Whether an insurer can refuse to provide coverage on the grounds that the bankrupt insured has not paid a self-insured retention (SIR) is often litigated during a bankruptcy case. Recently, in Sturgill v. Beach at Mason Limited Partnership, the United States District Court for the Southern District of Ohio joined a long line of cases holding that the bankruptcy of an insured does not relieve an insurer of its obligation under a SIR policy.
Plaintiffs Jeff and Sandy Sturgill were injured at The Beach Waterpark, whose parent company filed under chapter 11. The plaintiffs obtained relief from the automatic stay to pursue available insurance proceeds and were both awarded judgments in state court for their injuries. After the judgments were entered, the plaintiffs sought to add the debtor’s insurance company to the actions and asserted a right to the proceeds of the debtor’s insurance policy.
The debtor’s applicable insurance policy included a SIR of $10,000 per claim, meaning that the insured debtor had to pay $10,000 on each claim or occurrence before the insurer became obligated to pay. The policy also contained a “bankruptcy clause,” providing that the bankruptcy or insolvency of the insured debtor would not relieve the insurer of its obligations under the policy. Thus, the question for the court was whether the fact that the debtor did not pay its SIR obligation relieved the insurer from its coverage liability under the policy.
While the court noted that no case law in Ohio directly answered this question, the court joined a long line of cases from other federal and state jurisdictions holding that an insured’s failure to pay a SIR does not relieve the insurer of its contractual coverage duties.
Adopting its reasoning from prior decisions, the court agreed that where a bankrupt insured has paid its premiums in full, the policy is not an executory contract and the debtor’s failure to perform its SIR obligation does not excuse the insurer from its liability. Rather, the insurer must perform its payment obligations and will be entitled to an unsecured claim for any damages incurred as a result of the debtor’s breach of the policy. The court noted that to hold otherwise would permit an insurer to avoid its obligations under the insurance policy by reason of the insured’s bankruptcy—the exact result the “bankruptcy clause” seeks to avoid.
The court ultimately held that the insurer would need to pay the plaintiffs consistent with its obligations under the policy. As such, the insurer was not liable for the first $20,000 of the plaintiffs’ judgments, which represented two $10,000 per claim SIRs, but would need to pay the remaining amounts of the judgments, up to the policy limit.
The Sturgill decision serves as an important reminder that an insurer under a SIR policy has the exact same obligations whether or not an insured is in bankruptcy: the insurer must pay claims to the extent they exceed the amount of the SIR, up to the policy limits. To the chagrin of liability insurers everywhere, this outcome does not appear to be changing anytime soon.