PREMCOR USA, INC ., and THE PREMCOR REFINING GROUP , INC . v. American Home Assurance Company

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-2549
P REMCOR USA, I NC ., and
T HE P REMCOR R EFINING G ROUP , I NC .,
Plaintiffs-Appellants,
v.
A MERICAN H OME A SSURANCE C OMPANY ,
Defendant-Appellee.
____________
Appeal from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 03 C 7377—John W. Darrah, Judge.
____________
A RGUED D ECEMBER 10, 2004—D ECIDED M ARCH 9, 2005
____________
Before R IPPLE , M ANION , and W OOD , Circuit Judges.
M ANION , Circuit Judge. Premcor USA, Inc., and The
Premcor Refining Group, Inc. (together, “Premcor”) sued
American Home Assurance Company (“AHA”) for cover-
age of litigation defense costs under an “umbrella” insur-
ance policy (the “AHA policy”). Premcor argued that the
AHA policy required AHA to pay more than two million
dollars in costs that Premcor incurred while defending itself

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2 No. 04-2549
in an Illinois state court case. The parties filed cross-motions
for summary judgment. The district court granted judgment
in favor of AHA. Premcor appeals.
I
In 1995, two Premcor employees were fatally injured
while working at a Premcor facility in Blue Island, Illinois.
Subsequently, their estates initiated negligence actions in
Illinois state court to recover damages under the Illinois
Wrongful Death and Survival Act, 740 ILCS §§ 180.01 et seq.
The state trial court granted summary judgment to Premcor
in January 2004, but the case presently continues on appeal.
To date, Premcor has spent over two million dollars de-
fending this action.
At the time of the accident, Premcor was covered by sev-
eral insurance policies. The initial layer of insurance was
composed primarily of a two million dollar commercial
general liability policy (the “Reliance policy”) from Reliance
National Indemnity Company (“Reliance”). In addition,
Premcor had several other insurance policies covering dis-
crete areas such as employers’ liability and automobiles.
Premcor also contracted with AHA for an umbrella insur-
ance policy that would provide ten million dollars in excess
coverage. An umbrella policy is a type of policy that acts
both as an excess insurance policy and, in certain circum-
stances, as a primary insurance policy. Regarding the latter
aspect, an umbrella policy provides coverage for those
incidents left uncovered by other insurance policies, filling
gaps in underlying insurance.
When the accident occurred, Premcor filed a claim with
Reliance. The Reliance policy contained a “duty to defend”
provision, which provided that Reliance would pay defense
costs for any actions covered by the Reliance policy. Reli-

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No. 04-2549 3
ance, however, subsequently became insolvent, which left
Premcor itself to pay the defense costs in the Illinois state
court action. After Reliance became insolvent, Premcor filed
a declaratory judgment action against AHA in the Northern
District of Illinois, arguing that, under the AHA policy,
AHA had to “drop down” and pay all defense costs above
the amount Premcor received from Reliance, which because
of the insolvency was zero.
As this case turns on the precise coverage of the AHA
policy, we examine the applicable provisions in some detail.
The AHA policy begins with a broad description of its
coverage: “[t]o pay on behalf of [Premcor] that portion of
the ultimate net loss in excess of the retained limit as here-
inafter defined . . . .” Several provisions of the AHA policy
add specific contours to this general description. The
Declarations page sets forth the Limit of Liability of the
AHA policy. This Limit of Liability states that AHA will
provide ten million dollars in coverage for any loss in excess
of either:
(1) the amount recoverable under the underlying in-
surance as set out in the attached Schedule A
or
(2) $25,000 US ultimate net loss in respect of each
occurrence not covered by underlying insurance.
A second provision in AHA’s policy further explains
AHA’s obligation to provide coverage. Specifically, the
AHA policy’s “retained limit” clause states:
A. [AHA] shall be liable only for that portion of the
ultimate net loss excess of [Premcor’s] retained limited
defined as either:
1. the total of the applicable limits of the underly-
ing policies listed in the Schedule of Underlying

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4 No. 04-2549
Insurance hereof, and the applicable limits of any
other underlying insurance providing coverage to
[Premcor]; or
2. the amount stated in Item 3(A-2) of the
Declarations as the result of any one occurrence not
covered by such underlying policies or insurance;
and then up to an amount not exceeding the amount
as stated in Item 3(A) of the Declarations as the
result of any one occurrence.
The AHA policy defines “ultimate” net loss as:
the total sum which [Premcor], or any company as its
insurer, or both become obligated to pay be [sic] reason
of personal injury, property damage, . . . and shall also
include . . . expenses for doctors, nurses, and investiga-
tors and other persons, and for settlement, adjustment,
investigation and defense of claims. . . . [AHA] shall not
be liable for expenses as aforesaid when such are
covered by underlying policies of insurance whether
collectible or not.
In short, by defining ultimate net loss, the AHA policy
restricts its coverage to situations where either damages or
costs exceed the total of the applicable limits of the underly-
ing policies.
Another relevant portion of the AHA policy addresses
AHA’s liability in instances of insolvency by any underlying
insurers. Endorsement 10 provides:
The liability of [AHA] shall not be increased by the
refusal or inability of [Premcor] to pay its Self-Insured
Retention (or retained limit) or by the refusal or ina-
bility of any underlying insurer to pay, whether by
Reasons of Insolvency, Bankruptcy, or otherwise.

