Self-Insured Retentions Part 2: An Examination of the Uses and Problems (from FC&S Legal)

The following article is from National Underwriter’s latest online resource,
FC&S Legal: The Insurance Coverage Law Information Center.

The Insurance Coverage Law Information Center
SELF-INSURED RETENTIONS, PART TWO
This article presents an examination of the use and problems with SIRs.
May 6, 2013

SELF-INSURED RETENTIONS, PART TWO
AN EXAMINATION OF THE USE AND PROBLEMS
Summary:
This second and concluding part of the discussion on self-insured retentions first itemizes the points that should be
considered when either drafting or accepting SIRs. The discussion then addresses some additional problem areas not only
with self-insured retentions having to do with primary liability policies, but also with the SIR feature of umbrella policies.
It is not unusual, furthermore, for litigants, among others, to confuse deductibles with self-insured retentions, and there
are differences, as one case discussed points out. In light of the fact that self-insured retentions also are growing, it also
is important that parties to a contract are informed of their existence. To not do so, could end up with the accusation of
failure to procure the proper insurance and, of course, such a breach is not covered by liability policies. It is for this reason
that perhaps insurance certificates should be amended to insert room to notify (and warn) certificate holders of an SIR
existence.
Topics covered:
• Points to consider
• A catch-22 situation
• Comparing deductibles with self-insured retentions
• Insuring a self-insured retention
• Insurer’s right to settle
• Self-insured’s right to settle
• Is the SIR limited to occurrences or also offenses?
• Umbrella policy attachment point
• Excess over what?
• The issue with insurance certificates
• Drafting pitfalls
Points to Consider
Before drafting the wording of an SIR endorsement or approving its use, various issues must be addressed and the intent
behind the endorsement should be incorporated into, or reflected by, the wording used. Among the many important
points to consider are the following:
• ho has the right or obligation to designate the claims servicing organization?
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• s the entity using the SIR endorsement (to be referred to as the self-insured) entitled to select legal counsel to
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protect its interests?
• s the self-insured or the insurer responsible for providing defense of suits within the SIR?
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• f the self-insured is responsible for defense, is there any limit on the amount of legal costs that must be paid by the
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SIR?
• s the self-insured required to accept any reasonable offer of settlement within the SIR?
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• an the insurer to whose policy the SIR endorsement is attached settle without the self-insured’s permission if the
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amount of settlement is within the SIR?
• f the SIR endorsement describes the scope of defense coverage to be provided within the SIR, is the defense
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provision of the policy to which the SIR endorsement is attached automatically deleted, or is it modified to reflect
the scope of defense coverage provided by the endorsement?
• o what extent, if any, is the insurance company involved required to share defense expenses incurred by the
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self-insured?
• hen and under what conditions is the self-insured obligated to notify the insurer of the policy containing the
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SIR endorsement of any occurrence, claim or suit?
• s the amount of the SIR deducted from the policy limit, or is the policy limit payable in full once the SIR is
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exhausted?
• oes the wording of the SIR endorsement being used create a deductible or a true self-insured retention?
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• f the policy or its SIR endorsement includes an arbitration clause, is the venue (location) for settling a dispute
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mandated by the arbitration clause? If so, is that venue convenient to the self-insured?
• s the self-insured obligated to provide periodic reports to the insurer of occurrences, claims and suits?
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• s the SIR endorsement limited to bodily injury and property damage coverages, or does it encompass personal
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injury, advertising injury, and other coverages provided by the policy?
• an the self-insured reinsure the SIR amount or does the endorsement specifically prohibit this or require the
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insurer’s permission to do so?
• an the insurer advance settlement costs on behalf of the self-insured?
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• s the assistance and cooperation condition applicable to the respective parties clearly stated to apply under both
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the terms of the policy and the SIR endorsement?
• oes bankruptcy, insolvency, receivership, or inability of the self-insured to pay within the SIR relieve the insurer
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of its obligations?
Awareness of these and other potential issues is critical for insureds and insurers alike, who work with or use SIR
endorsements.
A Catch-22 Situation
Anyone with an interest in self-insured retention (SIR) issues may find it amusing to note the arguments over who has the
obligation to assume an SIR when both the contract and the insurance policy are silent on that point. Admittedly, it can
be a costly proposition for the insured to have to assume the SIR before the insurer has an obligation to defend or pay
damages. When the obligation to assume the SIR is silent, typically it is the insureds who want to avoid its application,
however possible. In insurance custom and practice, however, unless the obligation to assume an SIR is explicit, it falls
upon the named insured or, in other words, the one who purchases the policy that includes the SIR.
It may not always be the case, but it could be advantageous when an additional insured also has the obligation to
assume the SIR. For example, if multiple insureds are required to assume the SIR, it may take longer to exhaust policy
limits which would benefit the named insured, and possibly the insurer. (This, of course, hinges on what is at stake in
terms of defense costs and damages.) The issue can be especially frustrating to an additional insured under certain
circumstances. An example is when an insurer acknowledges additional insured status and coverage, and the additional
insured incurred defense costs sufficient to satisfy the SIR, but the coverage can only be triggered after the assumption
of the SIR solely by the named insured, who is not a named defendant.
