Risk
Environmental Newsletter

Self-Insured Retentions – What’s Coming out of your Wallet (And can it come from someone else’s?)

Aon Environmental Services Group

By M. Claire Juliana of Aon Risk Solutions

In insurance circles, a “self–insured retention” (“SIR”) generally represents some portion of the risk that is the insured’s responsibility - sometimes referred to as the insured’s “skin in the game”, loss wise. Insurance policies routinely include a self-insured retention amount (or its counterpart, the “deductible”) as a basic component of an insurance program. There is no uniformity among SIR clauses, and how they operate will depend upon the specific language and often the interpretation of that language by the courts. Recently, the Supreme Court for the state of Florida had the occasion to consider whether payments made by parties other than an insured could erode the SIR.

In the case of Intervest Construction of Jax, Inv. v. General Fidelity Insurance Company, 2014 Fla. LEXIS 568 (Fla. February 6, 2014), the Court was presented with a not unfamiliar fact pattern: ICI Homes, Inc. (“ICI”) had contracted with Custom Cutting, Inc. (“Custom”) to install attic stairs at a residence that ICI was building. The contract between ICI and Custom required that Custom indemnify ICI for any damage resulting from Custom’s negligence. Following completion of the residence, the homeowner fell while using the attic stairs and suffered serious personal injuries. The homeowner filed suit against ICI, but did not file suit against Custom. ICI tendered the claim to its carrier, General Fidelity Insurance Company (“General”) and also sought indemnification from Custom. Following mediation, the parties settled the underlying personal injury dispute with the homeowner for $1.6 million, with Custom’s insurer agreeing to pay ICI $1 million to settle the indemnification claim, which ICI would in turn pay to the injured homeowner. The dispute arose as to whether that $1 million payment by Custom to ICI that was then paid to the injured homeowner could be used to satisfy ICI’s $1 million SIR under the General insurance policy.

The text of the SIR provision in the General policy (with emphasis added) provided in pertinent part that:

  1. * * *
  2. Our total liability will not exceed the Limits of Insurance as specified in the policy Declarations, Coverage Parts or endorsements. The Limits of Insurance will apply only in excess of the Self-Insured Retention, hereinafter referred to as the "Retained Limit."
  3. We have no duty to defend or indemnify unless and until the amount of the "Retained Limit" is exhausted by payment of settlements, judgments, or "Claims Expense" by you.
  4. * * *
  5. * * *
  6. The "Retained Limit" will only be reduced by payments made by the insured.

The district court held in favor of General. It cited to several California cases addressing similar SIR provisions and, based on the reasoning in those cases, found that the language in the General SIR provision to be unambiguous because it provided that the “Retained Limit” must be paid by the insured and that the “Retained Limit” would only be reduced by payments made by the insured. Thus, the lower court found that the indemnity payment that ICI received did not exhaust the SIR obligation as required by the policy. On appeal, the Eleventh Circuit Court of Appeals found the provisions in the cited California cases to be distinct and the differences, “potentially significant”. One such policy provision required the insured to “pay from its own account all amounts within the Retained Amount.” Travelers Indemnity Co., v. Arena Group 2000, L.P., 2007 U.S. Dist. LEXIS 17931 (S.D. Cal. Mar. 8, 2007). Another policy required that the named insured “make actual payment” of the SIR and provided that “payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.” Forecast Homes,. Inc. v. Steadfast Insurance Co., 181 Cal. App. 4th 1466 (Ct. App. 2010). Indeed, the Circuit Court reasoned that a strong argument could be made that ICI exhausted its SIR because ICI bargained for and paid for the indemnity protection in the purchase price of the Custom contract and, without an express policy provision to the contrary, should be able to use it to satisfy the SIR. The Supreme Court agreed. It found that since the General policy did not expressly state that ICI itself, and not others, must pay the SIR, the General policy allowed the insured to apply the third party indemnification payments toward satisfaction of its $1 million self-insured retention.

Unfortunately, this case is not especially instructive on SIR wording because the Court’s analysis ultimately turned on how the particular language in the General policy was not as specific as it could have been in requiring that the SIR could be exhausted only by the actual payment by the insured and not by others such as additional insureds or insurers. But this case is instructive in that it does highlight that there can be uncertainty among the respective parties about their obligations with respect to satisfaction of a self-insured retention amount, and learning about that uncertainty at the time of a claim will undoubtedly be disappointing to one party and probably costly to both. Setting expectations prior to binding about what and who can erode the policy’s self-insured retention will at least clarify not only what is coming out of the wallet but whose wallet as well. Especially where the insured had bargained for the right of indemnification, and in another jurisdiction, or under other policy wording, may not have received the benefit of that bargain.