ultimate Net Loss of $5,000,000. These figures are specific to the 1974 policy between the parties. Certain Defendants' Motion for Summary Judgment, ¶ 10, Exhibit 5. Other policies contain similar Ultimate Net Loss Requirements.

11. The policies between Certain Defendants and Santa Fe contain the following "other insurance" provision, or another substantially similar provision:

Not withstanding anything to the contrary contained herein, it is further understood and agreed that where there is any other valid and collectible insurance providing coverages, as described in Section I-A and I-B hereof, this insurance shall be considered as excess insurance over and above such other insurance in effect at the time of the loss or damage except that permission is hereby granted for excess insurance over the limits of liability expressed in this Policy without prejudice to this insurance, and the existence of such insurance, if any, shall not reduce any liability under this policy.

Certain Defendants' Motion for Summary Judgment, Exhibit 5 at SFIP/0001113.

The standard by which summary judgment is granted is well-established:

The burden on the party seeking summary judgment is a strict one. The trial court is required to resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is sought. Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. When opposing a motion for summary judgment, an adverse party must come forward with evidence to establish a dispute to a material fact. In order to preclude summary judgment, the facts subject to the dispute must be material to the conclusive issues in the case.

Kerns v. G.A.C., Inc., 253 Kan. 515, 519-220, 856 P.2d 1313 (1993).

As to the issue of horizontal exhaustion, there is no genuine issue of material fact. It is an uncontroverted fact that Santa Fe maintained retentions as a part of their insurance plan. Santa Fe was willing to retain a certain amount of risk above which (Santa Fe) want[ed] to "transfer catastrophe losses." Burr Depo. at 58. Furthermore, the policies of Certain Defendants were held as coverage above and beyond the retentions held by Santa Fe. This court has previously held that the incidents underlying the NIHL loss claims were the result of a single occurrence. Thus, the issue of horizontal exhaustion concerns whether Santa Fe must pay more than one deductible for a single occurrence that occurred over multiple insured periods of time before the excess policies of Certain Defendants are brought into effect. Since this issue can be decided as a matter of law, summary judgment is appropriate.

Where an insurer intends to limit or restrict the coverage under its policy, it must do so in clear and unambiguous terms that reveals its purpose. Alliance life Ins. Co. v. Ulysses Volunteer Fireman's Relief Ass'n, 215 Kan. 937, 529 P.2d 171 (1974). The policies between Certain Defendants and Santa Fe contains the language "in no event shall there be imposed more than one deductible. . .in respect to one occurrence." Santa Fe's Memo. in Opp., Exh. 1 at SFIP0000283. If Certain Defendants intended to limit the terms of the coverage and require that more than one deductible would have to be met in the event an occurrence spanned more than one policy period, it was their affirmative duty to make that purpose clear within the policies. Certain Defendants assert that all excess coverage within all periods must be exhausted before the first layer of insurance comes into effect. If this was the purpose of the excess insurance/other insurance provision in the policies, it was not clearly communicated in the contract with Santa Fe, and it is not obvious to this court.

There is no question that an "other insurance" provision existed in the policies between Certain Defendants and Santa Fe. It is also clear that Kansas law requires all primary coverage to be exhausted before excess insurance is reached. However, Certain Defendants incorrectly rely on Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 934 P.2d 65 (1997) to argue that where one occurrence exists over several policy periods, all primary insurance must be exhausted. Americold must be limited to its facts. The "occurrence" issue was never reached by the court. The case simply defines both primary and excess insurance and holds that primary insurance must be exhausted before reaching excess insurance. Americold did not deal with an issue of one occurrence extending over several policy periods or whether "retentions" should be considered other insurance and/or primary insurance.

Certain Defendants contend that 1) the recognized distinction between primary and excess coverage dictates the exhaustion of all applicable primary coverage prior to implicating applicable excess coverage; 2) the "other insurance" provisions of Santa Fe's policies with certain defendants' require the exhaustion of underlying coverage; and 3) public policy precludes an insured from manipulating its source of recovery.

The first two contentions set forth by Certain Defendants rely on Santa Fe's retentions being considered "insurance," either "primary insurance" or "other insurance." Santa Fe argues that both of Certain Defendants' first two contentions fail because Santa Fe's retentions are not insurance but instead are the absence of insurance. As this court said in its Memorandum Decision on Santa Fe's Motion for Partial Summary Judgment on the Issue of Scope of Coverage, p. 11.

Finally, the court agrees with Santa Fe's characterization that a retention does not constitute "other insurance," but rather, the absence of insurance. Thomas M. Ryan, attorney for International Insurance Company, conceded at the Oral Argument on the Summary Judgment Motions that self-insurance is not insurance. (Transcript of Oral Arguments to Court, March 16, 1999, page 32). In addition, the "other insurance" provision is only applicable when there is "valid and collectible insurance." The interpretation of the "other insurance" provision that the insurers seek is a strained one at best. "Valid and collectible" are not terms ordinarily used when referring to a policyholder's ability to ante up a retention or deductible. Such an interpretation apparently would mean that if the policyholder was insolvent (ie. the retention was uncollectible) the excess insurance would kick in without the requirement of a retention or deductible. Such an interpretation is rejected by this court. For these reasons, the court finds Santa Fe cannot be included in the allocation of the loss as "other insurance."

Likewise, the retentions can be distinguished from primary insurance as well. Santa Fe argues that under Kansas law insurance is defined as "any contract whereby one party promises for a consideration to indemnify the other against certain risks." Londerholm v Anderson, 195 Kan. 649, 661, 408 P.2d 864m 874 (1965) (emphasis added). Clearly the retentions do not meet this definition of insurance because there is no contract, no other party, and no transfer of risk.

