Key Decisions

May 2012 – A SIR’s Satisfaction Triggers Indemnification

(filed under: | May 16, 2012)

A Settlement That Results In A SIR’s Satisfaction Triggers Indemnification

Axis Surplus Insurance Company v. Glencoe Insurance Ltd.
(Cal. Ct. of App., 4th Dist.), filed April 11, 2012 


Axis Surplus Insurance Company and Glencoe Insurance Ltd. provided general liability insurance in favor of Pacifica Pointe L.P. Pacifica was sued in a construction defect suit and tendered claims to both Axis and Glencoe. Axis agreed to defend Pacifica subject to a reservation of rights. Glencoe’s policy contained a self-insured retention (SIR) and stated Glencoe had no duty to investigate or defend any claim until Pacifica satisfied the SIR. Glencoe declined the defense tender because the Pacifica had not satisfied its SIR. However, Glencoe monitored the construction defect suit and asked Pacifica to inform it once it satisfied the SIR.

Pacifica and Axis paid a total of $1 million to settle the construction defect suit. Although Glencoe refused to participate in the settlement, it approved of Pacifica contributing $250,000 as part of the settlement. Pacifica contributed the $250,000. This contribution satisfied its SIR.

After the settlement, Axis sued Glencoe for declaratory relief and equitable contribution to recover at least a portion of the $750,000 it paid in settlement. After a bench trial, the court found in favor of Axis and allocated a 60/40 split of Axis’s settlement payment to the advantage of Axis.

Glencoe appealed.


The Court of Appeal affirmed.

The court explained that equitable contribution is available to apportion a loss among several insurers when each of those insurers is obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others. Thus, the central question was whether Glencoe was obligated to indemnify or defend Pacifica.

In an action for equitable contribution by a settling insurer against a nonparticipating insurer, the settling insurer has met its burden of proof when it makes a prima facie showing of potential coverage under the nonparticipating insurer’s policy. The settling insurer does not have to prove actual coverage.

After the settling insurer has satisfied its burden of proof, the burden shifts to the nonparticipating insurer to prove an absence of actual coverage under its policy.

The court rejected Glencoe’s argument that Axis had to show not only that Pacifica paid $250,000 to satisfy its SIR, but that this payment only applied to covered property damage. It reasoned that by settling, the parties gave up their right to have liability “established” by a trier of fact and the settlement becomes presumptive evidence of the insured’s liability and the amount of that liability. It noted that any other rule would make the settling insurer’s right to settle meaningless. Thus, the court concluded the settlement is presumed to be made for only damages covered under the applicable policy. Because the settlement included Pacifica’s payment of the SIR, the SIR shares the presumptive effect of the settlement as well. Therefore, Axis had no obligation to prove the SIR applied only to “covered property damage” as defined in the Glencoe policy.

The court next rejected Glencoe’s contention that its legal obligation to provide Pacifica with a defense in the construction defect suit could only be triggered after Pacifica satisfied the SIR, which was when the construction defect suit was settled. The court noted that Glencoe’s contention concerned the timing of its obligation to indemnify rather than whether it had one at all. As to the timing issue, the court noted that there was no precedent to which it could look.

In resolving the timing issue, the court considered the fact that although Pacifica had tendered the claim to Glencoe and Glencoe was “monitoring” the litigation, it otherwise did nothing. Then, recognizing that equitable contribution is an equitable doctrine and attempts to do what is “fair,” the court said:

To allow Glencoe to defeat an equitable contribution claim merely based on the timing of the payment of the SIR would award Glencoe for its inaction and work an injustice. Glencoe appears to have been hiding behind the SIR requirement in its policy, gambling that Pacifica would not satisfy it because Axis was providing Pacifica with a defense in the construction defect suit. We decline to adopt a rule sanctioning such gamesmanship.

It held:

When the insured has tendered a claim to the nonparticipating insurer, the nonparticipating insurer’s duty to defend is subject to the insured satisfying an SIR, and the insured satisfies the SIR as payment of a settlement of which the nonparticipating insurer was aware, the timing of the insured’s payment of the SIR does not prevent the settling insurer from establishing the nonparticipating insurer’s legal obligation to cover the underlying claim.


The court’s remark about Glencoe “hiding behind the SIR requirement in its policy, gambling that Pacifica would not satisfy it because Axis was providing Pacifica with a defense in the construction defect suit,” is interesting. Like Executive Risk Indemnity, Inc. v. Jones, 171 Cal.App.4th 319 (2009), this decision highlights certain risks that attach to carriers who approach litigation, with the expectation that a SIR offers substantial protection.