Expert Commentary

What Satisfies the Self-Insured Retention?

Some commercial general liability (CGL) policies contain self-insured retention (SIR) endorsements or deductibles1 that identify "the amount of the loss that the insured is responsible for before coverage can exist." In re Feature Realty Litigation, 2007 WL 2156605 (E.D. Wash. 2007). A given jurisdiction may answer the question of what satisfies the insured's SIR obligation differently than other jurisdictions based on how that jurisdiction treats the SIR policy language. This issue frequently arises where the insured cannot satisfy the SIR due to bankruptcy or for other reasons.


Liability Insurance
August 2009

Some jurisdictions treat SIRs that apply on a "per-occurrence" basis as requiring satisfaction of the SIR only once per occurrence, regardless of the number of insureds demanding a defense. Thus, in Travelers Cas. & Sur. v. American Int'l Surplus Lines Ins. Co., 465 F. Supp. 2d 1005 (S.D. Cal. 2006), Travelers issued a commercial excess liability (umbrella) policy to the developer of a condominium construction project. AISLIC issued two consecutive primary CGL policies to the grading subcontractor on the project. The AISLIC policies were subject to a $25,000 per occurrence SIR. The AISLIC policies also named the Developer as an additional insured for liability arising out of the subcontractor's work.

After the project was completed, the homeowners association filed suit against the developer alleging various construction defects. The developer filed a cross-complaint against AISLIC's subcontractor who had filed bankruptcy several years prior to suit being filed on this project and could not pay the SIR. AISLIC defended the subcontractor and ultimately settled the cross-claims "taking an SIR-equivalent $25,000 'credit' in lieu of ... actual payment" of the SIR by deducting that amount from the subcontractor's settlement obligation. Travelers at 1009.

Travelers accepted the defense of the developer under a reservation of rights. AISLIC declined the developer's tender of a defense as an additional insured taking the position that the subcontractor "was unable to pay from its own assets the $25,000 SIR prerequisite to triggering coverage obligations, and by its terms the SIR endorsement prohibited other insurance from satisfying the SIR, no duty to defend or indemnify [the developer] was triggered." Id. at 1010.

California law provides that an insurer paying the costs of defending and settling a claim against the insured has a direct cause of action against other insurers on the risk. Accordingly, Travelers filed suit against AISLIC seeking subrogation or equitable contribution for expenses it incurred in defending the developer. Travelers argued that AISLIC had the sole obligation to do so because AISLIC had a primary policy and Travelers' policy was an umbrella policy. Alternatively, Travelers argued that it paid a disproportionate share of the developer's defense costs because AISLIC refused to participate entitling Travelers to equitable contribution.

Travelers and AISLIC made several arguments in support of their respective positions but the court did not find it necessary to reach all of them. AISLIC admitted that it construed the $25,000 settlement "credit" as satisfaction of the SIR but argued that doing so was "wholly irrelevant to the issue as to whether AISLIC was obligated to defend" the developer against the claims in the underlying action. Travelers at 1019. The court disagreed and found that the policy language linked the SIR to "each 'occurrence,' not to each insured." Id. at 1020. The court held that "[o]nce the SIR was satisfied as to [the subcontractor], the court finds as a matter of law the SIR was satisfied as to all the insureds with respect to that occurrence ... [t]he court sees no principled difference between receiving a 'credit' against a liability, reducing the amount the insurer would otherwise be obligated to pay but for the 'credit' taken, and a direct payment of the SIR by the insured, as the SIR was a 'per occurrence' retention, not a 'per occurrence per insured' retention." Id.

Ultimately, the court found that Travelers was not entitled to equitable contribution because that claim is only available to insurers who share the same level of risk. However, Travelers was entitled to reimbursement of all post-tender defense costs it incurred on behalf of the developer. The carriers claimed additional issues and asserted other arguments, after which the court determined the following coverage hierarchy:

[t]he SIR provision in the AISLIC policies obligated [the subcontractor] to cover the first $25,000 per occurrence, followed by AISLIC's express duty to defend and to cover liability up to the recited policy limit, followed by the 'umbrella' coverage provided by Travelers' policy, the latter triggered only when all underlying primary coverage is exhausted. In cases where the insurers' coverage 'is in the nature of layers, the excess carriers should recover under subrogation before the primary insurers can be reimbursed' when reimbursement circumstances arise. '[A]n excess insurer has no duty to defend where the primary insurer refused the tender of defense.' ... The excess insurer may decide as a practical matter to step in and provide a defense in order to limit the insured's liability, and then sue the primary insurer for indemnity. That appears to be what happened in this case.