A case on point is Forecast Homes, Inc. v. Steadfast Insurance Company, 105 Cal. Rptr.3d 200 (2010) which involved
an appeal by the developer from a judgment in favor of the insurer. The developer contractually required all of its
subcontractors to defend and hold it harmless against any liability arising out of the subcontractors’ work. The
subcontractors also were required to add the developer to their liability policies as an additional insured. Several of
the subcontractors obtained their policies from Steadfast (hereinafter, the insurer) which refused to indemnify the
developer when a lawsuit was filed by several homeowners against the developer for construction defects.


The insurer maintained that only the named insured (subcontractors) and not the developer could satisfy the SIR and
trigger coverage, and because the lawsuits did not name the subcontractors, they did not have to assume the SIR,
which was a precondition for coverage. The trial court agreed with the insurer, holding that the liability policies were
unambiguous, not against public policy, and not illusory.
It was noted in this case that the developer’s contract with each subcontractor specified in great detail the required
insurance policy language and coverage specifications. Its contract, however, did not require any specific language
regarding the policies’ SIR provisions. The sole issue on appeal was over who was permitted to activate coverage by
assuming the specified SIR per occurrence amount.
Two versions of SIR endorsements with varying amounts were involved in this case. The one chosen by the court to
discuss was for $2,500 per occurrence with no aggregate, meaning that for purposes of this SIR, there was no stop loss,
each occurrence required an assumption of $2,500.
As a matter of space limitations, only one of these endorsements is described here. Entitled “Self-Insured Retention and
Defense Costs—Your Obligation”, this endorsement states in part:
The self-insured retention amounts stated in the Schedule of this endorsement apply as follows: 1. If the [p]er [o]ccurrence
self-insured retention amount is shown in the Schedule of this endorsement, it is a condition precedent to our liability
that you make actual payment of all damages and defense costs for each occurrence or offense, until you have paid
self-insured retention amounts and defense costs equal to the [p]er [o]ccurrence amount shown in the Schedule, subject
to the provisions of . . . , if applicable. Payments by others including but not limited to additional insureds or insurers,
do not serve to satisfy the self-insured retention. Satisfaction of the self-insured retention as a condition precedent to our
liability applies regardless of insolvency or bankruptcy by you. The [p]er [o]ccurrence amount is the most you will pay for
self-insured retention amounts and defense costs arising out of any one occurrence or offense, regardless of the number
of persons or organizations making claims or bringing suits because of the occurrence or the offense.
Both SIR endorsements permitted damages and defense costs to be used separately or in tandem to satisfy the per
occurrence amount shown in the Schedule. The example given was that if the SIR were $2,500, the payment of any
combination of damages or defense costs that added up to $2,500 would have triggered the insurer’s duty to defend
both the named insured, subcontractor, and the developer, additional insured. The problem was that the only named
defendant was the developer and with the SIR to be assumed solely by the named insured, subcontractor, the policy
could not be triggered.
Although the SIR endorsements appeared to be clear with references to “you” and “your” (meaning the named insured)
along with the specific statement in one of the SIR endorsements that “[p]ayments by others, including but not limited
to additional insureds or insurers, do not serve to satisfy the self-insured retention”, the developer persisted with its
arguments. Its arguments involved the usual ones, such as the introduction of other court decisions. The developer also
contended that the SIR endorsements were ambiguous and that the insurer’s position violated public policy and rendered
coverage illusory by precluding the additional insured from having a chance to invoke the insurance coverage it expected.
In affirming the trial court’s decision for the insurer, the appeals court held that the court cases relied on by the developer
did not support its arguments, and that the SIR endorsements were not ambiguous. It also held that the policy’s coverage
was not illusory. In so holding, the court also stated that the developer was still protected by its hold harmless agreements
with its subcontractors, which required the subcontractors to provide a defense and pay damages, regardless of insurance
coverage.
It is worth noting that cases like the one above could result in one party to the contract being forced to assume the
liability of other parties from whom coverage cannot be obtained. In the Forecast Homes case, for example, the
subcontractors were not named in the suit, meaning that it was the developer who had to assume the subcontractors’
liability.
Comparing Deductibles With Self-Insured Retentions
It is getting so that as litigation continues with respect to deductibles and self-insured retentions, both are referred to
as though they are one in the same; but, when it comes to their mechanics, the realization sometimes appears to be
that there is a difference between them. A lot is going to do with the fact pattern, including how the deductible or
self-insured retention applies along with the other policy provisions. A case on this subject is Southern Healthcare


Services, Inc. v. Lloyd’s of London, A/K/A Underwriters at Lloyd’s of London and Certain Underwriters at Lloyd’s, London,
2013 WL 628661. The parties consisted of Daleson Enterprises, LLC (Daleson), which operated Jones County Rest Home;
Medforce Management, LLC (Medforce), which operated Willow Creek Retirement Center; and Southern Healthcare
Services, Inc. (Southern Healthcare) managed both Daleson and Medforce (referred to collectively as the named insureds).
In 2001, a previous operator of Jones County Rest Home had purchased an policy from Lloyd’s with a $25,000
deductible. When the current new owners (named insureds) assumed operation in 2002, they asked their insurance
agent to obtain a policy similar to the one it had obtained from the prior owner. The agent obtained such a policy from
Lloyd’s that the named insured thought was nearly identical to the policy issued to the previous owner, except for the
lower limit and higher premium. What had also changed, but went unnoticed and purportedly not mentioned by the
agent, was the $250,000 per claim deductible.
