Umbrella Policy With an SIR is Treated as Primary With “First Dollar” Duty to Defend

Umbrella Policy With an SIR is Treated as Primary With “First Dollar” Duty to Defend


In Legacy Vulcan Corp. v. Superior Court, 2010 WL 1730788 (4/30/2010), the Court of Appeal interpreted the insuring agreement of a “second layer” liability policy to provide for an immediate duty to defend, without the insured having to first incur or pay a liability in excess of the self-insured retention (“SIR”) or “retained limit.” The Court’s reasoning was that unless the policy expressly provides to the contrary, the insurer has an immediate, “first dollar” defense duty.

The insured was sued for making and selling perchloroethylene, which was used by the dry cleaning industry and allegedly caused environmental contamination. The insured defended and settled the suits. Coverage litigation ensued.

The insuring agreement of the “Excess Catastrophe Liability” policy at issue provided that the insurer:

will indemnify the Insured for ultimate net loss in excess of the retained limit hereinafter stated which the Insured shall become legally obligated to pay as damages . . . to which this insurance applies, caused by an occurrence, and
(1) With respect to any personal injury, property damage or advertising injury not within the terms of the coverage of underlying insurance but within the terms of coverage of this insurance; or
(2) If limits of liability of the underlying insurance are exhausted because of personal injury, property damage or advertising injury during the period of this policy . . .
The Company will (a) have the right and duty to defend any suit against the Insured seeking damages on account of such personal injury, property damage or advertising injury, . . . . [Italics added.]

The policy defined “retained limit” to mean the greater of either the amount equal to the limits of the specified underlying insurance plus all other underlying insurance, or a specified sum because of covered damages not covered by the specified underlying insurance.

The Court described umbrella insurance as providing coverage for claims that are not covered by underlying primary insurance, that “drops down” to provide primary coverage. The Court read the subject insuring agreement as providing such “drop down” umbrella coverage. Although the insuring agreement began with an agreement to “indemnify in excess of the retained limit,” the Court noted that it “did not state that the duty to defend under clause (1) was limited in any manner by the ‘retained limit’ provisions in the policy, which expressly governed only [the insurer’s] indemnity obligation.”

Having determined that the policy provided “duty to defend” coverage, the Court applied the rules that apply to primary liability coverage to the umbrella coverage. The Court then determined that the insured need not show that a claim was actually covered by the policy to establish a duty to defend.

The insurer contended that an insurer has no duty to defend until the insured has become legally obligated to pay an amount in excess of any SIR. The Court rejected any such general rule, stating that an SIR or “retained limit” on its own is not sufficient to convey an understanding “to an unsophisticated insured” and that the impact of an SIR on the duty to defend depends on the particular policy language.

The Court added that “[a]ny limitation on coverage otherwise available under the policy must be stated precisely and understandably, in words that are part of the working vocabulary of the average layperson.” The Court distinguished cited cases on the ground that those cases involved clear policy language stating that coverage was excess of primary coverage. The Court went even further, stating that “in the absence of clear policy language so providing, to require the exhaustion of a self-insured retention before an insurer will have a duty to defend would be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage.” [Emphasis added.] The Court thus concluded the second layer liability insurer had an immediate duty to defend the insured.

Legacy would appear to be at odds with the general understanding of SIRs, which is illustrated in the following article.