Summary: This article focuses on (1) the definition of the SIR, in general terms, as used with reference to liability insurance; (2) its common uses; (3) how this concept generally differs in definition and application from a deductible; (4) how the SIR compares to the retained limit commonly used with commercial umbrella liability policies; (5) problem areas associated with its use; and (6) some suggestions to avoid or reduce some of its problems.

Topics Covered:

Introduction

SIR versus the deductible

Insuring a self-insured retention

Umbrella retained limit versus SIR

Other insurance issues

Structural problem areas

Meaning of “loss” problems

Per claim basis

Application of deductibles and SIRs to multiple claimants

Certificates and the SIR

Introduction

The self-insured retention (SIR) is a concept that, while widely used, is often misunderstood by insureds, insurers, and some courts. While its use has been linked historically to programs using commercial umbrella policies, the SIR is currently used throughout the primary level of liability protection with qualified self-insurance programs, fronting, and other financial risk management techniques.

Because of the diversity in wording used by those who draft self-insured retention wording, it is difficult to provide a definition that is a representation of all versions. Nonetheless, a self-insured retention, as its name connotes, represents the amount of damages, legal costs or any combination of the two that the insured must assume (retain) before liability insurance becomes payable. (For purposes here, this discussion is limited to SIR endorsements, and wherever used here, the term SIR is limited accordingly.)

Note that not all self-insured retentions refer to a combination of damages and legal costs. In some cases, the SIR is limited to damages, while in other cases, the SIR can be satisfied totally by the assumption of legal costs and/or damages. It all depends on the wording of the SIR endorsement, which is the basis for many problems in analyzing an SIR. The intent of an SIR also is not always clearly stated, thus leaving room for argument as to its intended application. The term “self-insured retention” also is somewhat of a misnomer because, as discussed subsequently, it is not generally considered insurance.

A variety of reasons can prompt the use of a self-insured retention. However, most uses can be categorized as one of the following:

•To retain predictable losses that, as such, are no longer a risk but rather a cost of doing business. Retention of a predictable level of loss cost, coupled with excess insurance for unpredictable events, is an economical way to fund damages and costs.

•To realize savings in areas such as premium taxes and other assessments that are included in the cost of any insurance purchased.

•To make the business entity more loss control conscious, something that might not occur absent a self-retention.

•To qualify for certain insurance not available unless part or all damages and/or costs are retained in areas where there is likely to be a substantial frequency of occurrence.

•To reduce insurance premiums.

•To assist in cash flow problems.

•The potential for tax advantages, not for funding the payment of future damages, but for assuming a certain part of every claim or lawsuit filed against the entity. Conversely, retaining a high level of risk involves tax and legal implications that may not always be beneficial.

SIR Versus Deductible

Although the terms “self-insured retention” and “deductible” sometimes are used interchangeably, particularly by the courts, there are some notable differences between these two concepts. The Insurance Services Office (ISO) offers two standard liability deductible forms. Though some nonstandard forms are available, the standard forms are more common. Self-insured retention endorsements, on the other hand, are generally manuscript (i.e., drafted from scratch or the product of a “cut-and-paste” process by combing provisions taken from other SIR endorsements). Although there is no benchmark by which to compare a self-insured retention and deductible endorsement, the following are some of the general differences between the two:

•The deductible is not limited primarily to use with liability insurance. It is commonly used with property (first party) insurance, including auto physical damage coverages. The SIR is not commonly used with property insurance. Chances are the entity with the SIR may likely utilize a deductible on its property insurance exposures, but may forgo automobile physical damage altogether while the automobiles are in use because of the spread of risk. However, that entity may still select insurance when there is a garage or terminal exposure (i.e., when many autos parked in the same location present a high concentration of values).

•The deductible commonly is used to eliminate the need for insureds handling numerous small claims. The self-insured retention is often used to make excess insurance more readily available and, by involving the insured, to cut costs by encouraging more efficient loss control and claims handling measures.

•To some extent, there may be rate credits for deductibles. But no credits per se are generally offered with the self-insured retention.

•With a deductible, the insurer generally has the sole responsibility for adjusting claims, as well as controlling settlement decisions, claims practices, handling defense, and paying judgments and settlements; whereas the insured usually has the principal responsibility for claims handling within the self-insured retention.