The problem began when five lawsuits were filed against the named insureds. It was with the issuance of the reservation
of rights letters that the named insureds learned about the deductible and its application. This is where the reservation
of rights letter informed the named insureds that the $250,000 deductible applied for each and every claim consisting of
indemnity and/or claim expenses. The named insureds claimed they were “thunderstruck” regarding the deductible’s
application.
Daleson and Medforce initially paid the attorneys directly until the dispute arose over the deductible. In early 2005, both
Daleson and Medforce filed for bankruptcy and stopped paying the defense attorneys, because they could not pay the
total $1.25 million for the five claims. Southern Healthcare, however, did not file for bankruptcy. As the first named insured,
it also was responsible for the deductibles. Between 2006 and 2007, Lloyd’s paid the defense attorneys and all five suits
were settled.
Later the named insureds filed suit against Lloyd’s, its third party administrator and insurance agent for failure to provide
coverage and pay defense costs based on various allegations. The complaint of the named insureds against their
insurance agent was failure to inform them of the $250,000 deductible. The trial court, however, ruled in favor of Lloyd’s.
This ruling required the named insureds to reimburse Lloyd’s in the amount of $701,153.54 for the costs of defense and
settlement.
One of the questions on appeal was whether the named insureds were subject to the deductible, i.e., was the deductible
clear and unambiguous. The Healthcare Professional Liability Claims-Made Coverage Part for Long Term Care Facilities
stated under the Conditions section having to do with deductibles:
A. he First Named Insured shall be responsible for the deductible amount shown in the Declarations, WHICH
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DEDUCTIBLE AMOUNT SHALL BE IN ADDITION TO AND SHALL NOT ERODE THE APPLICABLE LIMITS OF
INSURANCE SHOWN IN THE DECLARATIONS. Expenses we incur in investigating and defending claims and
suits are included in the deductible. The deductible applies to each medical incident.
B. he deductible aggregate is the total amount of damages arising out of the deductibles for all occurrences during
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the policy period.
C. e may pay all or part of the deductible to settle a claim or suit. The first Named Insured agrees to repay us
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promptly after we notify the First Named Insured of the Settlement.
The Deductible Liability Insurance Endorsement included a schedule of the applicable deductibles, showing a $250,000
per-claim deductible for medical incidents. It included the following provision:
APPLICATION ENDORSEMENT
A. ur obligation under the Bodily Injury Liability, Property Damage Liability, Medical Expense, and Medical Incident
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Coverages to pay damages on your behalf applies only to the amount of damages in excess of any deductible
amounts stated . . . .
C. The terms of the insured, including those with respect to:
1. Our right and duty to defend the Insured against any suits seeking those damages; and


2. Your duties in the event of an occurrence, claim, suit, or medical incident apply, irrespective of the application
of the deductible amount.
D. e may pay any part or all of the deductible amount to effect settlement of any claim or suit and, upon notification
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of the action taken, you shall promptly reimburse us for such part of the deductible amount as has been paid by us.
From the state Supreme Court’s perspective of the preceding, it found that the named insureds were subject to the
deductible and Lloyd’s duty to provide coverage only applied after the deductible was met. According to the
Declarations, said the court, the deductible included defense costs, with Lloyd’s obligation to provide defense not
triggered until the deductible had been met.
The named insureds claimed that when they obtained the first policy, their agent failed to tell them about the
deductible. They also claimed they did not receive a copy of the policy until eleven months after purchasing it. They
did, however, receive that copy before renewing it and, therefore, had the opportunity to read it. According the court,
there were numerous references to the deductible in the policy with several pages referencing the deductible signed by
the named insureds. The insureds may have signed the policy and endorsements without reading them, the court
explained, but failure to read the policy is not a valid reason for not knowing the contents.
Where this case was somewhat misleading is when the court started explaining how the deductible applied. For example,
the court stated: As with any deductible, the insured is required to expend the amount of the deductible before coverage
becomes available. In actuality, a deductible usually is applied against the amount otherwise payable. The fact that the
deductible, in this case, included defense costs may have led the court to say this was the usual application. In actuality
it is not. In fact, the court referred to the case of Hocker v. New Hampshire Insurance Company, 922 F.2d 1476 (10th Cir.
1991), as authority for the statement that “a retained limit is, in effect, a deductible”.
Adding to the mix was the court’s citing of Boston Gas Company v. Century Indemnity Company, 910 N.E.2d 290 (Mass.
2009), which stated that “[A]lthough deductibles and self-insured retentions (SIR) generally serve the same purpose—to
shift a portion of the risk from the insurer to the insured—they are different creatures. An SIR is just what its name implies,
a form of self-insurance. With an SIR, the insured is usually responsible for its own defense until the SIR is exhausted”. The
court also stated: “Where a policy is subject to an SIR, the insurer is more like an excess insurer, and the insurer’s duty to
defend and indemnify is not triggered until the SIR is exhausted. With a deductible, on the other hand, the insurer usually
has a duty to defend upon receipt of notice of the claim”.
In this case, however, the policy stated that the defense costs were included within the deductible, said the court. This
is why, the court added, the deductible here operated more like an SIR.
