When an insurance policy contains a “self-insured retention,” the policyholder agrees that it will pay a certain amount of money before the carrier will be on the hook for any additional payment. What if the source of the funds the policyholder uses to pay the SIR was an indemnification it received from another liable party? Can the policyholder use that payment to satisfy the Retained Limit? According to the Florida Supreme Court, the answer is, “Yes.”
Most of us are familiar, through the purchase of our own automobile or homeowner’s insurance, with the concept of a “deductible.” If I have an accident that results in, say, $2,000 of damage to my car, and I have a $500 deductible in my policy, what usually happens (in fact, what should happen, if the obligation is treated properly as a “deductible”) is that my insurer pays $2,000 to the body shop and I write a check to the insurer for $500. In a true “deductible” situation, the carrier pays the entire liability and seeks reimbursement of the deductible amount from the insured.
Although many courts treat a deductible and a self-insured retention as though they were interchangeable, they are in fact distinct. With an SIR, the policyholder must pay the amount of the SIR — often called a “Retained Limit” — before the carrier has any obligation to pay any amount insured above the Retained Limit. There is no question of reimbursement of the SIR by the carrier, as there is for a deductible. The policyholder is in effect self-insured from dollar-one up to the amount of the Retained Limit. It is inevitable, perhaps, that this kind of an arrangement sometimes leads to disputes about whether the policyholder has actually satisfied the SIR such as to trigger the insurer’s obligation to begin providing coverage.
Recently, the United States Court of Appeals for the Eleventh Circuit (which hears appeals from the U.S. District Courts located in Alabama, Florida, and Georgia) certified just such a dispute to the Florida Supreme Court. What this means is that the federal court, which is obliged, generally speaking, to apply the law of the state where the lawsuit arose, asked the Florida high court for guidance about a question of unsettled Florida law. The case is Intervest Constr. of Jax, Inc., et al. v. General Fidelity Ins. Co., No. SC 11-2320 (Feb. 6, 2014). (Get a copy here.) This is how it happened.
Intervest Construction and ICI Homes, Inc., or “ICI,” built a home for Katherine Ferrin. ICI subcontracted with a company called Custom Cutting to build stairs up to the attic of the home. After construction was complete, Ms. Ferrin was severely injured when she fell down the attic stairs. She sued ICI for her injuries. ICI responded by doing two things. First, it placed its own Comprehensive General Liability carrier, General Fidelity, on notice of the claim. Second, it made a claim against Custom Cutting for indemnification under the terms of an indemnity agreement in the subcontract between ICI and Custom Cutting. The case went to a mediation (a settlement meeting moderated by a trained negotiation facilitator) at which all of the potentially liable parties attended: ICI and General Fidelity, and Custom Cutting and its CGL carrier, North Pointe Insurance Company.
The case setted with an agreement to pay Ms. Ferrin $1.6 million. The ultimate issue was how this settlement should be divided among the participants. To complicate that issue, the CGL policy that General Fidelity had sold to ICI contained an SIR with a Retained Limit of $1 million. What this meant is that ICI would have to pay the first $1 million of any covered claim, after which General Fidelity would be responsible for coverage up to an aditional $1 million. The relevant language from the General Fidelity SIR policy endorsement said: “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.” “Claims Expense” was defined as the costs of defense — in this case the cost to defend the lawsuit filed by Ms. Ferrin against ICI. Note that the provision requires “payment … by you,” meaning “by ICI.” In fact, another provision of the policy says: “The ‘Retained Limit’ will only be reduced by payments made by the insured.”
So here’s how the $1.6 million was paid: North Pointe, the carrier for Custom Cutting, paid $1 million to ICI in satisfaction of its insured’s indemnity agreement under the construction subcontract. ICI turned around and paid the $1 million to Ms. Ferrin, to satisfy the Retained Limit under its policy with General Fidelity. ICI then sought the remaining $600,000 payment under the General Fidelity policy. General Fidelity took the position that the SIR had not actually been paid by ICI; it had been paid, instead, by North Pointe. This left Ms. Ferrin, of course, short $600,000 of the settment amount. To satisfy the settlement, ICI and General Fidelity agreed to pay $300,000 each to Ms. Ferrin and then to fight about the coverage issue separately, which is what they did.
The U.S. District Court in Florida, where ICI sued General Fidelity, ruled in favor of the carrier and required ICI to pay back General Fidelity’s $300,000 settlement contribution. The court agreed with the carrier that the language from the SIR endorsement in the policy unambiguously required ICI to pay the Retained Limit “from its own funds” and not from some other source. ICI appealed to the Eleventh Circuit, which found that there was no controlling Florida law on the narrow question presented. So it kicked the issue to the Florida Supreme Court. Was the $1million Retained Limit “paid by ICI” or was it paid by North Pointe?
