While the definition may vary from state to state and policy to policy, a self-insured retention (“SIR”) typically refers to a dollar amount stated in a liability policy that must be satisfied by the insured before the insurer will respond to a lawsuit or claim. Thus, a liability insurer will usually insist that the SIR be paid before it will defend or indemnify its insured. While varying in language, many liability policies specify that the insured must pay the SIR. This is certainly satisfied where the insured is the one who pays the SIR. But what if someone else – such as another party to the underlying dispute or another insurer – pays the SIR on behalf of the insured? In that situation, the language of the SIR provision can be critical.
A recent decision by the Florida Supreme Court, responding to a question certified by the Eleventh Circuit Court of Appeals found that even where the SIR provision expressly requires payment by the insured, that does not necessarily preclude payment of the SIR by another on behalf of the insured. Intervest Constr. of Jax, Inc. v. General Fidelity Ins. Co., No. SC11-2320, 2014 WL 463309, __ So.3d __ (Florida Supreme Court, Feb. 6, 2014).
In Intervest, a homeowner hired a general contractor to work on her home. She was later injured on stairs installed by a subcontractor. She sued the general contractor, who in turn sought indemnity from its subcontractor. The contractor also sought coverage from its liability insurer (General Fidelity). The subcontractor sought coverage from its liability insurer (North Pointe). At a mediation involving all of the parties and their insurers, the parties agreed to a $1.6 million settlement. The settlement called for North Pointe to pay the contractor $1 million to settle the contractor’s indemnity claim against its subcontractor, and for the contractor to turn that sum over to the homeowner.
The sticking point was who would pay the $600,000 balance: The contractor or its insurer, General Fidelity. The policy had a $1 million SIR. General Fidelity contended that the SIR must be paid by the contractor and no one else, and since the $600,000 settlement balance was less than the SIR, General Fidelity owed nothing. The contractor contended that the payment of $1 million by its subcontractor’s insurer, North Pointe, to satisfy the indemnity obligation fully satisfied the SIR.
The SIR provision in General Fidelity’s policy provided in part (emphasis added):
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….
The “Retained Limit” will only be reduced by payments made by the insured….
The payment of the “Retained limits” by the insured is a condition precedent for our obligation to pay any sums either in defense or indemnity…
The Court found the above language less restrictive than other policies that require the insured to pay the SIR “from its own account,” or state that payments by others do not satisfy the SIR. By contrast, the Court noted that General Fidelity’s policy stated that the SIR “must be paid by the insured, but does not specify where those funds must originate. Requiring payment to be made from the insured’s ‘own account’ is not necessarily the same as requiring that it be paid ‘by you.’” The Court also observed that the contractor “bargained for and paid for this right to indemnification [from the subcontractor] and, without an express policy provision to the contrary, should be able to use it to satisfy the SIR.”
Finally, the Court rejected General Fidelity’s attempt to seize the $1 million payment by the subcontractor by subrogating against the subcontractor under the policy’s transfer of rights clause. The Court found that General Fidelity’s subrogation rights, if any, do not abrogate Florida’s “made whole” doctrine under which the insured is entitled to priority over its insurer where funds recoverable from a third party are not sufficient to compensate both the insured and insurer.
The Intervest decision held under Florida law that absent clear policy language to the contrary, an insured may satisfy its self-insured retention with third party payments made on behalf of the insured. This is welcome news for insureds looking to their general liability insurers to fund settlements or judgments in many industries that rely heavily on subcontractors, consultants, vendors, and distributors, such as construction, manufacturing, and energy.
While the $1 million payment toward the settlement in Intervest was to satisfy the subcontractor’s contractual indemnity obligation toward the contractor, it seems consistent with the Court’s reasoning that the same result would have been reached if the contractor had been an “additional insured” under North Pointe’s policy. That was not the case here, but it is commonplace in many industries for upstream participants (e.g., owners and retailers) to be named as “additional insureds” under the liability policies of downstream participants (e.g., builders and manufacturers).
Intervest also serves as a good reminder of the importance of carefully reviewing policy language, including provisions governing self-insured retentions and deductibles, which too often receive scant attention. This is especially true given that not all jurisdictions have adopted the Florida Supreme Court’s approach to determining whose payments can satisfy an SIR. Because the language in SIR provisions varies from policy to policy, and the legal effect of that language can vary from state to state, policyholders should consult with experienced insurance recovery counsel regarding the effect of their policy SIRs both in purchasing insurance and in pursuing coverage after a claim has been made.