Travelers at 1029 (internal citations omitted).

Thus, the "per occurrence" SIR only has to be satisfied once per occurrence, regardless of the number of insureds demanding a defense. Unlike the cases discussed above, the language of the AISLIC SIR endorsement allowed the court to conclude that actual payment was not necessary to satisfy the SIR and trigger the AISLIC policies.

Multiple SIRs

Where Travelers addresses satisfaction of a per occurrence SIR by multiple insureds, Bordeaux, Inc. v. American States Ins. Co., 186 P.3d 1188 (Wash. Ct. App. 2008), addresses satisfaction of multiple primary policies' SIRs by one insured.

Bordeaux developed a condominium and was subsequently sued by the condominium association for construction defects. Bordeaux tendered its defense to its two primary insurers, American Safety and Steadfast. American Safety and Steadfast each issued primary CGL policies to Bordeaux with a $100,000 SIR for 1-year terms between September 30, 2000 and September 30, 2001 and September 30, 2001 and September 30, 2002, respectively.

At mediation, the parties agreed to a settlement of $630,000. American Safety and Steadfast agreed that their indemnity obligations would be allocated at 60 percent and 40 percent, respectively, after Bordeaux satisfied its obligation to pay its SIR. American Safety contended that the $105,399 Bordeaux paid in defense costs satisfied only the Steadfast SIR and that it expected Bordeaux "to pay an additional $100,000" to satisfy the American safety SIR or "it would withhold benefits under its policy." Bordeaux  at 692.

Bordeaux paid the additional $100,000 on the cutoff day for funding the settlement. The court allowed Bordeaux to recover the $100,000 from American Safety. In doing so, the court explained that the American Safety policy obligated American Safety to pay covered damages above $100,000. The policy said "nothing about whether or not Bordeaux's obligation to pay the American Safety SIR is satisfied when it fulfills a similar obligation under another policy." Id. at 698. Further, the defense costs paid by Bordeaux "were necessarily related to damages covered by both the American Safety and [Steadfast] policies." Id. The court further explained that American Safety had no right to apportion defense costs between the two policies. Consequently, Bordeaux was entitled to reimbursement of the second $100,000 payment.

Although the Bordeaux court held that payment of one amount satisfied both policies' SIRs, the court in Missouri Pac. R.R. Co. v. International Ins. Co., 679 N.E.2d 801 (Ill. Ct. App. 1997), reached the opposite result. In Missouri Pacific, the insured railroad was sued by thousands of current and former employees for noise-induced hearing loss and for asbestos-related injuries.

The claimants' work histories spanned 73 years. Missouri Pacific had no insurance prior to 1934, and policies with SIRs between 1934 and 1986. The policies at issue were in place between 1957 and 1986, and the dispute centered around the (over $67 million in) total SIRs. Missouri Pacific argued that it need only satisfy one SIR per type of injury.

The trial court agreed that all of the hearing loss claims arose from one occurrence and all of the asbestos exposure claims arose from one occurrence so Missouri Pacific need only satisfy one SIR for each occurrence. In reversing the trial court, the appellate court held that "Missouri Pacific must exhaust a full SIR per occurrence per policy period before it may look to coverage under the policies." Missouri Pacific at 811. The court explained that the SIRs constitute primary coverage and "[t]o hold otherwise would allow Missouri Pacific to manipulate the source of its recovery and avoid the consequences of its decision to become self-insured." Id. at 810. Accord Trinity Homes LLC v. Ohio Cas. Ins. Co., 2007 WL 1021825 (S.D. Ind. 2007) (explaining that and SIR endorsement effectively transforms the policy from a primary policy into an excess policy covering only amounts in excess of the self-insured retention).

Similarly, in City of Sterling Heights v. United Nat'l Ins. Co., 2009 WL 823634 (6th Cir. 2009), United argued that because the defamation claims against the City involved conduct that occurred over two policy periods, the City had to satisfy two $100,000 SIRs. While the court seemed inclined to recognize such a result, contrary to Bordeaux, supra, the court instead held that United waived the argument that two SIRs applied "by failing to give reasonable notice to the insured" that it was either invoking that policy provision or reserving its right to do so. Sterling Heights at 7.

