In American Safety Indemnity Co. v. Admiral Insurance Co. (No. D061587, filed 9/27/13), a California appeals court held that the presence of a self-insured retention (“SIR”) will not excuse the insurer from defending the insured in the absence of specific language requiring exhaustion of the SIR before any defense obligation attaches.
In American Safety, a developer insured by Admiral contracted with a grading contractor insured by American Safety (“ASIC”). The developer was also named as an additional insured on the grader’s ASIC policy. When grading caused slope failures, the adjacent homeowners sued and the developer tendered to ASIC as an additional insured on the grader’s policy. ASIC initially declined to defend, but did so after the developer filed a breach of contract and bad faith action. Further, ASIC provided a full defense to the developer, including for certain entities not named as additional insureds on the ASIC policy.
ASIC subsequently sued Admiral in equitable subrogation seeking a pro rata share of the developer’s defense costs. However, Admiral argued that it had no obligation for defense costs, because its policy contained an SIR endorsement making the developer liable for the first $250,000 in damages payable to any third party claimant.
The SIR endorsement stated that “Our total liability for all damages will not exceed the limits of liability as stated in the Declarations and will apply in excess of the insured’s self-insured retention (the ‘Retained Limit’). ‘Retained Limit’ is the amount shown below, which you are obligated to pay, and only includes damages otherwise payable under this policy…. If the ‘Retained Limit’ is subject to an annual aggregate, the aggregate amount shall be payable by the insured even if the policy is terminated prior to the expiration.”
Further, the SIR provision stated: “Expenses incurred under the SUPPLEMENTAL PAYMENTS-COVERAGES A AND B provisions of this policy are … [i]ncluded in the ‘Retained Limit’…. We have the right in all cases, at our expense, to assume charge of the defense and/or settlement of any claim wherein your liability is reasonably expected to exceed the Self-Insured Retention and, upon written request from us, you will tender such portion of the Self-Insured Retention as we may deem necessary to complete the settlement of such claim.”
The American Safety court held that this wording does not limit the insurer’s duty to defend or turn what is otherwise primary coverage into excess coverage. The court cited Legacy Vulcan Corp. v. Superior Court (2010) 185 Cal.App.4th 677, for the proposition that, absent express language limiting the duty to defend, SIR provisions only apply to the insurer’s duty to indemnify the insured for damages, not its duty to defend. The court pointed out that an SIR is the equivalent of no insurance, and the insured has no duty to contribute to insurers obligated to provide a defense. (Citing Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38.)
Finally, the American Safety court rejected an argument that ASIC had acted as a volunteer in paying defense costs for entities not listed in the additional insured endorsement, noting that defense counsel had refused to break down the billings and Admiral had concealed the existence of its coverage, stating that “there are compelling reasons for allowing recovery when the other insurer has not entered the case at all or has refused to defend the insured against suit by the injured party.”
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