Caution: SIRs Will Be Strictly Construed

The California Court of Appeal, Fourth Appellate District, parsed an insurer’s defense and indemnity obligations allegedly both subject to a self-insured retention (SIR).  The court held the SIR only precluded an indemnity obligation prior to SIR exhaustion and had no effect on the insurer’s duty to defend.

American Safety Indemnity Co. v. Admiral Insurance Co. (2013) 220 Cal.App.4th 1, involved typical indemnity and additional insured obligations arising from a homeowners’ suit over bad grading. The homeowners sued the developer, grading subcontractor and certain developer-related entities.  The developer and the developer-related entities tendered their defense to their insurer, Admiral, and the developer pursued additional insured rights under the grader’s policy with American Safety Indemnity Co. (ASIC).

ASIC initially denied the developer’s tender but eventually paid its fees.  The construction defect action settled for $4.9 million and Admiral and ASIC contributed their respective $1 million policy limits to the settlement.

ASIC sued Admiral seeking to recover the cost of defending the developer and related entities.  Admiral contended the developer-related entities had not satisfied its policy’s SIR.  The trial court found Admiral’s duty to defend was independent of the SIR provision.

On Sept. 27, 2013, the appellate court upheld the trial court’s ruling and found that the SIR provision in Admiral’s policy specifically limited its duty to pay “damages” and did not mention its duty to defend.  The appellate court further held that a reasonable insured would expect to receive a defense under a primary policy unless the SIR coverage limitation was clear and conspicuous. The court supported its interpretation of the Admiral policy by comparing the SIR endorsement with the “other insurance” provision, which expressly limited Admiral’s duty to defend.

Click here for the opinion.

Image courtesy of Flickr by Great Valley Center