Unlike a deductible, a self-insured retention (referred to an “SIR”) is, as the name suggests, a self-insured obligation of the insured before its insurer picks up coverage. The SIR needs to be exhausted by the insured (as the primary self-insurance component) before the carrier’s excess defense and indemnification obligations kick-in under the terms of the policy. However, an insured can generally exhaust an SIR by paying legal fees and costs associated with a claim.
Oftentimes, the language in the policy requires the SIR to be paid for by the named insured or an insured under the policy. This was an issue addressed by the Florida Supreme Court in Intervest Const. of Jax, Inc. v. General Fidelity Ins. Co., 133 So.3d 494 (Fla. 2014).
In this matter, a personal injury claimant asserted a claim against the contractor dealing with a residential home. The contractor hired a subcontractor to install attic stairs and the subcontract required the contractor to indemnify it. The owner of the house injured herself on the attic stairs and sued the contractor. The contractor, in turn, sought indemnification against the subcontractor that installed the attic stairs.
The contractor’s general liability policy had a $1 Million SIR (meaning it was self-insured for the first million that needed to be exhausted before its general liability policy applied).
The matter was mediated and a $1.6 Million settlement was reached. The subcontractor’s carrier was paying the contractor $1 Million to resolve the indemnification claim. This left a remaining $600,000 to fund the settlement. A dispute arose between the contractor and its carrier as to this money because the contractor claimed its SIR was paid for by virtue of the $1M it received through its indemnification action so the $600,000 should come from the carrier. The insurer claimed it was not as the SIR had to be paid by the insured. As a result, both the contractor and its insurer each paid $300,000 to settle the personal injury action and reserved rights to seek reimbursement from the other in a separate lawsuit.
In this separate lawsuit, and during the appellate process, the question was posed to Florida’s Supreme Court whether indemnification payments received from the insured can be used to satisfy the contractor’s $1M SIR. The policy provided that the SIR “will only be reduced by payments made by the insured” and that payment of the SIR “is a condition precedent for our [insurer’s] obligation to pay any sums either in defense or indemnity and shall not pay any such sums until and unless the insured has satisfied” its SIR.
The Florida Supreme Court held that the indemnification payment received by the subcontractor could be used to satisfy the contractor’s $1M SIR.
First, the policy did not contain a provision expressly stating “that regardless of other insurance the insured would continue to be responsible for the full SIR before the limits of the policy applied.” Intervest Const. of Jax, 133 So.3d at 502. Likewise, the policy did not contain a provision that stated “[p]ayment by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.” Id.
Second, there was nothing in the policy that required the insured “to pay all amounts within the retained amount [SIR] ‘from its own account.’” Id. Other policies have included this language with specific language that states that the SIR “‘is the responsibility of the Insured and is to be paid from the Insured’s own account.’” Id. Based on this, the Florida Supreme Court found that while the payment must come from the insured, it does not specify where the funds to pay the SIR must originate. Id.
If you are working with a policy with a SIR, it is important to work with counsel to understand your obligations when it comes to a SIR and, importantly, how the SIR operates.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.FUN