It was stated that the named insureds based much of their argument on appeal on the dissenting opinion of the Court
of Appeals. The dissenting judges opined that the policy did not require prepayment of the deductible as a condition
to providing a defense; they quoted the following policy terms in support of their position:
SUPPLEMENTARY PAYMENTS AND DEFENSE COSTS WITHIN THE LIMITS OF LIABILITY
Subject to the Deductible Liability Insurance Endorsement provisions of this policy, it is agreed that we will pay the
following Supplementary Payments and Defense Costs, which will be included within, not in addition to, and will erode
the Limits of Liability of the policy:
1. ll expenses incurred by us, all costs taxed against you in any suit defended by us . . .;
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D. easonable expenses incurred by you at our request in assisting us in the investigation or defense of any claim or
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suit, including actual loss of earnings;
E. ll defense costs, which shall mean all costs of investigation, adjustment and defense of claims, including court
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costs, interest on judgments, premiums on bonds and legal fees arising directly from claims covered by this
policy . . . provided such claims expenses are incurred by or with our prior written permission.
Given this wording, the dissenting judges wrote: “This endorsement contains no provision requiring prepayment of the
deductible as a condition for providing a defense to the named insureds (appellants), as required by the contract”.


It was stated that perhaps the dissenting judges and named insureds may have misunderstood the reservation of rights
letters and thought Lloyd’s required prepayment of the entire deductible amount before Lloyd’s would do anything
regarding the claims. If such were the case, it was said, the dissent would have been right. However, the named insureds
were not required to pay the entire deductible amount up front. That was not required under the policy, the court
explained, and was not required by Lloyd’s. However, the court went on to explain, the named insureds were required to
pay costs and expenses on an ongoing basis, up to the point the deductible was exhausted. The policy clearly says, the
court added, that the supplementary payments listed above, including defense costs are “[s]ubject to the Deductible
Liability Insurance Endorsement” which provided a $250,000 per-claim deductible. The court also stated that full
payment of the deductible was not a condition to Lloyd’s providing a defense, because Lloyd’s was involved in the
defense and it had the right to pay defense costs and settle the claim, even if the deductible was not paid. It was clear
from the terms above, the court added, that Lloyd’s intended to participate in the defense, subject to the attorneys’ fees
being the named insureds’ obligations up to the deductible amount.
Regarding the Deductible Liability Insurance Endorsement, the court stated that the dissent implied that defense costs
were not included in the deductible because the endorsement did not define defense expenses as damages. The policy,
however, was said to have repeatedly stated that defense costs were included within the deductible and that the amount
Lloyd’s would pay for defense costs was subject to the deductible. Lloyd’s therefore was said by the court to have a duty
to be involved in the defense upon notice of the claim, but it was not required to pay defense costs until the deductible
had been exhausted.
In conclusion, the court stated that Lloyd’s did not breach any contractual or fiduciary duties to the named insureds.
Lloyd’s did not deny coverage, as the named insureds had alleged. Instead, Lloyd’s exercised its right to provide a
defense, while reserving its right to deny coverage for claims that might not have been covered by the policy. Lloyd’s
also exercised its right under the policy to advance part of the deductible amount to settle the claims.
Insuring A Self-Insured Retention
Some insurers seek to prevent an insured from buying insurance, or having insurance as an additional insured, for the
amount of the SIR, in order to motivate the insured to implement loss control measures (since without some kind of
conscious effort on behalf of the insured to prevent or reduce loss, the insurer’s policy limits are potentially more at peril).
So, can an insured’s SIR obligation be satisfied by being named as an additional insured on the policy of another? In other
words, can sums paid on behalf of the 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 is a question that 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 Company, Inc. v. United States Fire Insurance Company, 78 Cal. App.4th 52 (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 Company. The accident occurred in the common area of a shopping mall owned by Longs Drug 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 to the Longs’ Comprehensive General Liability policy. In addition, Vons maintained its own
CGL policy issued by United States Fire Insurance Company. The Vons’ policy provided limits of $1 million but included a
self-insured retention (SIR) endorsement, limiting the insurer’s obligation to sums in excess of a $1 million SIR.
Following the incident, the injured party sued Vons, who, in turn, cross-complained against Longs based on the indemnity
agreement, alleging that Longs was partly at fault. Following a settlement, the insurer of Longs paid $1 million 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 million. This
endorsement also provided that it was “subject to the limits of liability, exclusions, conditions and other terms of the
policy to which this agreement is attached . . . and that all other terms and conditions of this policy remain unchanged”.
It was the wording “subject to” that the appellate court in this case found most relevant in its resolution of the coverage
dispute in 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 $559,905 that 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 Gen Star National Insurance Corporation v. World Oil Company, 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 had 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 that Gen Star 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.
The court in this case then held that even though the Gen Star policy was denominated 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 had 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 are 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, applicable 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 it was “subject to” all of the policy’s terms and conditions, which remain unchanged.
Among the conditions of the Vons’ policy was one labeled “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 only if and when the primary coverage is exhausted. U.S. Fire, however, 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 Ins. Company 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 which 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 policy is clear
on this point. SIR endorsements should clearly state their intent to require that the insured pay the SIR from its own
pocket. Many policies state so specifically, utilizing wording like that found in the policy of Longs Drugs, mentioned in
reference to the Vons case.