SIR and Bankruptcy

Many SIR provisions now include language requiring that the insured make actual payment of the SIR in order to trigger an insurer's obligations under the policy, and/or that the SIR payment must be made only by the insured and cannot be satisfied by another. Where satisfaction of the SIR is a condition precedent to coverage, "an insurer providing coverage in excess of a self-insured retention has no duty to defend until the self-insured retention is exhausted in accordance with the terms of the policy." Trinity Homes, LLC v. Ohio Cas. Ins. Co., 2007 WL 1021825 (S.D. Ind. 2007).

Several courts have upheld the SIR language requiring exhaustion as a condition precedent to coverage even where the insured has filed bankruptcy and is obviously incapable of satisfying the SIR. See e.g., In re Apache Prods. Co., 311 B.R. 288 (Bankr. M.D. Fla. 2004) (court relied upon the plain language of the policy requiring exhaustion of the SIR and the failure to pay resulted in no obligation for the insurer).

In reaching its decision in Apache, the court relied upon the plain language of the policy. The court in In re OES Envtl., Inc., 319 B.R. 266 (Bankr. M.D. Fla. 2004), distinguished Apache because the policy language "regarding the SIR is not as in depth and does not use the term 'exhausted' but merely states that the [SIR] is 'borne by' the insured." OES at 268. Accordingly, the OES court found that the stay could be lifted to allow the claimant to pursue the policy but the insurer was "obligated to defend and indemnify the [insured] for the portion of any judgment or settlement exceeding the [SIR], irrespective of [insured's] inability to pay the claimed retention amount." Id. at 269.

Similarly, in Home Ins. Co. v. Hooper, 691 N.E.2d 65 (Ill. Ct. App. 1998), the court found that requiring actual payment of the SIR as a condition precedent to triggering insurer's obligation when the insured was bankrupt violated both Illinois public policy as well as the policy provision stating that the bankruptcy or insolvency of the insured will not alter the insurer's obligations under the policy. However, the court found that the policy did not require the insurer to drop down and pay the SIR amount in the event of insolvency of the insured. Accordingly, the court held that the insurer was obligated to cover any judgment in excess of the $250,000 SIR but was not obligated for the first $250,000. Hooper at 70.

Most often bankruptcy courts will seek to find a Hooper-type result in which the insurer's obligations are not changed so that they are responsible for amounts only in excess of the SIR but the claimants become unsecured creditors for the SIR amounts and/or the SIR becomes an unsecured debt or is treated like a deductible which is ultimately set-off from the insurer's payment of a judgment or settlement. See e.g., In re Keck, Mahin & Cate, 241 B.R. 583 (Bankr. N.D. Ill. 1999).

In Pak-Mor Mfg. Co. v. Royal Surplus Lines Ins. Co., 2005 WL 3487723 (W.D. Tex. 2005), the court relied upon the plain language of the SIR endorsement to reverse the bankruptcy court's finding that Royal's obligations under its policy were triggered where the bankrupt insured failed to satisfy the SIR. The SIR endorsement stated that actual payment by the insured of the SIR was a condition precedent to coverage under the Royal policy. Accordingly, the court found that Royal "has no obligation under the policy to pay anything until Pak-Mor satisfies the self-insured retention." Pak-Mor at 6.

The Pak-Mor court went a step further, however, and explained that while the Royal policy required actual payment by the insured, the insured "may satisfy the self-insured retention by making its payment in whatever form it wants [i.e., a promissory note issued to the creditors]. ... so long as the Bankruptcy Court confirms that the payment is performed in a credible and reliable manner " Id. at 6 and 7. Upon satisfaction of the SIR, Royal is "obligated only to pay amounts beyond the $100,000 SIR up to the limits of the policy." Id. at 7.

Conclusion

Courts typically enforce the language of the SIR endorsements, whether actual payment is required prior to triggering the insurers' obligation or whether payment only by the insured will satisfy the SIR obligation. However, bankruptcy courts will often find ways to protect the creditors that ignore the plain language of the policy in favor of equitable and public policy concerns.


Contributing author Rebecca C. Appelbaum is a senior associate practicing in the area of third-party coverage at the firm of Butler Pappas Weihmuller Katz Craig, LLP.


1Technically, the two are different, but courts often use the terms interchangeably.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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