Both the Eleventh Circuit and the Florida Supreme Court recognized that policies at issue in cases decided in other jurisdictions sometimes contain more restrictive provisions than the one that appears in the General Fidelity policy. For example, in one California case, which the District Court had relied on to reach its conclusion, the SIR endorsement said that the Retained Limit must be “paid from the Insured’s own account.” In another California case, the endorsement provided that “Payments by others, including by additional insured’s or insurers, do not serve to satisfy the self-insured retention.” The General Fidelity endorsement contained no similar language.
While the Florida Supreme Court did not express it in so many words, what it was essentially saying was that insurance companies know how to dictate — or to restrict – the specific source of funds to satisfy an SIR when they want to do so. The Florida high court also noted that ICI had “paid for” the indemnification agreement that it received from Custom Cutting as part of the consideration for the subcontract. In that respect, it paid for the protection that it received from North Pointe in satisfaction of the General Fidelity SIR.
This was obviously a great result for the policyholder in this case and it should provide support for a similar outcome in future cases. SIR endorsements are very common in CGL policies. But query whether the case really goes far enough. By distinguishing the cases that interpreted SIR endorsements that require payment “from the insured’s own account,” the Court at least suggests that ICI’s claim might have come out differently if the General Fidelity policy had contained this “more restrictive” language. Would that have been the right outcome?
What if ICI had gone to a bank and borrowed the $1 million and then paid it over to Ms. Ferrin? Would that have satisfied the “more restrictive” language of an SIR endorsement requiring payment from “the Insured’s own account?” What if ICI had taken the $1 million indemnity payment it received from North Pointe and placed it into a special account to be used for a rainy day and then had written a check to Ms. Ferrin from its business account? Would that have constituted payment from ICI’s “own account?” Let’s assume that, a week after making the payment, ICI decided that it didn’t want or need a rainy-day fund, after all, and it deposited the $1 million back into its business account. Could General Fidelity then claim that the $1 million didn’t really come from “the Insured’s own account?” What if the principal of ICI had played the lottery on the day it entered into the settlement, won $1 million, and “donated” that money to ICI to satisfy the SIR? Would that constitute payment from ICI’s “own account?” Would it matter if ICI was required to pay the lottery winnings back to the principal in a balloon payment in, say, five years? Should it matter?
In fact, the SIR should be deemed satisfied under any of these hypotheticals. The source of the funds with which the insured pays the Retained Limit should not matter one iota to the insurance company. However that money found its way into the insured’s coffers, the insurance company got precisely what it bargained for in connection with the ICI claim: it did not have to pay the first $1 million of Ms. Ferrin’s $1.6 million settlement. That first $1 million went into ICI’s account (or, perhaps, into its attorney’s trust account for the benefit of ICI). It was money that “belonged” to ICI. Indeed, the payment was very likely a taxable event (caveat: tax law is beyond the scope of information provided by this blog, not to mention beyond the education and experience of this blogger). The point is that it is not the purpose of an SIR to make an insured “feel pain” from the payment of a Retained Limit. The purpose of an SIR is simply to shift responsibility from the insurer to the insured for dollar one of insurance coverage, up to a bargained-for limit.
Questions about satisfaction of SIRs and deductibles frequently arise in bankruptcy claims. A claim of negligence, say, is asserted against an insured company and, thereafter, the insured files a petition in bankruptcy. Any CGL policies sold to the debtor are usually considered assets of the estate and available to pay claims against the insured. Where there is an SIR, however, the debtor/insured will likely be unable to satisfy any retained limit. Does this mean that the carrier never has to provide coverage for an insured negligence claim against the debtor, even if the claim exceeds the SIR?
Most courts answer this question by requiring the insurance company to pay the claim to the extent that it exceeds the retained limit. The claimant (that is, the person or entity with the claim against the debtor corporation) must then seek recovery of the SIR as an unsecured claim from the bankruptcy estate. This rule recognizes that the SIR provides a gap to the extent of the retained limit in the carrier’s coverage obligation but it does not relieve the carrier altogether of its obligations if, as one court has put it, the policyholder “pays the retained limit in any form it desires so long as the Bankruptcy Court confirms that the payment is performed in a credible and reliable manner.” (That case is Pak-Mor Mfg. Co. v. Royal Surplus Lines Ins. Co. No. SA-05-CA-135-RF,2005U.S. Dist. LEXIS 34683 (W.D. Tex. Nov. 3, 2005)).
It must be acknowledged that some states have passed statutes that affect the relationship among debtors, claimants, and insurance companies in the event of a covered claim and these statutes may influence the way a court will apply an SIR in the context of a bankruptcy. Thus, we cannot look to decisions in bankruptcy cases and expect to find precedent that will always help us to determine the insured’s rights and the carrier’s obligations in respect of an SIR. What we can say, however, is that — unless the policy clearly and explicitly states otherwise — the source of the funds a policyholder uses to satisfy an SIR should not enter into it. While the decision in Intervest Constr. of Jax, Inc., et al. v. General Fidelity Ins. Co. does not go quite so far as that, it does reach the correct conclusion for many of the correct reasons.