Some insurers take a different approach, stating that the insured is free to insure the SIR if it so chooses. What is clear,
based on custom and practice involving the expectation of insureds and cases like those discussed, is that a failure to
address the issue is tantamount to an authorization to satisfy the SIR, with or without insurance, as the insured sees fit.
Insurer’s Right to Settle
Whether the insurer has a duty to consider the interests of its insured when settling a claim falling within a self-insured
retention will depend on a variety of factors, including policy and endorsement wording, applicable case law, facts, and
other circumstances. The foregoing issues should be addressed when the SIR endorsement is being drafted or considered
for use. But all too often they are ignored until it is too late, as evidenced in the case of The Austin Company Cigar
Supply Company v. Royal Insurance Company, 842 S.W.2d 608 (1992).
The entity in this case maintained a self-insured retention of $250,000, which was administered by the insurer that
provided $1 million of liability insurance excess of the SIR. Attached to the policy was an endorsement titled “Special
Claims Instructions”. This endorsement stated in effect that the local claims office of the insurer would consult with the risk
manager at the Austin Company prior to any settlement in excess of $5,000. If the risk manager strongly disagreed with
the settlement, the insurer was to contact its home office immediately.
Following an auto accident, a judgment was rendered against the insured in the amount of $152,000, which, along with
prejudgment interest, brought the total amount payable to $190,000. The insurer wanted to settle the case, while the
insured insisted that the judgment be appealed. Despite the insured’s objections, the insurer settled the matter for
$170,000 and then demanded that the insured reimburse it for this amount, plus other related expenses, per the terms of
the policy.
The insured refused to reimburse the insurer, insisting that the endorsement previously noted, dealing with special claims
instructions, precluded settlement by the insurer if the insured objected. The insurer, on the other hand, maintained that
the endorsement required only that the insurer keep its insured advised on the progress of any settlement negotiations
and that, in the event of any disagreement, the insurer, not the insured, had the final decision regarding settlement. The
policy provision relied on by the insurer stated, in part: “[Royal has] the right and duty to defend any suit asking for these
damages. However, [Royal has] no duty to defend suits for bodily injury or property damage not covered by this policy.
[Royal] may investigate and settle any claim or suit as [Royal] consider[s] appropriate. [Royal’s] payment of the LIABILITY
INSURANCE limit ends [Royal’s] duty to defend or settle”.
The court ultimately held in favor of the insurer. In doing so, it stated that the policy provision quoted above
unambiguously gave the insurer the right to take whatever action it deemed necessary with regard to any claim made
against the insured, this, notwithstanding that up to $250,000 of any settlement involved the insured’s funds. The court
also stated that there was no wording in the special claim instructions endorsement to support the insured’s contention
that it has veto power over any settlement. The court went on to state that there was no issue raised as to whether the
insurer adequately represented the insured during the trial. It was not until settlement was reached, the court stated, that
the insured challenged the insurer’s authority to settle claims. More importantly, the court added, the insurer consulted
extensively with the insured before making the final decision and, indeed, sought the insured’s blessing.
While the policy provisions were held by this particular court to be unambiguous, it is worthwhile to consider revising
the wording of an SIR endorsement to clarify the intent related to the insurer’s duty to settle. The wording of an SIR
endorsement, for example, might include the following: The Company may pay any part or all of the self-insured retention

and, upon notification of the action taken, the named insured shall promptly reimburse the Company for all or such part
of the self-insured retention as has been paid by the Company.
It also may be preferable to clarify here, as well as in other areas, whether the SIR includes defense costs, or whether
defense costs are paid in addition to the limits and, thus, outside the scope of the provision.
Self-Insured’s Right To Settle
If the self-insured must perform some functions normally handled by the primary insurer, such as the investigation,
defense and settlement of claims or suits, an issue arises as to whether the duties owed by the self-insured are similar to
those owed by the primary insurer. This was the precise question in International Insurance Company v. Dresser Industries,
Inc., 841 S.W.2d 437 (1992), where the self-insured, in a fronting arrangement, agreed to take on the additional role of
primary insurer. This case arose when the excess liability insurer objected to the manner in which the self-insured handled
and defended an underlying lawsuit, allowing the settlement to penetrate the excess insurer’s layers of coverage. The
insurer relied on a special claims handling agreement and a document incorporated into that agreement, referred to as
the “Guiding Principles for Primary and Excess Insurers”. (These guiding principles were promulgated and recommended
for use in 1974 by the Claim Executive Council of the American Insurance Association, the American Mutual Insurance
Alliance, and some insurance companies. The nine guiding principles [recommendations] are designed to address
problems normally associated with liability actions and the interaction between primary and excess insurers.)
Based on these documents, the excess insurer claimed that a self-insured entity that controls the investigation, defense
and settlement of claims and suits owes a duty to the excess insurer in connection with its claim handling activities.
Even though the self-insured entity stipulated that it would be bound by the guiding principles, the court ruled that the
self-insured did not have a duty to settle the underlying case within the primary limits of the fronting policy. The court
stated that in reviewing these principles, it must be remembered that, while the self-insured entity agreed to operate
under the guiding principles, it did not abandon its status as an insured. The self-insured, instead, remained at all time
the mutual insured of both the fronting insurer and the excess liability insurers. The self-insured entity, therefore, had sole
authority to settle the lawsuit against it.
