By: Richard E. Guttentag, Esq., Stearns, Roberts & Guttentag, LLC

A self-insured retention (SIR) endorsement in a commercial general liability (CGL) insurance policy is an amount specified that the insured must pay before the insurance company pays under the policy. The case of Intervest Construction of Jax, Inc. v. General Fidelity Insurance Company, 2014 WL 463309 (Fla. 2014), analyzed the issue of whether a party other than the insured can pay the SIR after which the insurer will provide coverage under the policy.

In Intervest Construction of Jax, Inc. v. General Fidelity Insurance Company, a Contractor entered into a subcontract with a Subcontractor to install attic stairs in a residence that the Contractor was building.  The subcontract contained an indemnification provision requiring the Subcontractor to indemnify the Contractor for any damages resulting from the Subcontractor’s negligence.  After the project was completed, the Owner of the residence fell while using the attic stairs constructed by the Subcontractor, resulting in the Owner suffering injuries.  The Owner filed suit against the Contractor for her injuries.  Consequently, the Contractor sought indemnification from the Subcontractor under the terms of the subcontract.

At the time of the accident, the Subcontractor maintained a CGL policy with North Pointe Insurance Company (North Pointe), and the Contractor maintained a CGL policy with General Fidelity Insurance Company (General Fidelity).  The Contractor was not an additional insured under the Subcontractor’s CGL policy. The General Fidelity policy contained a SIR endorsement in the amount of $1 million, which stated that General Fidelity would provide coverage only after the insured had exhausted the $1 million SIR.

The Contractor, Subcontractor, North Pointe and General Fidelity agreed to a $1.6 million settlement of the Owner’s claim.  As part of the settlement, North Pointe agreed to pay the Contractor $1 million to settle the Contractor’s indemnification claim against the Subcontractor.  In turn, the Contractor would pay that $1 million to the Owner.  A dispute then arose as to whether the Contractor or General Fidelity was responsible for paying the Owner the remaining $600,000.00. The Contractor and General Fidelity each paid $300,000 to the Owner, but the parties reserved their right to bring claims against each other to be reimbursed for their contribution to the settlement.

The Contractor filed suit against General Fidelity for breach of contract and a declaratory judgment seeking the return of the $300,000 it paid above the $1 million indemnification payment, and General Fidelity filed a counterclaim seeking the return of the $300,000 it paid to the Owner.  The Contractor and General Fidelity each filed motions for summary judgment on the issue of whether the Contractor’s SIR obligation was exhausted by the $1 million indemnification payment made by the Subcontractor.  The court granted General Fidelity’s motion finding that the SIR endorsement in the policy stated that the retained limit must be paid by the insured and that the limit would only be reduced by payments made by the insured, thereby requiring the Contractor to exhaust the SIR by payment of its own funds, not by the application of the indemnification funds.  The Contractor appealed the court’s decision.

Under Florida law, insurance contracts are construed according to their plain meaning.  Courts are to read each policy as a whole, endeavoring to give every provision its full meaning and operative effect.

The appellate court reasoned that the General Fidelity policy neither contained language requiring the insured to “make actual payment” of the SIR amount, nor provided that payments by others do not serve to satisfy the self-insured retention.  The appellate court explained that although the General Fidelity policy stated that the retained limit must be paid by the insured, it did not specify where those funds must originate.  Requiring payment to made from the insured’s “own account” is not necessarily the same as requiring that it be paid by the insured.

The Court also found that a strong argument could be made that the Contractor exhausted its SIR obligation because it paid for the protection afforded in the indemnification clause – as the Contractor paid for the indemnify protection in the purchase price of the subcontract.   Thus, the Court concluded that the Contractor bargained for and paid for the right to indemnification, and without an express policy provision to the contrary, should be able to use it to satisfy the SIR. Therefore, given the policy language and the right to indemnification for which the Contractor paid, the appellate court held that the General Fidelity policy allowed the Contractor to apply indemnification payments received from a third party (i.e. Subcontractor) to satisfy the  $1 million self-insured obligation in the CGL policy.

This case demonstrates how insurance contracts are construed according to their plain meaning.  As discussed above, based on the policy language and the right to indemnification for which the Contractor paid, the Contractor was allowed to apply the payments received from its Subcontractor to satisfy the SIR obligation in its CGL policy.

About the Author: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, LLC, and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at [email protected].