An Insurer Cannot Rely Satisfaction of a SIR as a Prerequisite to Defend its Insured Unless the Policy Language Expressly Sets Forth in Clear and Unambiguous Terms that the Defense is Conditional on Satisfaction of the SIR

American Safety Indemnity Co. v. Admiral Ins. Co. 2013 WL 5397890 (Cal.App.4 Dist.)

By: Jon A. Turigliatto and David A. Napper
October 15, 2013

The Fourth District Court of Appeal held that a self-insured retention (“SIR”) in a commercial general liability policy does not necessarily excuse the insurer from providing a defense to an insured that had not first satisfied the SIR through payment of defense costs. The Court once again applied the well-establish principle that any limitation on the coverage provided by a liability insurance policy must be express and consistent with the reasonable expectations of the insured.

Following a landslide alleged to have resulted from grading deficiencies, homeowners sued several defendants, including the developer and the grading contractor. The developer was insured by Admiral Insurance Company (“Admiral”) and the grader was insured by American Safety Indemnity Company (“ASIC”). The developer was named as an additional insured on the ASIC policy and tendered its defense to ASIC. ASIC initially declined to defend. But after the developer sued for bad faith, ASIC agreed to defend the developer and its related entities (collectively “Developer”).

The underlying suit was settled in 2007, with ASIC and Admiral each contributing $1 million to the settlement. ASIC, which said it had spent more than $2.2 million defending the Developer, then sued Admiral for contribution seeking to recover defense fees. Admiral argued that it did not owe a duty of defense because the SIR in Admiral’s policy applied not only to its duty to indemnify but also to its duty to defend. ASIC contended that Admiral’s duty to defend the Developer was independent of the policy’s SIR provisions.

Admiral’s policy and duties under the policy were limited by an SIR endorsement which read as follows: “Our total liability for all damages will not exceed the limits of the liability as stated in the Declarations and will apply in excess of the insured’s self insured retention (the “retained limit”). Retained limit is the amount shown below, which you are obligated to pay, and only includes damages otherwise payable under this policy.”

The Court held that Admiral’s policy did not expressly and unambiguously condition Admiral’s duty to defend upon satisfaction of the SIR. The Court held that in “the absence of clear policy language so providing, to require the exhaustion of a self-insured retention before an insurer will have a duty to defend would be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage.”

The Court upheld the trial court’s ruling that the Developer was not required to satisfy the SIR as a condition of obtaining a defense from Admiral. Pursuant to American Safety, if the policy does not expressly relieve the insurer of its immediate and independent duty to defend its insured prior to satisfaction of the SIR, insureds and by extension, additional insureds, are entitled to an immediate and independent defense. An insurer cannot rely on satisfaction of a SIR as a prerequisite to defending its insured unless the policy language expressly sets forth – in clear and unambiguous terms – that the obligation to provide a defense is conditioned upon satisfaction of the SIR.

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