The argument that a self-insured owes an excess insurer a duty to settle within primary or self-insured limits also was
rejected in Commercial Union Assurance Companies v. Safeway Stores, Inc., 164 Cal. Rptr. 709 (1980) (a case cited and
relied on in the previously mentioned Dressers Industries case). The court in the Safeway case stated that when deciding
on whether to defend a suit, an insured need not subordinate its own financial interest to that of the excess insurer,
adding: “The protection of the [excess] insurer’s pecuniary interests is simply not the object of that bargain”.
In many jurisdictions, the insurer of the umbrella or excess layer of coverage above the SIR cannot force the self-insured
to settle a claim within the SIR limits. The self-insured can gamble by not settling even if the end result is a verdict that
pierces the excess layer. In jurisdictions following this logic, it is held that the excess insurer has no legitimate expectation
that the self-insured will give as much consideration to the financial well-being of the excess insurer as it does to its own
interests.
Generally speaking, absent some specific contractual obligation to do so, the self-insured may have no defense
obligation in relation to the next layer of coverage. See, for example, Cooper Laboratories v. International Surplus Lines
Insurance Company, 802 F.2d 667 (1986). But there is generally an obligation on the part of the self-insured to pay that
portion of defense held to be within the SIR where such an obligation is already set forth.
Absent clear wording in the SIR endorsement, determination of specific defense obligations under the SIR should be in
favor of the self-insured entity. It is therefore important for underwriters, and others involved in placing coverage above
an SIR to review the pertinent wording. This is not to say that the self-insured can act in total disregard of the interests
of successive layers of coverage. The self-insured, subject to specific contract wording, cannot act in a way to injure the
legitimate expectations of excess layer insurers or deprive them of rights expressly granted.
The terms and conditions of excess layers of coverage are expressly agreed to by the insured. So the insured (also the
self-insured) must at all times remain in compliance with these contractual obligations. This is often an issue in actions
where equitable subrogation (also called legal subrogation because it is affected by law and does not depend on any
contractual relationship between the parties) is sought by an excess insurer against a primary insurer.


Is the SIR Limited To Occurrences Or Also Offenses?
As mentioned with reference to the Vons Company case, the SIR applied both to occurrences and offenses. This, however,
is not always the reality of the situation. In many cases, the SIR provision appears to be limited to occurrences.
In fact, one case on point is New York Marine General Insurance Company v. Specialty Restaurants Corporation, No.
8:11-CV-77-T-17TGW (U.S. Dist. Ct. Middle Dist. FL 2012). New York Marine (insurer) brought suit against Specialty
Restaurants (named insured) seeking a declaratory judgment that it has no duty to defend or indemnify its named insured
in a lawsuit. The named insured filed a counterclaim, alleging that the insurer was obligated to reimburse the named
insured for claims paid by it to third parties. The named insured appealed the district court’s grant of partial summary
judgment for the insurer on the grounds that the named insured’s Self-Insured Retention Policy (SIR) applied to all types
of coverages, and the court’s ruling that the insurer had no duty to reimburse its named insured for funds paid by the
named insured to third parties.
The named insured asserted that the SIR provision of its policy applied only to occurrences, and not to offenses. In
contrast, the insurer maintained that the SIR was applicable to the entire policy, including offenses. The court stated that
in relying on the principles of contract interpretation and the facts of the present case, the SIR in the named insured’s
policy applied only to occurrences. The SIR, in fact, was said to have specifically referred to occurrences in a number of
different places in the policy, but made no mention of offenses anywhere.
The court went on to say that if the insurer had intended the SIR to apply to both occurrences and offenses, it had a duty
to state this in a conspicuous, plain, and clear manner in the policy. In conclusion, the named insured was held entitled to
full reimbursement for the underlying lawsuit, because it involved an offense to which the SIR did not apply. The U.S court
of appeals also stated that the district court was incorrect in granting the insurer summary judgment on the grounds that
the SIR applied to the entire insurance policy.
(Note that this case is an unpublished opinion.)
Umbrella Policy Attachment Point
Another fertile problem area involving the SIR endorsement is its interaction with the umbrella or excess liability policy.
Sometimes the issue is over the point at which the excess policy is to attach. Apart from the self-insured retained limit of
umbrella policies, some umbrella and excess liability policies state they are not activated until the underlying limit has
been exhausted solely by the payment of damages. The self-insured entity, however, may assert that a combination of
damages and allocated claims expenses are counted toward exhausting underlying SIR limits, triggering the excess
policy. One such case involving umbrella coverage is Republic Insurance Company v. Harnischfeger Corporation,
445 N.W.2d 58 (1989).
In this case, a self-insured entity in the manufacturing business decided to structure a self-insurance program for its
products liability exposures. Its program, at the time of this litigation, consisted of an SIR for limits of $1 million per
occurrence and $2 million aggregate, including attorneys’ fees and other costs. The umbrella policy above the SIR
provided limits of $10 million and identified the SIR limits in the schedule of underlying limits. A products liability action
was filed against the self-insured manufacturer demanding $5,370,000 in damages. The case was eventually settled for
$1.5 million. Both the umbrella insurer and the self-insured entity agreed that the umbrella insurer would pay $500,000 of
the $1.5 million settlement, plus $300,000 in attorneys’ fees. The umbrella insurer, however, reserved the right to contest
the amount paid for attorneys’ fees. The umbrella insurer filed a declaratory action resulting in a ruling that only the
payment of damages exhausted the SIR and not a combination of damages and legal costs.
