The scenario: You have been injured and PretendCorp is liable to you in the amount of $100,000. PretendCorp has a commercial general liability insurance policy (“CGL”), which covers your claim. The CGL has a $20,000 self-insured retention (“SIR”) clause that states that PretendCorp is to directly pay you before the insurance company is liable for the remaining amount of the claim. PretendCorp files for federal bankruptcy protection and, as a result, is not required to pay the SIR. Is the insurance company still liable for your claim? At least one federal court in Ohio says “yes.” See Sturgill v. Beach at Mason Ltd. P’ship, No. 1:14cv0784, 2015 U.S. Dist. LEXIS 142490 (S.D. Ohio Oct. 20, 2015).
Unlike a deductible (which is advanced by an insurer, and reimbursed by a policyholder), a policyholder may be required to pay the amount of the SIR for defense costs or directly to the claimant before its insurance company is liable on the claim. However, when a policyholder files for federal bankruptcy protection, it may never be required to pay the SIR. Insurance companies, like the one inSturgill, argue that when a policyholder is unable or not required to pay the SIR under bankruptcy laws, the insurance company is also relieved of its coverage obligations because payment of the SIR is a condition precedent to coverage. Id. at *4. The Sturgill court, finding no direct Ohio precedent on point, agreed with the majority of courts that hold, although sometimes for different reasons, that an insurer is not relieved of its coverage obligations merely because an insured files bankruptcy and does not pay the SIR. Id. at 6.
The Sturgill court made its determination, in part, because the insurance policy at issue included a “bankruptcy clause” that stated that the “[b]ankruptcy or insolvency of the insured . . . will not relieve [the insurer] of [its] obligations under the policy.” Id at *4. The court stated that this clause is at odds with the insurer trying to avoid its obligations, specifically emphasizing that if the insurer is relieved of its obligations because of a policyholder’s bankruptcy, the insurer would receive a “windfall” while the third party claimants suffer an “economic loss.” Id. at *12. Other courts have reached the same result based on public policy reasons. Id. at *10-11.
Significantly, however, the Sturgill court only required the insurer to pay for amounts above the amount of the SIR. In other words, taking the initial scenario, PretendCorp’s insurance company would only be liable to you in the amount of $80,000. You would be required to file a claim against the bankruptcy estate of PretendCorp for, in the very least, the remaining $20,000 (although it is good practice to file a claim for the entire $100,000 amount due). Note that such a claim must be filed by the bar date set by the bankruptcy court or you may be forever barred from asserting the claim. Further, there is no guarantee that the SIR claim will be paid in full or at all. But if you are lucky, you will receive a partial payment on your $20,000 claim on top of the $80,000 you should receive from PretendCorp’s insurer.