February 25th, 2019
Picking up the tab: who is responsible for the defense under policies with a deductible or self-insured retention?
By, Laura F. Locklair, Esq.
Insurers often rely on deductible and/or self-insured retention (“SIR”) endorsements to shift the burden to pay for a portion of the defense to the insured. However, absent specific policy language, such endorsements do not operate to excuse or delay an insurer’s duty to defend. Moreover, although the terms are often used interchangeably, important distinctions exist between deductibles and SIRs that impact when an insurer is obligated to defend.
“A deductible or self-insured retention states the monetary threshold of the insurer’s obligation to pay liabilities covered by the policy.” Insurance Coverage of Construction Disputes, Deductibles and Self-Insured Retentions (2d ed.). “Deductibles represent the portion of a covered loss that the policyholder may eventually be obligated to reimburse the insurer.” §1:43 Practical Tools for Handling Insurance Cases, Deductibles and Self-Insured Retentions (June 2018 Update). Whereas a deductible represents a portion of a covered loss lying within the terms of the policy for which the policyholder may be obligated to reimburse the insurer, a SIR is an initial portion of a loss that lies outside the policy. Legacy Vulcan Corp. v. Superior Court, 185 Cal.App.4th677, 694 (2010) (“A ‘self-insured retention,’ or ‘retained limit,’ generally refers to the amount of a loss or liability that the insured agrees to bear before coverage can arise under the policy.”). Unlike an SIR, wherein the amount of the retention is not included in and the limits of the policy stack on top of the SIR amount, “[w]ith a deductible, the amount of the deductible is included in the amount of the policy limits.” §4:6 Insurance Coverage of Construction Disputes, Deductibles and Self-Insured Retentions (2d ed.). Because “the insurer has no responsibility to pay claims until [the SIR] is exhausted,” some jurisdictions have indicated that a SIR typically “must be divulged” on a certificate of insurance or declarations page Id.
When a deductible is involved, an insurer owes an immediate obligation to defend claims that are subject to the deductible. §1:43 Practical Tools for Handling Insurance Cases, Deductibles and Self-Insured Retentions (June 2018 Update). Payment of a deductible is not a precondition to the duty to defend, even if the insured may ultimately be required to reimburse the insurer for some portion of the costs of the defense that the insurer was required to provide. See e.g American Safety Cas. Ins. Co. v. City of Waukegan, Ill. 678 F.3d 475, 482 (7th Cir. 2012) (rejecting insurer’s arguments that “an insurer’s duty to defend begins only after the insured’s [defense] expenses exceed the deductible.”); Continental Cas. Co. v. National Union Fire Ins. Co. of Pittsburg, PA, 940 F.Supp.2d 898 (D. Minn. 2013) (“Simply because [the insurer] will ultimately be reimbursed for certain costs it expends in defending [the insured] does not indicate that [the insurer] does not have a duty to defend [the insured].”); Century Indemn. Co. v. Marine Group, LLC, 2012 WL 6016953 at *2 (“[I]n the case of a deductible, the insured must pay a portion of the loss but is not obligated to exhaust the deductible before a defense is provided.”) aff’d on reh’g Century Indemn. Co. v. Marine Group, LLC, 848 F.Supp.2d 1238, 1250 (D. Or. 2012) (“The duty to defend does not depend on the ultimate amount expended in defense of a claim…[to do so] would nullify the policy language that establishes a duty to defend in the first place.”).