•Another distinction is that the SIR has no effect on available policy limits.

The manner in which the deductible and the self-insured retention affect the payment of damages and legal costs varies, too. As noted, some self-insured retentions encompass damages and legal costs. However, it would be the exception, rather than the rule, for a deductible to include legal costs (i.e., the insurer usually has the responsibility for the payment of all legal costs, and usually in addition to the policy limit.) In actual practice, it may difficult to determine whether it is the deductible or a self-insured retention that is being used, because each may contain some of the other's general characteristics and are often mislabeled.

Insuring A Self-Insured Retention

A problem that often arises in the context of SIRs is how they are exhausted for purposes of triggering any coverage above them. More specifically, how do insurers feel about permitting insureds to purchase insurance to cover all or part of a large SIR, as is sometimes the case with deductibles? The answer is that some insurers seek to prevent insureds from buying insurance for the amount of the SIR, in order to motivate the insured to implement loss control measures. Without some kind of conscious effort on behalf of the insured to prevent or reduce the chances of a claim or suit, the insurer's policy limits are potentially more at peril.

Related to this subject is the recurring problem of whether an insured under one policy can apply sums paid on its behalf by other insurers toward exhausting a SIR or deductible. Despite the fact that most policies are silent on this point, insurers continue to insist that their self-insured retentions or deductibles cannot be satisfied by anyone other than the insured. The problem is that payments made on behalf of an insured by other insurers can be argued to constitute payment by the insured. The rationale for prohibiting the insuring of deductibles or self-insured retentions is based essentially on an insurer's underwriting philosophy or, as stated previously, based on the insurer's belief that insureds who are obligated to assume their own SIR or deductible will exercise more care than those not so obligated. However, failure to clarify that intent means the insured has no knowledge of it.

As is the case with multiple deductibles or self-insured retentions, some insurers have taken steps to clarify wording of their SIR and deductible endorsements. An example of such wording is the statement that an SIR cannot be insured or reinsured. Another endorsement in use states that payments by some entity, other than the named insured, including additional insureds or insurers, will not satisfy the SIR. (Note that what is interesting here is the reference to insureds in their capacity as additional insureds. The question is: can sums paid on behalf of an additional insured be applied toward satisfying the additional insured's SIR under its own policy should the claim impact that insured's own insurance portfolio? That question may be answered in the affirmative, unless insurers take specific steps to prevent an insured from doing so.)

A case on point is The Vons Companies, Inc. v. United States Fire Insurance Company, 92 Cal.Rptr.2d 597 (2000). This case involved bodily injuries sustained by an individual who was struck by a pallet jack being operated by an employee of The Vons Companies. The accident occurred in the common area of a shopping mall owned by Longs Drugs Stores. As part of the lease agreement, Longs had agreed to indemnify Vons for injuries sustained in the common area. Vons was also named as an additional insured on the Longs' CGL policy. In addition, Vons maintained its own CGL policy issued by United States Insurance Company. The Vons policy provided limits of $1 million but included an SIR endorsement, limiting the insurer's obligation to sums in excess of the $1 million SIR.

Following the incident, the injured party sued Vons, who, in turn, cross-complained against Longs based on the indemnity agreement and alleging that Longs was partially at fault. Following a settlement, the insurer of Longs paid one million dollars and Vons paid an additional five hundred and forty thousand dollars. The settlement agreement made no allocation of the settlement funds, nor did it address Vons' cross-complaint against Longs. Before the settlement was reached, a dispute arose between Vons and its insurer as to whether the $1 million SIR could be satisfied by sums paid on behalf of Vons as an additional insured under another policy. Vons' insurer took the position that the SIR endorsement attached to Vons' policy required Vons to pay $1 million of its own money. The SIR endorsement stated that the insurer's duties were “limited to payment of that portion of the ultimate net loss resulting from any one occurrence or offense which is in excess of the self-insured retention of $1,000,000″. This endorsement also provided that it was “subject to the limits of liability exclusions, conditions and other terms of the policy to which this endorsement is attached . . .” and that “all other terms and conditions of this policy remain unchanged”. It was the wording underlined above that the appellate court in this case seized upon and found most relevant in its resolution of the coverage dispute in the favor of Vons.