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No. 04-2549 5
This endorsement indicates that insolvency by an underly-
ing insurance provider has no effect on the amount of
AHA’s liability.
In addition to these provisions regarding excess insurance,
the AHA policy, as an umbrella insurance policy, also
supplies primary coverage in some circumstances. Under a
section designated “Defense, Settlement, Supplementary
Payments,” the AHA policy provides primary coverage “to
occurrences covered under this policy but not covered by
any underlying policies . . . .” The primary coverage aspect
of the AHA policy therefore only exists where there is a hole
in the coverage of the underlying insurance.
Notwithstanding the policy language that seems to
address insolvency of underlying insurers, Premcor argued
in its declaratory judgment action that AHA was required
to pay all defense costs because Reliance was insolvent.
Premcor maintained that the amount recoverable language
in the AHA policy meant that AHA was responsible for all
amounts above that which was actually recovered from the
underlying insurance. As the underlying insurance paid
nothing in this case, Premcor argued that AHA should be
responsible for the entire two million dollars.
The parties filed cross-motions for summary judgment
and the district court decided in favor of AHA. The district
court found that the amount recoverable language in the
AHA policy was ambiguous as a matter of Illinois law, but
that Endorsement 10 expressly forbade increased liability
because of the insolvency of underlying insurance. This
appeal followed.
II
We review de novo the district court’s decision involving
cross-motions for summary judgment. See Huntzinger v.

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6 No. 04-2549
Hastings Mut. Ins. Co., 143 F.3d 302, 307 (7th Cir. 1998).
Summary judgment is proper when the “pleadings, dep-
ositions, answers to interrogatories, and 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 a judgment as matter of law.” Fed. R.
Civ. P. 56(c). With cross-motions, we construe the evidence
and all reasonable inferences in favor of the party against
whom the motion under consideration is made. See Metrop.
Life Ins. Co. v. Johnson, 297 F.3d 558, 561-62 (7th Cir. 2002).
The law of Illinois applies to the interpretation of these
contracts. The construction of the provisions of an insurance
policy is a question of law, subject to de novo review. See Am.
States Ins. Co. v. Koloms, 687 N.E.2d 72, 75 (Ill. 1997). “In
order to ascertain the meaning of the policy’s language and
the parties’ intent, the court must construe the policy as a
whole and take into account the type of insurance pur-
chased, the nature of the risks involved, and the overall
purpose of the contract.” Emerson Elec. Co. v. Aetna Sur. &
Cas. Co., 815 N.E.2d 924, 937 (Ill. App. Ct. 2004); see also
Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d
1204, 1212 (Ill. 1992); Transamerica Ins. Co. v. South, 975 F.2d
321, 327 (7th Cir. 1992) (applying Illinois law) (“All the
provisions of the insurance contract, rather than an isolated
part, should be read together to interpret it and to determine
whether an ambiguity exists.”). If the language of the policy
is susceptible to more than one meaning, it is considered
ambiguous and will be construed strictly against the insurer
who drafted the policy and in favor of the insured. See
Maremont Corp. v. Cont’l Cas. Co., 760 N.E.2d 550, 554 (Ill.
App. Ct. 2001). “However, [a] court ‘will not strain to find
ambiguity in an insurance policy where none exists.’ ”
Travelers Ins. Co. v. Eljer Mfg. Co., 757 N.E.2d 481, 491 (Ill.
2001) (quoting McKinney v. Allstate Ins. Co., 722 N.E.2d 1125,
1127 (Ill. 1999)).