Conversely, a SIR may operate to excuse an insurer’s obligation to defend a policy holder until the retention has been satisfied but only if the language is sufficiently “conspicuous, plain and clear.” Legacy Vulcan Corp., 185 Cal.App.4th at 697 (holding that in order for a SIR provision in a policy providing primary liability coverage to relieve the insurer of the duty to provide an immediate “first dollar” defense, the policy must expressly so provide). Specifically, some courts have found that the “conspicuous, plain and clear” language required for a policy with a self-insured retention to exclude an insurer’s otherwise immediate duty to defend must expressly reference the abrogation of the defense obligation. Id. (insurer had duty to defend despite insured’s failure to exhaust retained limit where policy “did not state that the duty to defend was limited by the retained limit in any manner”); see also Axis Surplus Ins. Co. v. Glencoe Ins. Ltd., 204 Cal.App.4th 1214, 139 Cal.Rptr. 578, 583 (2012) (“[T]he policy stated [the insurer] had no duty to investigate or defend any claim until [the insured] satisfied the [self-insured retention]”; State Nat’l Ins. Co. v. Cnty. Of Camden, Civ. No. 08-1528, 2012 WL 6652819, at *1 (D.N.J. Dec. 19, 2012 (self-insured retention endorsement expressly stated that the insured “shall be obligated to provide an adequate defense and investigation of any action for or notice of any actual, potential or alleged damages”).
Despite the difference noted above, often the terms “deductible” and “SIR” are used interchangeably. In acknowledgment of the confusion, courts have recognized “these terms alone are not sufficient to convey to an unsophisticated insured an understanding of what an insurance expert or attorney might believe to be the essence of a self-insured retention” and, as a result, “[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.” Legacy Vulcan Corp., 185 Cal.App.4th at 694.
The Beaufort County Court of Common Pleas in South Carolina recently had an opportunity to consider the differences between a deductible and an SIR and the impact on an insurer’s duty to defend in Centex Homes, a Nevada General Partnership v. Raymond and Denise Gibbo, et al., C.A. No. 2016-CP-07-02287 (Dec. 17, 2018). In that case, the insurer suggested that a “deductible endorsement” on the policy excused its obligation to defend an additional insured in several underlying construction defect actions because the defense fees and costs of the additional insured in those underlying actions did not (and would not, given that the underlying actions had resolved) exceed the deductible amount. While the deductible endorsement specified a deductible amount that was inclusive of damages and supplementary payments and the deductible endorsement also stated:
4. Other Rights and Duties (Ours and Yours)
All other terms of this policy, including those with govern (a) our right and duty to defend any claim, proceeding or suit against you, and (b) your duties if injury occurs, apply irrespective of application of this deductible endorsement.
The trial court determined that “the ‘unambiguous, clear and explicit’ terms of the Deductible Endorsement provide that [the insurer’s] duty to defend’ applies “irrespective of the deductible.” See Gibbo. The South Carolina trial court’s holding was consistent with other courts across the country interpreting the same language in similar endorsements. See e.g., Continental Cas., 940 F.Supp.2d at 922. (determining that “the Deductible Endorsements do not disclaim or alter [the insurer’s] duty to defend” and instead “expressly reaffirm that [the insurer] has a duty to defend.”). Because it determined that the insurer’s duty to defend the additional insured “was not altered or excused” by the deductible endorsement, the Gibbo court concluded that the insurer breached its duty to defend and awarded the additional insured all of the defense fees and costs it incurred in the underlying action as well as the fees and costs it expended in a declaratory judgment seeking to force the insurer to honor its duty to defend.
Even if the named insured is responsible for reimbursing the insurer for the amount of defense fees and costs that fall within the limits of a deductible, courts have concluded that the insurer retains the duty to defend because “the duty to defend is distinct from a mere obligation to pay for defense costs.” Continental Cas., 940 F.Supp.2d at 918 (“Simply because [an insurer] will ultimately be reimbursed for certain costs it expends in defending [an insured] does not indicate that [the insurer] does not have a duty to defend [the insured].”). The duty to defend is more than the mere payment of money, instead it “encompasses hiring attorneys and managing lawsuits,” developing litigation strategy, and evaluating and securing settlements and judicial dispositions. Id. As a result, an insurer’s attempt to transfer its duty to pay for defense fees and costs through a deductible or SIR may not ultimately be successful in transferring or extinguishing its duty to defend.