The insurer of Vons filed a declaratory relief action, following which a trial court found that the insurer was required to reimburse Vons for the $559,905 it had paid. In doing so, the trial court found, among other things, that: (1) the policy of Vons provided primary coverage and was not intended to be excess over other insurance; (2) the policy of Vons did not limit the source of the $1 million SIR in any way or require Vons to pay it from its own pocket; and (3) had the parties intended that the SIR could be satisfied only when Vons, and not some other source paid the SIR, the policy would have said so.

The insurer of Vons objected to this decision on a number of grounds and an appeal followed.

In addressing the issues involved, the appellate court looked to the case of General Star Nat. Ins. Corp. v. World Oil Co., 973 F. Supp. 943 (1997). In that case, Gen Star had issued a policy to World Oil that included a per accident deductible of $100,000 with a yearly aggregate deductible of $150,000 for a combined amount of $250,000. World Oil purchased a policy from Hartford Insurance Company providing coverage for the $250,000 deductible called for in the Gen Star policy. Following an incident obligating World Oil to pay damages, Gen Star paid $525,000 and Hartford paid $250,000. Gen Star then sued World Oil to recover $133,688, the difference between what it actually paid and what it would have paid if World Oil had paid the deductible.

Gen Star alleged that: (1) permitting an insured to buy coverage for its deductible violated Gen Star's risk sharing philosophy which motivated insureds to act more safely; (2) the policy stated that World Oil was obligated to assume and pay a $100,000 deductible and to reimburse Gen Star for any part of the deductible Gen Star had paid; (3) it had required World Oil to post a bond to cover any unpaid deductibles; and (4) a clause providing that Gen Star need only share proportionately in covering claims covered by other primary policies also precluded the use of other coverage to pay the deductible.

In granting summary judgment for World Oil, the court noted that: there was no evidence that Gen Star ever shared its risk-sharing philosophy with World Oil; Gen Star did not tell World Oil it could not insure the deductible; World Oil acted as though it believed it could insure the deductible; and the letter of credit referenced by Gen Star was purchased before World Oil obtained the Hartford policy and would also protect against the insolvency of other insurers.

The court in the World Oil decision then held that even though the Gen Star policy was denoted as primary coverage, subject to a deductible, it was in fact transmuted into excess coverage, subject to an SIR. This was so, the court held, because Gen Star's duties to defend and indemnify did not come into play, unless and until World Oil's ultimate net loss payment on a claim exceeded the deductible. The court also held that because the policy did not expressly prevent the insured from insuring the deductible, the policy was ambiguous on that point and to be resolved against the insurer.

The court in the Vons case noted that the World Oil court had reached two important conclusions for purposes of deciding the Vons case. First, that the labels used to define policy terms were not controlling; what the insurer had dubbed to be a deductible was found to be an SIR. Second, if policy terms permitted the use of insurance to cover a deductible (or were ambiguous on that point), the insured could exhaust the SIR in that manner. The court specifically noted the wording of the Longs policy which expressly addressed the issue, stating: “In the event there is any other insurance, whether or not collectible, to an occurrence, claim or suit within the Retention Amount, you will continue to be responsible for the full retention amount before the Limits of Insurance under this policy apply”.

The SIR endorsement in the Vons' policy, on the other hand, did not preclude Vons from insuring the deductible and expressly stated that it was subject to all of the policy's terms and conditions which remain unchanged. Among the conditions of the Vons' policy was one headed “Other Insurance”. It stated in relevant part: “If other valid and collectible insurance is available to the insured for a loss we cover . . . our obligations are limited as follows: . . . (b) Excess Insurance – This insurance is excess over any valid and collectible other insurance whether primary, excess, contingent or on any other basis: (1) That is Fire, Extended Coverage, Builders risk, Installation risk or similar coverage for your work.”

The court noted that the net effect of an SIR is to make the policy excess to any primary coverage, with the excess insurer's obligations triggered if and when the primary coverage is exhausted. U.S. Fire contended that Vons' obligation to pay the SIR was, in fact, primary coverage. The problem the court had was in interpreting the combined wording of the policy and the SIR endorsement, particularly in light of the position taken by U.S. Fire. The court stated that it was being required to determine why the SIR—which standing alone would ordinarily make the Vons' policy excess—was made subject to policy provisions that also stated that the insurance was excess in the event that other insurance was available.

