Failure to Exceed SIR Releases the Excess Insurers

No Cover Available from Excess and Umbrella Policies

Insurers use a self-insured-retention (SIR) to avoid the expense of dealing with small claims and avoid the expense of defending or indemnifying an insured until the SIR or underlying insurance is exhausted. As a result the excess insurer can charge a small premium because its exposure is limited.

In City Of Phoenix v. First State Insurance Company, a foreign insurer; No. 16-16767, United States Court of Appeals For The Ninth Circuit (April 4, 2018) the City of Phoenix (“the City”) appealed an adverse summary judgment in favor of First State Insurance Company, Twin City Fire Insurance Company, New England Reinsurance Corporation, and Nutmeg Insurance Company (collectively, “Hartford”) on the City’s declaratory judgment, breach of contract, and bad faith claims, and from the denial of the City’s motion for partial summary judgment.

FACTS

The City’s insurance coverage action against Hartford arose from an underlying personal injury and wrongful death lawsuit brought by Carlos Tarazon and his wife. Mr. Tarazon was exposed to asbestos through his work as an underground pipe layer in the City from 1968 to 1993 and died of mesothelioma in 2014. The City settled the Tarazon family’s claims against it for $500,000. The City’s legal defense expenses amounted to over $1,400,000.

From July 1, 1981 to July 1, 1985, the City was covered by four successive excess liability policies (“Excess Policies”) issued by Hartford, each of which provided $500,000 in liability coverage in excess of a $500,000 self-insured retention (“SIR”). The City also purchased three successive umbrella policies (“Umbrella Policies”) from Hartford, covering periods from July 1, 1981 to July 1, 1984.

THE POLICY WORDING

The Excess Policies’ basic insuring agreement states that Hartford “will indemnify the [City] for ultimate net loss in excess of the retained limit [of $500,000.]” “Ultimate net loss” is defined in the Excess Policies to “exclude[] all loss adjustment expenses . . . .” The parties agree that defense costs are “loss adjustment expenses.” The plain language of this provision is unambiguous. Hartford only has to indemnify the City if the City’s ultimate net loss (i.e., not including defense costs) exceeds $500,000. The City settled its claim for $500,000 and is not entitled to indemnity.

The Excess Policies also contain a “No Costs” provision, which states: “Should any claim arising from such occurrence be adjusted prior to trial court judgment for a total amount not more than the retained limit, then no loss expenses or legal expenses shall be payable by the Company(s).”

ANALYSIS

The City attempts to inject ambiguity into the No Costs provision by arguing that use of the term “adjusted” includes both liability and defense costs, and defense costs therefore erode the SIR. However, this reading would contradict the language from the basic insuring agreement, which clearly provides that Hartford’s duty to indemnify applies when the retained limit is exhausted by liability costs. We are also persuaded by City of Oxnard v. Twin City Fire Insurance Co., which examined an insurance policy with similar policy language, and likewise concluded that the insured “was responsible for defense costs for claims it settled within its SIR amount.” 44 Cal. Rptr. 2d 177, 180 (Cal. Ct. App. 1995).

The City argues in the alternative that if Hartford is not obligated to pay the City under the Excess Policies, Hartford must pay under the Umbrella Policies. The Umbrella Policies provide that Hartford will indemnify the City “for ultimate net loss in excess of the underlying limit or the [SIR], whichever is the greater . . . .” The Umbrella Policies define “underlying limit” as the “limits of liability of the underlying insurance . . . .” Each Umbrella Policy’s Schedule of Underlying Policies lists an Excess Policy and states that the Excess Policy’s limit of liability is $500,000 in excess of the $500,000 SIR. Where no underlying insurance applies, the Umbrella Policies have a separate SIR of $10,000 or $25,000, depending on the policy year.

Because the City’s asbestos liability fell within the scope of the Excess Policies, the City is only entitled to “ultimate net loss in excess of the underlying limit . . . .” As the City did not exhaust the underlying limit of the Excess Policies, it is not entitled to indemnity under the Umbrella Policies.

The City conceded below that it could not show bad faith if Hartford’s refusal to pay out on the policies was justified.

ZALMA OPINION

Excess means what it says. The insurer doesn’t pay unless the underlying limit or SIR are exhausted. Since they were not exhausted the excess and umbrella insurers owed nothing. For once the Ninth Circuit has a clear, simple and appropriate decision.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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