October 5th, 2018
By, Laura Locklair, Esq.
Though the saying goes “better late than never,” the Court’s opinion in Episcopal Church in South Carolina v. Church Insurance Company of Vermont, 53 F.Supp.3d 816 (D.S.C. 2014) suggest that an insurer’s failure to timely acknowledge its defense obligations to its insured, even when the insurer later agrees to participate in the insured’s defense, can still result in stiff penalties, not all of which are monetary.
The insured church, which was also the plaintiff in Episcopal Church in S.C. (the “Insured”), was sued by another church on March 5, 2013 concerning disputes regarding the ownership of certain real, personal and intellectual property (the “Underlying Action”). Episcopal Church in S.C., 53 F.Supp.3d at 819. The Insured tendered its defense in the Underlying Action to its insurer in August of 2013, and the insurer denied the defense on August 29, 2013. Id. at 819-820. On February 28, 2014, and only after the Insured was forced to file a declaratory judgment action and successfully persuaded the Court to find on summary judgment that the insurer owed a duty to defend, the insurer issued a reservation of rights letter agreeing to participate in the Insured’s defense in the Underlying Action. Id. At 820. However, in its reservation of rights correspondence, the insurer alleged that it was entitled to replace the Insured’s attorney who had represented the insured for over a year in the Underlying Action with new counsel of the insurer’s choosing. Id. When called upon to predict whether the South Carolina Supreme Court would find that an insurer retains the right to control the defense after it refused to defend in breach of the insurance contract , the Court in Episcopal Church in S.C. concluded that the insurer’s wrongful refusal to defend the Insured in the Underlying Action forfeited the insurer’s right to control the defense of the Insured, even after the Insurer later reversed its position and acknowledged its defense obligations. Id.
In reaching its determination, the Court first acknowledged that South Carolina courts have found that where a policy provides an insurer with the right and duty to defend, the insurer has “the right and the duty to control the defense until such time as it [i]s determined that it ha[s] no liability insurance coverage.” Id. at 823, citing Allstate Ins. Co. v. Wilson, 259 S.C. 586, 193 S.E.2d 527, 530. That right to control the defense, the Court suggested “includes the right to control the defense and select defense counsel.” Episcopal Church in S.C., 53 F. Supp.3d at 823.
However, the insurer’s right to control the defense and appoint counsel is not without limit. In this instance, the Court concluded that the insurer “lost its right to control the defense and select defense counsel when it breached its duty to defend.” Episcopal Church, 53 F.Supp.3d at 826. The Court’s opinion is in line with and relied on both treatises on insurance law and decisions from other courts. Id. at 824-825. Namely, compendiums reviewed by the Court universally agreed that an unjustified refusal by an insurer to defend an insured results in the insurer’s loss of the ability to control the defense and select defense counsel. See, e.g., 49 A.L.R.2d 694 at § 18; 1 Insurance Claims & Disputes § 4:38; 3-17 New Appleman on Insurance law Library Ed. § 17.07. Likewise, courts around the country have opined that an insurer’s refusal to defend forfeits any right to control the defense, including selection of counsel. See, e.g., BellSouth Telecomms., Inc. v .Church & Tower of Fla., Inc., 930 So.2d 668 (Fla.Dist.Ct.App.2006); Eigner v. Worthington, 57 Cal.App.4th 188, 66 Cal.Rptr.2d 808 (1997), Royal Ins. Co. of Am. V. Kirksville Coll. Of Osteopathic Med., Inc., 304 F.3d 804 (8th Cir.2002); Wells’ Dairy, Inc. v. Travelers Indem. Co. of Ill., 266 F.Supp.2d 964 (N.D. Iowa 2003), Sentinel Ins. Co., Ltd. v. First Ins. Co. of Haw., Ltd., 76 Hawai’i 277, 875 P.2d 894, on reconsideration sub nom. Sentinel Ins. Co., Ltd. v. First Ins. Co. of Haw., Ltd., 76 Hawai’i 453, 879 P.2d558 (1994); Grube v. Daun, 173 Wis.2d 30, 496 N. W.2d 106 (Wis.Ct.App.1992).