The court found that the policy wording was ambiguous. In doing so, it held that if, as U.S. Fire had contended, the SIR provided excess coverage which precluded payment of the SIR by other insurance, U.S. Fire must explain why those provisions were expressly made subject to policy terms that also provided that this insurer's coverage was excess if any other valid insurance was available for the same occurrence. Because U.S. Fire did not offer any explanation, and the wording was thus unclear, the court held that the insurer had waived the issue of insuring the SIR. As referenced earlier, the court placed great emphasis on the fact that the SIR endorsement of U.S. Fire was made “subject to” other policy terms.

Insurers seeking to avoid the type of conclusions in the above cases should be careful to ensure that their policies are clear on this point. SIR endorsements should clearly state their intent to require insureds to pay the SIR from their own pockets. Many policies state this, specifically using wording like that found in the policy of Longs Drugs. Some insurers take a different approach, stating that the insured is free to insured the SIR, if it so chooses. What is clear, based on custom and practice involving the expectations of insureds and cases like those discussed above, is that a failure to address the issue is tantamount to an authorization to satisfy the SIR, with or without insurance, as the insurer sees fit.

Umbrella Retained Limit Versus SIR

To avoid confusion, it may be worthwhile to compare the retained limit used by umbrella liability policies with the mechanics of a self-insured retention. The retained limit found in umbrella liability policies usually clarifies how and when the umbrella policy is applicable when no underlying coverage applies. If the insured fails to maintain underlying insurance (as opposed to underlying coverage not applying), the insured could, depending on the facts and policy wording, be required to retain (assume) the amount of the primary insurance that was not maintained. When underlying coverage applies, the retained limit of the umbrella policy usually is defined to mean total limits of underlying coverage, as scheduled, and any other applicable or collectible insurance. Assume, for example, that the scheduled underlying policy has a limit of $1 million per occurrence. The umbrella policy does not usually become payable until this retained limit of $1 million underlying has been paid or becomes payable (depending on the policy provisions in question).

In areas where underlying coverage does not apply, the retained limit of the umbrella policy usually is defined to mean the amount stated in the umbrella policy declarations as the self-insured retention for any one occurrence not covered by the underlying policy or other applicable coverage. Assume, for example, the umbrella retained limit is the total of underlying limits if there is coverage, or if there is no applicable underlying insurance, then most commonly, $25,000. If the umbrella policy covers a given claim where there is no underlying coverage, it will be the insured's responsibility to assume only the retained limit of $25,000 before coverage under the umbrella policy is activated.

Other Insurance Issues

It is becoming increasingly common to see various commercial liability policies include reference to the term “self-insurance”. Parties to the insurance contract are increasingly using some form of self-insurance, and insurers want that level of funding to be taken into consideration as other insurance and/or primary insurance when determining the amount payable under two or more policies. If reference to self-insurance is not made within the other insurance provisions of commercial liability policies, the entity with the SIR may not be required to contribute to the payment of damages or costs or both, because there is no clear consensus on whether self-insurance (including an SIR) is considered to be “other insurance”.

One of the commonly cited cases dealing with whether self-insurance is other insurance for purposes of liability policies is American Nurses Assn. v. Passaic General Hospital, et al., 484 A.2d 670 (1984). The New Jersey Supreme Court ruled that the $100,000 characterized as a self-insured sum by a hospital's insurer was actually a deductible, rather than other insurance; this amount therefore was not viewed as other insurance, but rather the antithesis of insurance.

However, some courts have ruled to the contrary. One such case is Hillegass v. Landwehr, et al. 499 N.W.2d 652 (1993). In this case, two employees were injured in an auto accident while occupying a company car being used for pleasure not business purposes. Their employer was self-insured for up to $1 million under an SIR endorsement, but maintained an umbrella policy over the SIR in the amount of $2 million. The employee who was operating the auto at the time of the accident maintained his own auto insurance with a limit of $250,000. This policy contained an other insurance clause holding that it would be liable for “excess over any other collectible insurance”. The employer asserted that because it was self-insured, there was no other collectible insurance within the meaning of the employee's personal auto policy and, therefore, the employee's personal auto insurer, and not the employer, was the primary insurer. However, in considering whether self-insurance and self-insured retention endorsements constitute other insurance, the Wisconsin court rejected the employer's argument and concluded that self-insurance constitutes insurance within the meaning of the employee's personal auto policy.

