Can an Additional Insured Satisfy the SIR? No, if the Policy Language Clearly Says it Cannot

Can an Additional Insured Satisfy the SIR? No, if the Policy Language Clearly Says it Cannot

05.17.2010

In Forecast Homes, Inc. vs. Steadfast Insurance Company, 181 Cal.App.4th 1466 (2010), the Court examined whether Steadfast Insurance Company, which had issued liability policies to several subcontractors with “additional insured” endorsements, was required to defend and indemnify the developer in construction defect litigation. The issue was whether the developer as additional insured could pay the self-insured retention (“SIR”) to trigger Steadfast’s obligations.

The developer’s contracts required the subcontractors to include the developer as an additional insured on their policies. This they did. However, each of the Steadfast policies included a $2,500 SIR, that had not been paid. The developer was willing to pay it, but Steadfast argued that the policies required the name insureds (subcontractors) to satisfy the SIR. No other person or entity, it contended, could satisfy the SIR.

Steadfast agreed that payment of damages and/or defense costs adding up to $2,500 would trigger Steadfast’s duty to defend the named insured subcontractor and the developer, the additional insured. The dispute was therefore limited to who was permitted to activate coverage by paying the SIR.

The policy language stated that:

You shall be responsible for 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 per occurrence amount shown in the schedule. . . .  [Italics added.]
The Court emphasized that throughout each policy, the words “you” and “your” referred to the named insureds shown in the declarations, not to additional insureds. As such, the Court concluded that the developer’s payment of the SIR would not trigger Steadfast’s duties.
Some of the Steadfast policies further stated that “it is a condition precedent to our liability that you make actual payment of all damages and defense costs for each occurrence or offense. . . . payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.” [Emphasis added.]
The Court also rejected the developer’s argument based on public policy, reasoning that no public policy would be advanced by rewriting unambiguous policy provisions and essentially inserting “an additional phrase permitting the additional insured to satisfy the SIR obligation.” The term “retention,” it said, refers to a specific sum or percentage of loss the insured must satisfy before there is any coverage for anyone under the policy. 

This last statement is what the Legacy Court rejected as a general understanding of SIRs. The outcomes in both cases could be harmonized by examining the specific language of the policies. In Forecast, the policy’s SIR provision referred to both “damages and defense costs,” while the SIR provision in Legacy was set apart from the “duty to defend” provision, among other things.