The issue on appeal, therefore, was the point at which the umbrella policy was to attach. The insurer maintained that its
policy did not contemplate exhaustion of underlying SIR occurrence or aggregate limits by defense costs. The insurer’s
rationale was based in part on umbrella policy definitions of personal injury, property damage, and occurrence, which did
not include defense costs. Because of this, the umbrella insurer argued that its policy was unaffected by the defense costs
incurred within the SIR. The court rejected the umbrella insurer’s arguments. In doing so, the court concluded that the
unambiguous terms of the umbrella policy’s declarations page and limits of liability provisions, which incorporated the SIR
by reference, incorporated the self-insured wording that legal fees and defense costs were included in the SIR, thereby
triggering umbrella coverage when a combination of defense and indemnity exhausted the SIR.
Another troublesome case involving the attachment point of an umbrella liability policy is Playtex FP, Inc. v. Columbia
Casualty Company, 609 A.2d 1087 (1991). This complex case also involved a fronting arrangement. Briefly, the facts in this
case involved a primary policy issued by Northwestern National Casualty Insurance Company with limits of $1 million per

occurrence and a $7 million annual aggregate limit (using a so-called “deductible equals limits” policy under which the
risk of loss fell entirely upon the self-insured entity); a lead umbrella policy issued by the Mission Insurance Company for
limits of $5 million occurrence and annual aggregate; a first layer excess policy issued by Columbia Casualty Company for
limits of $10 million per occurrence and annual aggregate; and several additional layers amounting to a total of $200
million of coverage.
The basis of this litigation was over the attachment point of the lead umbrella and excess layers. Because the
endorsement wording called for a deduction from the loss, as opposed to the limits of liability, Columbia contended
that the self-insured entity had a $1 million per occurrence self-insured retention in addition to the $1 million per
occurrence, $7 million aggregate limits of the Northwestern fronting policy. Under this theory, the self-insured entity
would have been required to pay $2 million for any single occurrence before the lead umbrella policy would have been
triggered.
What prompted Columbia’s argument was an endorsement attached to the fronting policy that read in part: In consideration of the premium charged and the issuance of policy number. . . issued by Northwestern National Insurance Company,
it is agreed that $1,000,000 shall be deducted from the amount of any loss, including defense coverage, as a result of each
occurrence reported under this policy.
The court ruled against the insurer, because the deductible endorsement was considered not to be a part of the Northwestern fronting policy. In retrospect, it is difficult to understand the rationale for attaching this particular deductible
endorsement to the fronting policy, considering this kind of an arrangement. What was especially troublesome was the
reference in this deductible endorsement to the undefined term “loss”. Finally, an SIR endorsement might be labeled as
such, but in actuality, could operate as a deductible, to the detriment of the insured.
Excess Over What?
Sometimes an SIR endorsement is considered unnecessary, particularly in those cases where the program is structured
in such a way that once the SIR is exhausted, umbrella or excess liability insurance is activated. The problem with this
approach is that there should be an understanding between the self-insured entity and the excess insurer on the exact
conditions under which the SIR can be exhausted. Otherwise, the self-insured entity may be free to exhaust its SIR by the
payment of any combination of damages and legal costs for any kind of claim or suit, whether or not it is a kind covered
by the umbrella/excess liability policy. When this happens, arguments can arise.
A case on point is Ford Motor Company v. Northbrook Insurance Company, 838 F.2d 829 (1988). Ford was self-insured
for the first $2 million per claim. An umbrella liability policy issued by Northbrook provided the first layer of insurance.
The umbrella policy’s schedule of underlying insurance included Ford’s scheduled self-insurance as one of the underlying
insurances. The second excess was shared by several insurers on a so-called “follow form” basis. The issue in this case
was over the application of exclusion (p) of the umbrella policy, which said: Except insofar as coverage is available to the
insured under the underlying insurances, set out in the attached schedule, this policy shall not apply . . . (p) To punitive
or exemplary damages awarded against any insured.
The parties stipulated that the umbrella policy covered punitive damages, unless coverage was excluded by the above
provision. However, the insurers maintained that the above exclusion could only mean that punitive damages would
be covered by the umbrella policy if such damages were covered by underlying insurance. But since Ford’s primary
protection was provided by self-insurance rather than by an insurance policy, the exclusion was argued to be enforceable
to deny protection. The court disagreed with the insurers. In doing so, it explained that the language of the umbrella
policy did not, on its face, require the existence of underlying insurance to cover punitive damages.
The court also said that exclusion (p) could reasonably be read to mean that Ford’s $2 million per claim self-insurance
was underlying insurance set out in the attached schedule, for the following three reasons: (1) Self-insurance could
reasonably be understood to encompass underlying insurances; (2) Ford’s self-insurance was set out in the attached
schedule of underlying insurances; and (3) It makes no difference, in light of the above exclusion’s manifest purpose of
protecting Northbrook against dropping down into the position of a primary insurer, whether the initial exposure was
covered by self-insurance or a conventional policy of insurance, so long as that exposure was covered.
It was perhaps fortunate for the self-insured entity in the above Ford case that the court ruled for coverage in part based
on its opinion that self-insurance is other insurance. However, the fact that the SIR was specifically scheduled on the
umbrella liability policy might have influenced the court’s decision. The point is that nothing can be taken for granted
when arranging insurance and when a self-insured retention is involved.