Structural Problem Areas

As noted at the outset of this discussion, a self-insured retention usually is provided by endorsement to a liability policy. It is well-settled that an endorsement should modify and take the same format (and structure) as the liability policy to which it is attached. Unfortunately, however, drafters of these endorsements sometimes word the SIR endorsement as if it were a separate policy. By not recognizing the fact that unless the endorsement clearly modifies appropriate parts of the policy, the provisions intended to be modified by the policy may still apply, thus creating an ambiguity.

A primary function of the SIR endorsement is to explain the application of the self-insured retention in relation to the policy's limits of insurance provision. It is therefore important for the endorsement to specifically set forth the extent to which the policy's limits of insurance provision is being amended and the mechanics/interaction. For example, the preamble of the SIR endorsement could read in part: “The limit of the Company's liability (as stated in the policy shall apply in excess of the self-insured retention (as stated in this endorsement) . . . The Company's obligation under the policy applies only to the amount in excess of the self-insured retention. . . .”

Some SIR endorsements use terminology commonly found in umbrella liability policies. It is not unusual, for example, to see these endorsements refer to “ultimate net loss” to explain the application of endorsement limits. This is perfectly acceptable, so long as the term being used is being defined and the endorsement clarifies what provisions of the policy are being modified. Failure to do so can cause problems of interpretation.

Meaning of “Loss” Problems

It is not unusual for an SIR endorsement to refer to the term “loss” without defining the term. Yet, in custom and practice, this term generally has no place (nor meaning) in relation to a liability policy. Generally, liability policies use the terms occurrence, claim, or suit. It may well be that the term is meant to refer to ultimate net loss in short form. Whatever the rationale, problems can be expected when the undefined term “loss” is used in an SIR endorsement attached to a commercial general liability policy.

A case in point is Columbia Casualty Co. v. Northwestern National Insurance Co., 282 Cal.Rptr. 389 (1991). This case involved a fronting arrangement whereby the liability coverage to which the SIR endorsement applied appeared to be the insured's primary insurance but, in fact, turned out to be a fronting arrangement. The insurer, in this arrangement, guaranteed that the insured's obligations to pay certain damages and costs within the SIR limit would be honored. In practice, however, the insurer was not obligated to indemnify the insured for such damages. The insurer, instead, was to be reimbursed by the insured. This type of fronting policy is sometimes issued to satisfy financial responsibility laws by guaranteeing to third persons who may be injured, that their claims against the insured will be paid.

In this particular case, there were two endorsements. The first was referred to as combined single limit endorsement. It purportedly indemnified against both damage (undefined) and ultimate net loss for a total liability of $1 million as the result of any one occurrence. The term “ultimate net loss” was defined as the total sum the insured must pay as a consequence of an occurrence causing personal injury. The term “ultimate net loss” included legal and adjustment expenses, as well as damages within its definition. The second endorsement provided that the $1 million shall be deducted from any loss, including defense coverage, as a result of each occurrence.

The fronting insurer maintained that this latter endorsement's purpose was to take away what was given by the first endorsement. The court had a problem with the insurer's contention. While the term “ultimate net loss”, as it appeared in the combined single limit endorsement, was a defined term, the second endorsement simply referred to “the loss” without definition or explanation. It therefore could be presumed, the court said, that “the loss”, an undefined term in the policy, had a different meaning from “ultimate net loss”, which was a defined term. The court stated that the policy was by no means unambiguous as the insurer contended and stated further: “More a vehicle for Jesuitical or Talmudic debate than a definition of the rights and obligations of the parties to the contract, the policy crosses one's eyes and boggles one's mind”.