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No. 04-2549 7
A
The parties’ dispute over the scope of coverage of the
AHA policy focuses on the interpretation of the “amount
recoverable” language. This language is critical to determine
when AHA’s obligation to provide excess coverage begins.
In the past, Illinois courts have interpreted such amount
recoverable language, considered alone, to be ambiguous.
See Donald B. MacNeal, Inc. v. Interstate Fire & Cas. Co., 477
N.E.2d 1322, 1324-25 (Ill. App. Ct. 1985). In the MacNeal
case, the Illinois appellate court indicated “that language
might possibly be interpreted either to expose [the excess
insurer] only for amounts over the dollar limits of the un-
derlying insurance or to expose [the excess insurer] for
amounts which the insured is not able to actually recover
from the underlying insurer because of its insolvency.” Id.
at 1325 (quoting Reserve Ins. Co. v. Pisciotta, 640 P.2d 764
(Cal. 1982)). Faced with two plausible interpretations of this
language, and with no other terms in the policy shedding
light on which was proper, the Illinois court found an ambi-
guity and strictly construed the amount recoverable language
against the insurer. See id.
Premcor argues MacNeal controls and that this court must
interpret the “amount recoverable” language to provide
coverage. However, the AHA policy is distinguishable from
the policy in MacNeal. Here, the AHA policy contains
several provisions informing the meaning of the “amount
recoverable” language, offering the guidance that was lack-
ing in MacNeal. A cardinal rule of contract interpretation is
that a document “should be read to give effect to all its
provisions and to render them consistent with each other.”
Mastrobuono v. Shearson, Lehman, Hutton, Inc., 514 U.S. 52, 63
(1995); see also Wuerttemberger v. Cont’l Cas. Co., 178 N.E.2d
136, 138 (Ill. App. Ct. 1961). In this case, the relevant
provisions show that the AHA policy only covered costs in

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8 No. 04-2549
excess of the limits of the underlying policy, and the amount
recoverable language must be interpreted consistently.
Like the district court, we consider Endorsement 10 to
be significant. It states that AHA’s liability should not be in-
creased “by the refusal or inability of any underlying insurer
to pay, whether by Reasons of Insolvency, Bankruptcy, or
otherwise . . . .” Any interpretation of the AHA policy that
would lead to an increase in liability because of the insol-
vency of one of the underlying insurers would not be valid,
as it would contradict the express terms of this endorse-
ment. Yet such an increase is what Premcor’s interpretation
of “amount recoverable” would require. In its brief Premcor
acknowledges that if AHA is called upon to pay defense
costs “previously owed by the insolvent primary insurer”
(Reliance), “this theoretically could increase the excess
carrier’s total monetary obligation.” The language of
Endorsement 10, however, prohibits such a result.
A second clause in the AHA policy confirms that AHA’s
responsibilities are not changed by insolvency. The defini-
tion of ultimate net loss in the AHA policy states that
“[AHA] shall not be liable for expenses as aforesaid when
such are covered by underlying policies of insurance
whether collectible or not.” The insolvency of Reliance does
not require AHA to drop down and pay all defense costs.
Rather, the AHA policy specifically provides that AHA will
not be liable for defense costs in the case of insolvency, even
if Premcor cannot recover from the underlying policy.
The retained limit language is a final provision that dem-
onstrates that the AHA policy does not cover costs in the
event of an insolvency of an underlying insurer. “[AHA]
shall be liable only for that portion of the ultimate net loss
excess of the Insured’s retained limit,” which in this case is
defined as “the total of the applicable limits of the underly-
ing policies listed in the Schedule of Underlying Insurance

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No. 04-2549 9
1 Not raised in this appeal is the obvious question of the pre-
mium paid for primary and “umbrella” coverage. “[P]remiums
for umbrella policies tend to be comparatively small for the type
of risk involved . . . . The umbrella policy issued by [insurer]
should be required to contribute only after the limits of the
[primary] policy have been reached.” Travelers Indem. Co. v. Am.
Cas. Co., 786 N.E. 2d 582, 587 (Ill. App. Ct. 2003). See also Zurich
Ins. Co. v. Mail Co., 815 F.2d 1122, 1126 (7th Cir. 1987) (“[the
excess insurer] did not contract to bear the risk of the primary
carrier’s insolvency, nor do its premiums reflect the cost that the
assumption of this risk would entail”).
2 “In Molina, however, the excess policy indemnified the insured
for ‘the ultimate net loss in excess of the retained limit,’ where
‘retained limit’ was defined as ‘the total of the applicable limits
of the underlying policies.’[] ” MacNeal, 477 N.E.2d at 1325
(quoting Molina v. U.S. Fire Ins. Co., 574 F.2d 1176, 1178 (4th Cir.
1978)).
hereof.” 1 In MacNeal, that court commented on cases in
which the insolvency of the primary insurer did not require
the excess insurer to assume the primary’s obligation. The
MacNeal court distinguished its case from these cases based
on policy language nearly identical to the AHA policy re-
tained limit provision.
2 See id.
“Clearly the language in Molina [v. Fire Ins. Co., 574 F.2d
1176, 1178 (4th Cir. 1978)] and St. Vincent’s [Hosp. & Med.
Ctr. v. Ins. Co. of Am., 457 N.Y.S.2d 670 (N.Y. Sup. Ct. 1982)]
reveals that the insurance provided that the excess insurer
would pay for losses in excess of a fixed amount, the pri-
mary policy limits.” Id. According to the MacNeal court, in
cases of insolvency, the retained limit language means that
an excess insurer is not obliged to pay costs that would
otherwise be borne by the insolvent insurer, but instead is
only responsible for providing coverage in excess of the

