Self-Insured Retention
July, 2008
In Bordeaux, Inc., v. American Safety Insurance, 2008 SL 2636817 (July 7, 2008), the Washington Court of Appeals made two rulings with regard to an insured's self-insured retention ("SIR").
First, the risk retained by an insured under an SIR is not primary insurance for purposes of subrogation. Therefore, self-insured policyholders are not primary insurers and are entitled to be made whole from third-party settlement funds before their insurers have any subrogation rights. American Safety and Steadfast Insurance Company ("Zurich") issued two consecutive CGL policies to each of two insureds. The American Safety and Zurich policies contained similar SIR provisions under which the insurers agreed to pay "in excess of any self-insured retention amounts stated in the Schedule." American Safety argued that the SIRs operated as primary insurance, making American Safety's policy excess insurance and entitling American Safety to recover in subrogation from third-party settlement funds before the insureds were made whole. The court rejected this argument on the basis that self-insurance is like the deductibles in automobile and medical insurance and involves risk retention rather than risk shifting.
Next, the court held that Bordeaux was not required to pay two SIRs even if a duty to defend is triggered under two policies issued to it. Under the applicable policies, amounts incurred by the insured in either its defense or in payment of settlement monies satisfied the SIR provisions. American Safety argued that the $105,399 Bordeaux paid for its defense satisfied only one SIR and that Bordeaux was obligated to pay a second $100,000 SIR before the American Safety policy was triggered. The court disagreed, reasoning that each policy only required the insured to pay one SIR amount. Because each insurer was independently obligated to pay the defense costs associated with damage covered under its policy - and no defense costs could be attributed solely to one policy or the other - neither the defense costs nor the insured's payment of its defense costs would be allocated between the policies, and the insured was not required to satisfy two SIRs.