Another case wherein use of the undefined term “loss” in a self-insured retention endorsement caused problems of interpretation is Owens-Illinois, Inc. v. United Insurance Co., 625 A.2d 1 (1993). This case involved litigation dealing with asbestos injury against the manufacturer and its captive insurance company (a corporation organized, in this particular case, for the purpose of insuring the liability of its owner, Owens-Illinois). One of the many arguments set forth by the insurers in this case, was that the $250,000 SIR should have applied to each individual claim. The basis for this argument of the insurers was a reference in the policy declarations page of a liability policy that the insured was “[s]elf-insured for the first $250,000 of each loss”. Fortunately for the insured, however, the significance of this isolated reference to loss was considerably mitigated by examining the rest of the policy. In this regard, item 5 of the policy declarations indicated that the SIR applied on an occurrence basis. And, the policy itself repeatedly referred to a “self-insured retention of $250,000/occurrence”. The policy also stated, “[f]or purposes of determining the limit of the [c]ompany's liability, all personal injury and property damage arising out of continuous or repeated exposure to conditions shall be considered as arising out of one occurrence”. The single occurrence interpretation also was supported by the policy's insuring agreement wherein the insurer promised to pay “all sums which [the insured] shall become legally obligated to pay because of personal injury . . . caused by an occurrence”.

The point to remember is that the undefined term “loss” has no place within the terminology of an SIR endorsement. If the drafter must use that term, it must be defined in the endorsement (because it is not a defined term in the liability policy). So, wherever the term “loss” appears in the endorsement, one can refer to the definition to determine the meaning of the term in the context in which it appears.

Sometimes an SIR endorsement will define a term never used elsewhere in the endorsement. When this happens, the undefined term cannot affect the meaning and application of the endorsement, because the defined term is: (1) not part of an insuring agreement; (2) not an exclusion; and (3) not a condition. Its meaning is only of significance if the term, as defined, is used within the context of the endorsement's provisions.

(Note that the Owens-Illinois decision was reversed by the New Jersey Supreme Court in Owens-Illinois, Inc. v. United Insurance Company, 138 N.J. 437 {1994}. However, the decision was reversed on grounds other than those pertaining to the SIR.)

Per Claim Basis

Self-insured retention endorsements, like deductible endorsements, are available on a per claim or per occurrence basis. But how these limits are explained in their respective endorsements is of the utmost importance, because a lack of clarity can cause problems. Especially troublesome in this regard are the mechanics of the SIR endorsement written on a per claim basis. One problem is that this kind of an SIR endorsement usually is attached to an occurrence policy (which explains what an occurrence is and how it applies). However, the endorsement does not define the term “claim”, what the term is intended to encompass, or how it interacts with the occurrence wording of the policy.

It may be helpful for drafters of SIR endorsements to look at how the per claim basis is worded in the deductible endorsement offered by ISO. The pertinent provisions of the ISO deductible read as follows:

The deductible amount stated in the Schedule above applies as follows:

a. PER CLAIM BASIS. If the deductible amount indicated in the Schedule above is on a per claim basis, that deductible applies as follows:

(1) Under Bodily Injury Liability Coverage, to all damages sustained by any one person because of “bodily injury”;

(2) Under Property Damage Liability Coverage, to all damages sustained by any one person because of “property damage”;

(3) Under Bodily Injury Liability and/or Property Damage Liability Coverage, to all damages sustained by any one person because of:

(a) “Bodily injury”;

(b) “Property damage”; or

(c) “Bodily injury” and “property damage” combined;

as a result of any one “occurrence”.

In light of the above references to any one person, how the per claim deductible endorsement applies leaves little question. An example is the case of Capitol Indemnity Corp. v. Miles Roofing and Coating, Inc., et al., 978 F.2d 437 (1992), where the policy was written with a $500 per claim deductible, which was defined as meaning that a deduction applied to “all damages because of property damage sustained by one person or organization, as the result of any one occurrence”. The court ruled that the policy's deductible of $500 per claim applied to each car damaged by the insured during the spraying of exterior foam insulation on a building, rather than to the building owner's claim against the insured for contribution after settling with car owners.

Generally speaking, (there are exceptions) if the wording specifies a per claim deductible, which clearly refers to injury sustained by one person (or organization), the number of deductibles is contingent on the number of third parties injured. Courts generally hold that each third party represents one claim and one deductible. Where the wording specifies a per occurrence or per accident deductible, the number of deductibles is, generally speaking, contingent on the number of occurrences giving rise to the liability.

It is probably based on the success of insurers in cases involving per claim deductibles that court decisions involving such deductibles are cited by some insurers attempting to prove the application of an SIR endorsement written on a per claim basis. However, the application is unclear because these SIR endorsements fail to define how the term “each claim” is to be construed. Technically speaking, cases involving per claim deductible endorsements should have no application to per claim SIR endorsements, because of their basic differences.

