May 29th, 2012

Beware of Insurance Policy Language that Can Defeat Coverage

May 29, 2012, Los Angeles – The need for reliable insurance coverage is a fact of life for all businesses. Third party liability policies that businesses typically purchase, such as Commercial General Liability policies, often require payment of a significant self-insured retention (“SIR”) before coverage is triggered. This seems like a straightforward proposition. The insured party pays the SIR amount specified in the policy, and then the insurance carrier steps in and provides coverage. However, cleverly crafted SIR provisions limiting who may satisfy the SIR requirement, and how it may be paid, could deprive coverage to unwary businesses.

For instance, an SIR provision may state that only the named insured, and no other party, may satisfy the SIR requirement, and may do so only with its own funds, not other insurance proceeds or third party funds. Under such a provision, if the named insured is unwilling or unable to satisfy the SIR requirement, no other party, not even an additional insured, would be permitted under the policy to satisfy the SIR. Coverage for a covered loss would go un-triggered, and the carrier would have no coverage obligation.

In Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4th 1466 (2010), homebuilder Forecast tendered its defense of five construction defect lawsuits to Steadfast, a carrier that had insured Forecast as an “additional insured” under its subcontractors’ policies. Steadfast denied Forecast’s tender on the ground that only the named insureds, not additional insured Forecast, could satisfy the SIR pursuant to the language in the policies’ SIR provisions written by the carrier.

The California Court of Appeal agreed with Steadfast. In reaching its decision, the court construed two different policy forms. One form stated: “[p]ayments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.” The other form contained less explicit language, stating only that the named insured, must “make actual payment” of defense costs and/or damages. The court construed both provisions as prohibiting anyone other than the named insured from paying the SIR.

The impact of the Forecast Homes decision is beginning to reach other jurisdictions, and the impact is not just upon unwary “additional insureds,” as in Forecast Homes, but upon policyholders under their very own policies as well.

In a case out of Florida, ,Intervest Const. of Jax, Inc. v. Gen. Fid. Ins. Co., 662 F.3d 1328 (11th Cir. 2011), homebuilder ICF was sued for injuries sustained by a homeowner while using stairs installed by a subcontractor. ICF settled an indemnification claim against its subcontractor by accepting $1 million from the subcontractor’s carrier. ICF then sought to use those proceeds toward a $1.6 million settlement reached with the plaintiff, in satisfaction of ICF’s $1 million SIR requirement. However, ICF’s carrier, General Fidelity, refused to pay the remaining $600,000 of the settlement amount on the ground that ICF could not satisfy the SIR with proceeds from a third party because the policy required ICF to satisfy the ICF with its own funds. Moreover, the carrier also argued that General Fidelity, not ICF, was entitled to the $1 million dollar indemnity proceeds under a provision assigning ICF’s subrogation rights to the carrier.

Finding Forecast Homes persuasive, the trial court agreed with General Fidelity, holding ICF did not satisfy its SIR because its proceeds were derived from a third party, and not from ICF’s “own account,” as required under its policy. ICF appealed to the Eleventh Circuit Court of Appeals, and on November 21, 2011, the Eleventh Circuit issued an opinion certifying for resolution by the Florida Supreme Court whether General Fidelity’s policy allows ICF to apply proceeds received from a third party to satisfy its $1 million SIR under Florida law.

Although the Florida Supreme Court has yet to decide the matter as of this writing, the lessons to be taken from Forest Homes and Invervest are clear. Businesses should make sure that neither their own policies, nor policies in which they are listed as “additional insureds” contain language that limit (1) who may satisfy the SIR (i.e. only the named insured), or (2) how the SIR may be met (i.e. from the named insured’s own funds).

Because insurance brokers may not be aware of, or have the expertise to deal with this issue, businesses should consult an insurance coverage attorney to review proposed SIR provisions when considering new policies or policy renewals offered by carriers. Likewise, businesses that rely upon vendors and/or subcontractors should consult with an insurance coverage attorney when drafting insurance coverage requirements in vendor/subcontract agreements.

If you would like to discuss SIR retention provisions in particular, or need assistance with the enforcement of insurance coverage in general, please contact a Lim Ruger attorney.

Arnold Barba is a trial attorney and partner with LimRuger in Los Angeles,   California, where he practices complex, business, real estate and insurance   coverage litigation. His practice includes representation of corporate   insurance policyholders in connection with insurance enforcement and recovery   disputes. Arnold is also an Adjunct Professor of Law at Pepperdine University   School of Law in Malibu, California, where he teaches an upper division   course on civil trial preparation and settlement.

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