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10 No. 04-2549
underlying policy limits. See also, U.S. Fire Ins. Co., Inc. v.
Charter Fin. Group, Inc., 851 F.2d 957, 959-61 (7th Cir. 1988)
(in absence of amount recoverable language, excess policy
that referenced limits of underlying insurance started cov-
erage at those limits, whether the underlying insurance was
recoverable or not); Zurich Ins. Co. v. Heil Co., No. 85-C-6497,
1986 WL 2607, at *4 (N.D. Ill. Feb. 21, 1986) (“The case
authority is clear that where, as here, the excess insurer
limited its liability to ‘the ultimate net loss in excess of the
retained limit’ the risk of the primary insurer's insolvency
rests with the insured.”). See also Zurich Ins. Co. v. Heil Co.,
815 F.2d 1122, 1126 (7th Cir. 1987) (affirming district court).
Premcor attempts to minimize the effect of the retained
limit language by referring to a case from the Fifth Circuit
involving an insurance policy with both amount recoverable
and retained limit/ultimate net loss provisions. See Sifers v.
Gen. Marine Catering Co., 892 F.2d 386, 402-03 (5th Cir. 1990).
In Sifers, the Fifth Circuit concluded that the amount
recoverable language was not ambiguous, but in fact
required the excess insurer to cover any amounts above
what the underlying insurance actually paid. See id. at 401.
The Fifth Circuit then decided that this language controlled
over the retained limit language that the policy also con-
tained. See id. at 402-03.
This is obviously not our case. In Sifers, the Fifth Circuit
attempted to reconcile seemingly conflicting provisions that
each had a clear meaning under Louisiana law. Under
Illinois law, that is not our task because Illinois law has
found the amount recoverable language to be ambiguous in
isolation. Our task is to determine whether this provision
remains ambiguous when viewed in the context of the entire
AHA policy. It does not.
Interpreting the amount recoverable language in light of
the contract as a whole removes the apparent ambiguity

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No. 04-2549 11
when the amount recoverable language is viewed out of con-
text. Unlike MacNeal, this case features several contractual
provisions that illuminate the true meaning of this phrase.
Endorsement 10, the definition of ultimate net loss, and the
retained limit language show that the AHA policy would
not assume additional responsibilities to cover defense costs
in the event of the insolvency of an underlying insurer. The
proper interpretation of the amount recoverable language,
which is most consistent with these provisions of the AHA
policy, is that AHA only covers costs in excess of the limits
of the underlying policy. Therefore, AHA is not required to
pay the defense costs that Premcor incurred in the underly-
ing litigation.
B
Premcor asserts that, at a minimum, the AHA policy covers
the cost of defense to the extent it exceeds the two million
dollar limit of the underlying Reliance policy. However, the
Reliance policy provides unlimited defense costs—it does
not limit its coverage to the first two million dollars. And
the AHA policy provides, “The Company [AHA] shall not
be liable for expenses as aforesaid when such are covered by
underlying policies of insurance whether collectible or not.”
Thus, under the policies, Premcor is not entitled to recover
the cost of defense in excess of two million dollars because
Reliance’s policy covered such costs. This interpretation
accords with common sense as well. If Premcor’s argument
is correct, there would be duplicate coverage by AHA and
Reliance for all cases exceeding two million dollars in
defense costs, since the Reliance policy provides for the
payment of unlimited costs and AHA’s obligation, accord-
ing to Premcor, begins once the costs reach the two million
dollar level.

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12 No. 04-2549
3 Premcor also suggests that, even if the argument is waived, this
court should consider it. While we do have the power to consider
a waived argument, we have no obligation to do so. See Belom v.
Nat’l Futures Ass’n, 284 F.3d 795, 799 n.3 (7th Cir. 2002).
C
Premcor offers another argument on this appeal—that the
AHA policy provides primary insurance in cases where
underlying insurance does not. Premcor contends that this
gap-filling provision should apply here, alleging the Reliance
policy could be read to exclude work-related injuries.
Premcor, however, fails to provide any information about
other underlying insurance policies and whether they could
cover this situation. No matter. We need not tarry over this
argument; it was not presented to the district court and was,
therefore, waived. See Williams v. REP Corp., 302 F.3d 660,
666 (7th Cir. 2002) (“A party waives any argument that it
does not raise before the district court . . .”). 3
III
Interpreted as a whole, the AHA policy contains no am-
biguity. Instead, it provides for excess coverage only after
the underlying insurance has been paid to the policy limits.
AHA is not required to pay the two million dollars in de-
fense costs, which would have been the obligation of Reliance
in the absence of the insolvency. Summary judgment for
AHA was correct, and the decision of the district court is
A FFIRMED .

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No. 04-2549 13
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-9-05

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