It is uncertain whether there have been any problems with an SIR endorsement written on a per claim basis attached to a claims-made liability policy. However, an SIR endorsement written on an occurrence basis attached to an occurrence liability policy seldom is the source of misunderstanding in application. Much of the reason for this ambiguity is that the term “occurrence” is defined in the occurrence policy (to which the SIR endorsement is attached) and policy provisions refer to the meaning of that term throughout the (occurrence) policy.

Application of Deductibles and SIRs To Multiple Claimants

One area of constant dispute involves construction defect litigation where a contactor or developer is faced with suits by homeowners associations alleging construction defects to numerous homes. Typically, the deductible or self-insured retention will state that it applies on a per-claim basis. The problem is that the majority of these endorsements do not explain what a claim is for purposes of applying a deductible or self-insured retention.

Many insurers insist that each home constitutes a separate claim, despite the fact that the lawsuit typically involves one suit encompassing all homeowners, and these endorsements typically lack wording clarifying the insurer's intent to apply the self-insured retention or deductible to each home. What makes this problem and resulting litigation absurd is the fact that a few insurers do use wording clarifying that the self-insured retention or deductible applies to each dwelling, home or habitational unit.

One insurer uses wording stating that its SIR applies to each and every claim regardless of how many claims arise from a single occurrence or where the claims are combined in a single suit. Even here, however, the issue of what a claim is in relation to the self-insured retention still remains unclear, since the term “claim” often remains undefined. Why standard ISO endorsements, and others as well, generally do not define the term “claim” or otherwise clearly state that self-insured retentions and deductibles apply to each dwelling, building or habitational unit is a mystery, particularly since that wording is already being used by some insurers.

Certificates and the SIR

Even though ACORD certificates do not ask for evidence of an SIR, it would be a good idea that it be shown nonetheless for at least two reasons. The first is that the SIR usually deals with high limits and can have an impact on coverage. The second reason is that making known that an SIR exists will not only inform the certificate holder of the SIR's existence, but also gives it the opportunity to ask questions about the SIR in more detail before a problem arises. In fact, one case that exemplifies such a problem is the case of Continental Casualty Insurance Company v. Zurich American Insurance Company, et al., 2009 WL 455285. A subcontractor was supposed to have obtained a primary liability policy with minimum limits of $1 million issued by an A-rated or better insurer. What the subcontractor did, instead, was to obtain a policy with a $1 million SIR, which the court considered as being a breach of contract, even though the contract involved here did not explicitly prohibit self-insured retentions. The court stated that if the subcontractor intended to self-insure in an amount equal to the dollar amount of coverage it agreed to obtain, it should have notified the other party to that effect to allow the other party to decide whether this arrangement was satisfactory.

What happened as a result was that the insurer of the subcontractor's liability policy had no duty to provide defense until the retention was exhausted which, in this case, never occurred. As a consequence, the court explained, the subcontractor's insurer did not provide the other party with the primary coverage it had expected. This failure to procure insurance by the subcontractor was the reason for the court's decision having to do with breach.

Another case is Spector v. Cushman & Wakefield, 955 N.Y.S.2d 302 (2012). Under an agreement between Citibank and OneSource, the latter was required to purchase an insurance policy with a limit of $1 million per occurrence. OneSource, instead, obtained a policy with an each occurrence limit of $1.5 million, an aggregate limit of $1.5 million, and a $500,000 self-insured retention. Although OneSource was said to have correctly maintained that the agreement did not prohibit self-insured retentions, the agreement did require OneSource to provide a certificate of insurance notifying Citibank of such a provision and no such notice was given. Thus, it was said that the insurance procurement provision was breached, because Citibank reasonably expected that OneSource would either provide effective coverage or notice of the amount of the self-insured retention.

Although these court cases involved a number of parties, there was no mention about the producer and whether any insurance certificate might have been issued to confirm coverages. Rest assured, however, that when it comes to finding fault, there is no safe harbor for anyone however remotely related to the transaction. The point is that showing the existence of an SIR could avoid a lot of problems between the parties, including the costly and unproductive time of producers to the extent they could have made the SIR known.