First Dollar Defense Was Required Despite A Self-Insured-Retention

American Safety Indemnity Company v. Admiral Insurance Company
(Cal. Ct. of App., 4th Dist.), filed September 27, 2013, published September 27, 2013

KEY FACTS

As a result of construction and grading on a tract of land owned by Zephyr Newhall, LP and Zephyr Partners, LLC, neighboring homeowners sustained damages to their properties. The homeowners sued the Zephyr entities as well as the developer, grading contractor and soils engineering firm involved in the work. As part of their grading contract, the grading contractor agreed to indemnify the developer against liability for any loss attributable to the grading contractor’s breach of duty, even if the developer’s conduct also contributed to the loss. At the time, the developer was insured by Admiral Insurance Company and the grading contractor was insured by American Safety Indemnity Company. The grading contractor’s policy identified the developer as an additional insured.

A dispute arose between the insurers as to their respective defense obligations. Part of the basis for the dispute was the presence of a self-insured retention clause.

HOLDING AND REASONING

In the ensuing coverage litigation, the Court of Appeal explained:

Here, the subject commercial general liability policy has a provision labeled “Self-insured Retention (SIR)” that clearly makes the insured liable for the first $250,000 in damages payable to any third party claimant. The policy also makes it clear the insured’s payment of defense costs count toward meeting the insured’s SIR obligations.

However, the SIR clause we are asked to consider does not expressly make payment of the SIR a condition of the insurer’s broader obligation to provide a defense when an arguably covered claim is tendered. Rather, the SIR clause expressly applies only as a limitation on the insurer’s duty to indemnify the insured for covered damages for which the insured is found liable. Given the language of the policy, an insured could quite reasonably interpret it as providing a defense to arguably covered claims as soon as such claims are tendered and before any SIR has been paid. Thus, like the trial court, we find the defendant insurer in this equitable subrogation action had a duty to defend its insureds when large soil subsidence claims were made against them and without regard to the SIR provisions in their policies.

We recognize other liability insurance policies contain SIR clauses that expressly and unambiguously make payment of a SIR obligation a condition of any obligation under the policy, including any duty to defend. We also recognize those SIR provisions have been enforced according to their terms. The policy in dispute here, however, does not contain such an express condition on the defendant insurer’s duty to defend.

ANALYSIS

This case emphasizes that not all SIRs are the same. Depending on the particular wording of the SIR, the carrier’s obligations may substantially differ.