The caveat here about proper arrangement of protection applies to both the self-insured entity and the excess insurer.
Furthermore, neither custom and practice in the insurance industry generally, nor the consensus of the courts thus far,
views a self-insured retention to be other insurance. One way to address this issue and to perhaps reduce, if not eliminate,
problems is to modify the other insurance condition and limits of liability section of the insurance policy to clearly state
that self-insurance is considered to be other insurance. This also should be clarified in the SIR endorsement and any
contract that may call for insurance to be provided. See, for example, Nabisco,, Inc. v. Transport Indemnity Company, 143
Cal. App. 3d 831 (1983), where a policy’s clause deemed its coverage excess if there was other insurance or self-insurance.
Another issue of concern primarily to umbrella/excess liability policies is how to restrict the exhaustion of the SIR to
damages and legal costs that are covered by the excess insurance when there is no primary insurance between the SIR
and the excess liability policy. If an SIR applies immediately beneath an umbrella or excess policy, it would behoove the
umbrella or excess liability underwriter to clarify how an SIR can be exhausted before the umbrella policy becomes
payable. The umbrella policy may require an endorsement to clarify that intent. The endorsement, for example, might
state that the self-insured retention endorsement can be exhausted for purposes of triggering umbrella or excess
coverage only by claims or suits that would be covered by the terms and conditions of the umbrella or excess policy.
The Issue With Insurance Certificates
It would appear that the use of self-insured retentions with commercial liability policies continues to be growing. With that
in mind, insureds other than the named insured (i.e., those who require proof of insurance), should be apprised of the SIR
provisions. The problem is that there is no way to determine if an SIR provision exists unless a specific question is posed
because certificates do not ask whether they apply, except with reference to umbrella policies. Given the importance of
an SIR, it needs the same attention as that given to additional insured status, and could eliminate some problems.
One of these problems can be explained by discussing the case of Spector v. Cushman Wakefield, Inc., 955 N.Y.S.2d
302 (2012). Under a Citibank—OneSource Agreement, OneSource was required to purchase an insurance policy with a
limit of $1 million per occurrence. OneSource, however, was said to have obtained a policy with a limit of $1.5 million per
occurrence, an aggregate of $1.5 million, and a $500,000 self-insured retention. Although OneSource was said to have
correctly maintained that its agreement did not prohibit self-insured retentions, it did require OneSource to provide a
certificate of insurance notifying Citibank of such a provision and no such notice was given. Thus, the insurance
procurement provision was breached, according to the court, because Citibank reasonably expected that OneSource
would either provide effective coverage or notice of the self-insured retention amount.
In addition, OneSource also agreed to maintain the sidewalks, walkways, and parking lots free of snow and ice at all times
to prevent a hazard to the public and personnel. As such, evidence that a person (plaintiff) was injured on the icy sidewalk
abutting the Citibank was sufficient to establish that the injury arose out of the Citbank-OneSource agreement. In
granting summary judgment for Citibank for the OneSource failure to procure the prescribed insurance, the court held
that, in terms of an insurance-based claim, this matter was precisely the type of risk or claim for which Citibank was
seeking insurance.
Drafting Pitfalls
It has been said that the first step in interpreting a policy, endorsement, or coverage provision is to determine if it is
ambiguous (it produces more than one reasonable interpretation that is not strained.) If the document is ambiguous, the
next step is to determine what rule will be applied to resolve such ambiguity. In this regard, the courts generally follow
one of three methods: (1) the doctrine of reasonable expectations; (2) the rule of contra proferentem (i.e., the ambiguity
is resolved against the one who selected the policy language); or (3) the consideration of extrinsic evidence to determine
the intent of the parties.
If the insurer drafts the SIR endorsement that is deemed to be ambiguous, the document may be considered a contract
of adhesion (a contract drafted by one party that must be adhered to by the other party on a “take-it-or-leave-it” basis),
and under the rule of contra proferentem, will be considered against the party who selected the language. However,
some endorsements are drafted by the combined efforts of the insurer, the broker, and the entity’s risk management
department. In that event, the courts might look to methods (1) or (3). When the meaning of an SIR endorsement (or any
insurance policy, endorsement, or coverage provision, for that matter) is unclear, extrinsic evidence of the parties’ intent
may be looked at to resolve the ambiguity. If the parties’ intent cannot be clearly determined, courts may look to the
parties’ reasonable expectations.


Courts at times may be reluctant to impose the rule of contra proferentem because of the sophistication of the
parties involved, or where the bargaining power of the parties was equal. Still other courts reject the position that
sophistication, equal bargaining power, or mere size of an insurance brokerage or insurance/risk management
department should change the way an insurance policy, endorsement, or coverage provision should be interpreted. This
is particularly true, given the varying degree of sophistication and knowledge possessed by individual risk managers and
brokers of large, reputable firms. It is too subjective of an issue to be answered without devoting considerable time and
expense to it.
Suffice it to say, that when the SIR endorsement is drafted or negotiated by, for example, the combined efforts of the
insurer, broker and/or risk manager, and there is a question of intent or an ambiguity, it may take considerable time to
resolve this subjective issue. It therefore behooves everyone involved to be extremely careful when drafting these
endorsements.


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