Certain Defendants, however, rely on the case Missouri Pacific Railroad Co. v. Admiral Ins. Co., 288 Ill. App. 3d 69, 679 N.E. 2d 801, 810 (1997) as support for their position that self-insured retentions (SIRs) constitute primary coverage.

Santa Fe, however, points out one major distinction between Missouri Pacific Railroad Co. (Mo Pac) and Santa Fe. Mo Pac contracted to be treated as a primary insurer as follows:

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.

Mo Pac, 679 N.E. 2d at 811 (emphasis added).

While the court in Mo Pac found that Mo Pac agreed contractually to be a primary insurer, the court also relied on two other Illinois cases [United States Gypsum Co., 268 Ill. App. 3d 598, 205 Ill. Dec. 619, 643 N.E. 2d 1226 (1994) and Outboard Marine Corp. v. Liberty Mutual Insurance Co., 283 Ill. App. 3d 630, 219 Ill. Dec. 62, 670 N.E. 2d 740 (1996)] in holding that SIRs constitute primary coverage that must be exhausted before tapping excess coverage.

Apparently, however, there is a split of authority in Illinois regarding issues in continuous damage cases. See Illinois Power Co. v. Home Ins. Co., No. 95 L 284 (Macon County, Illinois, Aug. 18, 1997) at 5-6. While the Illinois Supreme Court in Zurich Insurance Company v. Raymark Industries, Inc., 118 Ill. 2d 23, 112 Ill. Dec 684, 514 N.E. 2d 150 (1987) did not expressly address horizontal exhaustion or self-insured retentions, the Court did support a strict interpretation of contract language.

The Court in Zurich rejected a "pro rata" approach in favor of an "all sums" approach. The "all sums" approach provides that any triggered policy period shall be responsible to provide full indemnity to the insured. While vertical exhaustion is required by the contracts, nothing in the contractual language requires horizontal exhaustion. With the "all sums" approach (as has been adopted by this court), the court need not reach the issue of horizontal exhaustion. As stated by the court in Illinois Power Co., "(t)he imposition of multiple retentions would be judicial re-engineering of the plain language which speaks only of one retention per occurrence." Illinois Power Co., at 6.

There is a long-held rule of law that the intentions of the parties and meaning of a contract are to be deduced from the instrument where its terms are plain and unambiguous. First Nat. Bank & Trust Co. v. Lygrisse, 231 Kan. 595, 647 P.2d 1268 (1982). Here, the language of the policies is quite clear. Santa Fe, by the terms of the policies, is only required to meet one deductible per occurrence. Therefore, because this court has held the NIHL losses were the result of a single occurrence, Santa Fe need only meet one deductible before reaching the excess insurance policies held by Certain Defendants.

Such a finding by this court should not be precluded by certain defendant's public policy argument that an insured should be prohibited from manipulating its source of recovery. As stated in Illinois Power Co. at p.5, "(t)hese policies are business contracts. If an insured's right to indemnity has not been limited by the policy language, the insured has the right to select an option which provides the greatest economic benefits."

Summary Judgment is hereby granted on the Cross-Motion of Plaintiff, Santa Fe, and in favor of Santa Fe on the issue of horizontal exhaustion for the reasons set out above. Santa Fe need only satisfy one deductible before the excess policies of Certain Defendants may be reached. The court, likewise, denies Certain Defendants' Motion for Summary Judgment on the Application of Self-Insured Retentions.

This Entry of Judgment shall constitute the court's entry of judgment when filed with the Clerk of this court and no further journal entry is required.

IT IS SO ORDERED.

Dated this 24th day of July , 2000.

 
________________________
Nancy Parrish
Judge, Third Judicial District
Division Fourteen

I hereby certify that a copy of the above and foregoing MEMORANDUM DECISION AND ORDER was mailed this 24th day of July , 2000, to the following:

 
Weston W. Marsh
David V. Goodsir
Freeborn & Peters
311 S. Wacker Drive
Suite 3000
Chicago, Illinois 60606

 
Steve R. Fabert
Fisher, Patterson, Sayler & Smith
3550 SW 5th Street
Topeka, Kansas 66601

 
Thomas M. Ryan
Bollinger, Ruberry & Garvey
Citicorp Center
500 West Madison Street
Suite 2300
Chicago, Illinois 60661

 
Arthur A. Glassman
Michael E. Francis
Sloan, Listrom, Eisenbarth, Sloan & Glassman
714 Capitol Federal Building
Topeka, Kansas 66603

 
Corliss S. Worford
Richard M. Watson
Lord, Bissell & Brook
One Atlantic Center
1201 West Peachtree Street
Suite 3700
Atlanta, Georgia 30309

 
Daniel E. Murphy, II
Gilberg & Kiernan
1250 Eye Street, N.W.
Suite 600
Washington, DC 20005

 
Steven W. Cavanaugh
Fisher, Cavanaugh & Smith
534 Kansas Avenue
Suite 1035
Topeka, Kansas 66603

 
Eric C. Young
Dunham Boman & Leskera
103 East B Street
Belleville, Illinois 62220

 
Paul E. Escobar
German, Gallagher & Murtagh
The Bellevue
Fifth Floor
200 South Broad Street
Philadelphia, PA 19102

 
Richard W. Bryan
Jackson & Campbell
South Tower
One Lafayette Center
1120-20th Street, NW
Washington, DC 20036

 
Richard V. Eckert
5601 SW Barrington Court South
Topeka, Kansas 66614

 
Stacy S. Freel
Brand & Novak
135 South LaSalle Street
Suite 3700
Chicago, Illinois 60603