It Is All a Matter of Interpretation

Author: Kelly Denham

In the insurance world, everything is based on a contract. But what happens when contract provisions are unclear? Can they be enforced?

Near the close of 2013, a California Court of Appeal decision came down regarding policy language, specifically language addressing the issue of self-insured retentions (“SIR”). To recap, an SIR is a dollar amount specified in a liability insurance policy which must be paid by the insured before the insurance policy will respond to a loss. After the SIR limit is reached, the insurer will make any additional payments for defense and indemnity covered by the policy.

In American Safety Indemnity Co. v. Admiral Insurance Co. (2013) 220 Cal. App. 4th 1, the underlying case began when several homeowners sued Holding and Horton (“Developer”) for slope failures resulting in landslides and tension cracks. The particular subcontractor at issue in this case was the grader. Admiral Insurance (“Admiral”) insured the Developer and American Safety Indemnity Co. (“ASIC”) insured the grader. The grader
was hired by the Developer under a general liability policy which included a $250,000 SIR retention. During the underlying lawsuit, Developer tendered its defense to ASIC, which declined. This resulted in a bad faith lawsuit, which settled. In settlement, ASIC agreed to defend Developer and pay Developer’s defense fees, unaware of Developer’s coverage by Admiral.

This case arose when ASIC sought to recover its payment of Developer’s defense costs. In its defense, Admiral contended because Developer had not paid the SIR on the Admiral policy, Admiral’s duty to defend was not triggered. The issue presented to the court was whether the SIR clause in the Admiral policy expressly and unambiguously made payment of the SIR a condition precedent to Admiral’s duty to defend.

The trial court held, and the Court of Appeal confirmed, that Admiral was required to reimburse ASIC. The Court of Appeal found the language in the Admiral policy “did not expressly and unambiguously make [Admiral’s] duty to defend the [developer] entities subject to the SIR. Rather, the SIR endorsement expressly provided the contrary: ‘Retained Limit’ is the amount shown below, which you are obligated to pay, and only includes damages otherwise payable under this policy.’ In light of this unambiguous limitation on the scope of the SIR, it is not surprising there is no other provision of the SIR that nonetheless extends the scope of the SIR to include the costs of defense.”

The Court also looked to the policy’s provisions with respect to other insurance. The Court found the policy expressly provides where a claim is covered by other insurance, the Admiral policy is excess and Admiral has no duty to defend. As to the scope of the SIR, “the absence of such an express extension of the scope of the SIR leads any reasonable insured to conclude that, consistent with the express terms of the SIR, the SIR only applies to damages.” In sum, the developer entities were not required to satisfy the SIR as a condition of obtaining a defense from Admiral. Based on principles of equitable subrogation, ASIC “steps into the shoes” of Developer’s rights against Admiral, requiring Admiral to reimburse ASIC for Developer’s defense fees.

Following this case, it is clear contract interpretation is a complicated issue. An insurance policy may not always mean what an insured or insurer think it means. The policy language must be taken for its true meaning, and if insurer’s wish otherwise, they must do so expressly and unambiguously.

ABOUT THE AUTHOR: Kelly Denham graduated from Loyola Law School in 2012. Ms. Denham’s primary focus at Tyson & Mendes is construction defect litigation. Contact Kelly at 858.263.4117 or

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