Self-Insured Retention on Policy Allows Insurer to Deny Contractor’s Claim

A general contractor was unsuccessful in its bid to gain coverage as an additional insured, due to a self-insured retention (SIR) endorsement on a subcontractor’s commercial general liability (CGL) insurance policy.

In a decision issued by an Indiana appeals court last month, the court sided with Zurich American Insurance Company that in procuring the SIR endorsement the subcontractor would be responsible for costs and damages up to the SIR limit of $500,000.

Walsh, a general contractor, hired Roadsafe Holdings, Inc. in January 2009 as a subcontractor in a traffic exchange construction project in Lake County, Indiana. Walsh’s contract specified that Roadsafe obtain a CGL policy that named Walsh as an additional insured on a primary noncontributory basis. Roadsafe purchased a CGL policy from Zurich which defined Roadsafe as the named insured and included an endorsement defining additional insureds as “any person and organization where required by written contract.”

Roadsafe also purchased a $500,000 per occurrence self-insured retention endorsement as part of the CGL policy.

The language within the SIR endorsement stated the following:

The insurance provided by this policy is subject to the following additional provisions, which in the event of conflict with any other provisions elsewhere in the policy, shall control the application of the insurance to which this endorsement applies:

1. Self Insured Retention and Defense Costs—Your Obligations

A. The “self insured retention” amounts stated…apply as follows:
1. If a Per Occurrence Self Insured Retention Amount is
shown in this endorsement, you shall be responsible for
payment of all damages and “pro rata defense costs” for each
“occurrence”[] until you have paid damages equal to the Per
Occurrence amount….

B. Defense Costs
Except for any “defense costs” that we may elect to
pay, you shall pay “pro rata defense costs” as they are
incurred….

C. Settlement of Claim
1. Within Self Insured Retention
If any final judgment or settlement is less than the “self
insurance retention” indicated…above, you shall have the right and obligation to settle all such claims or suits….

II. Our Rights and Obligations Excess of the Self Insured
Retention* * *

B. Damages Excess of Self Insured Retention—Per Occurrence or Per Claim
We shall be liable only for the amounts of our share of
“pro rata defense costs” and damages in excess of the “self insured retention” amounts…above….

Definitions—
A. “Self insured retention” means: the amount or amounts which
you or any insured must pay for all compensatory damages and “pro rata defense costs” which you or any insured shall become
legally obligated to pay because of damages arising from any
coverage included in the policy

In June 2009, Boguslaw Maczuga sustained an injury as a result of an auto accident as he maneuvered through the work zone traffic pattern. Maczuga sued Walsh resulting in Walsh filing a third party lawsuit against Roadsafe. Walsh alleged Roadsafe failed to indemnify it and breached its contract. Walsh notified Zurich of the suit and requested defense which Zurich denied. Walsh filed a declaratory judgment with the parties moving for summary judgment.

The trial court sided with Zurich and entered summary judgment on its behalf. It noted that the policy was between Zurich and Roadsafe and no suit was filed against Roadsafe. In addition, the SIR endorsement required the insured to pay the first $500,000 in costs and/or damages of any claim.

Walsh appealed the decision. Walsh and Roadsafe both argued the SIR endorsement amends only Zurich’s relationship to Roadsafe and that it doesn’t apply to Zurich’s obligations to Walsh under the CGL policy. Zurich argued that the SIR amount must be satisfied before any obligation under the CGL policy triggers.

The appeals court agreed with the trial court in that “Zurich’s reading of the SIR endorsement properly harmonizes the totality of that document’s language and applies the SIR endorsement as it was intended to be applied.”

The court explained the difference between a policy with a SIR versus one without, “We have noted that a policy with a deductible obliges the insurer to respond to a claim from “dollar one” (i.e., immediately upon tender), subject to the insurer’s right to later recoup the amount of the deductible from the insured. A policy subject to a SIR, in contrast, obliges the policyholder itself to absorb expenses up to the amount of the SIR, at which point the insurer’s obligation is triggered.”

The court noted that the SIR endorsement shifts the initial cost burden from Zurich to Roadsafe, for both Roadsafe’s damages and defense costs and also for an additional insured’s damages and defense costs.