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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.
R. Steven Rawls and
Rebecca C. Appelbaum
Butler Pappas Weihmuller Katz Craig, LLP
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
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
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."
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
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.
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
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
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.
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.
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.
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.
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.
Appelbaum is a senior associate practicing in the area
of third-party coverage at the firm of Butler Pappas Weihmuller
Katz Craig, LLP.
two are different, but courts often use the terms interchangeably.
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