Moreover, the Court was not persuaded that the insurer’s later about face and belated acceptance of the defense was sufficient to cure the breach or permitted the insurer to control the Insured’s defense. To that point and as additional support for its decision that the insurer’s breach forfeited its right to participate in the defense, the court focused on the fact that the Insured, which had been forced to retain and pay its own attorney in the Underlying Action for over a year, would “suffer material harm if forced to relinquish control of its defense.” Episcopal Church in S.C., 53 F.Supp.3d at 826.
As a result of the insurer’s unjustified refusal to defend the Insured, the Court determined that the insurer was not only precluded from appointing defense counsel of its choosing, it was also required to reimburse the Insured for the reasonable costs of defense of the Underlying Action, including costs incurred pretender. Episcopal Church in S.C., 53 F.Supp.3d at 830.
Insurers in South Carolina and beyond should be cautioned that their failure to get it right the first time by assuming the timely demanded defense of an insured can have significant consequences, including forfeiting the right to select counsel, loss of the ability to control defense strategy, and the responsibility for shouldering the entirety of the insured’s reasonable defense costs, including those fees and costs incurred pretender.
1 Because the Court’s jurisdiction was based on diversity, the Court looked to South Carolina law to evaluate the rights and responsibilities of the Insured and insurer. Episcopal Church in S.C., 53 F.Supp.3d at 821. However, because the South Carolina Supreme Court had not addressed the particular issue before the Court, the Court required to predict how that the South Carolina Supreme Court would rule if presented with the issue. Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of S.C., 433 F.3d 365, 369 (4th Cir. 2005).
2 For example, Florida insurers are statutorily required to retain “independent counsel which is mutually agreeable to the parties.” FLA. STAT. § 627.426. To be mutually agreeable, the insured must actually approve the selected counsel. See Cont’l Ins. Co. v. City of Miami Beach, 521 So. 2d 232, 233 (Fla. App. 3d Dist. 1988); Am. Empire Surplus Lines Ins. Co. v. Gold Coast Elevator, Inc., 701 So. 2d 904, 906 (Fla. App. 4th Dist. 1997).
3 Though not an issue before the Court in Episcopal Church of S.C., courts have found that an insurer’s unjustified refusal to defend also waives its right to be involved in defense strategy, reject settlements, and receive notice of developments in the underlying action. See, e.g., Orleans Vill. V. Union Mut. Fire Ins. Co., 133 Vt. 217, 335 A.2d 315, 318 (1975) (“[A]n insurer who refuses to defend after timely demand is made upon it to do so cannot control the defense or expect advance notice of the refused party’s trial strategy.”); Royal Ins. Co. of Am. V. Kirksville Coll. of Osteopathic Med., Inc., 304 F.3d 804 (8th Cir. 2002) (“When an insurance company refuses to defend its insured, the insurer loses its right to control the litigation and to reject what it considers an unfavorable settlement.”); 14 Couch on Insurance 3d § 202:7 (explaining that “where insurer breaches its contract by refusing to defend…the insurer…cannot object to the insured’s handling of the case .. is not entitled to notice of the insurer’s trial strategy, and has no right to notice of pleadings filed in the underlying action.”).
May 16th, 2018
By, Laura L. Locklair, Esq.
South Carolina and Florida are not always aligned in their treatment of issues affecting insurers and policyholders, but the states are in agreement that an insurer’s duty to defend is several, personal and not subject to division by or contribution from other carriers. Cont’l Cas. Co. v. United Pac. Ins. Co., 637 So.2d 270, 272-7 (Fla. 5th DCA 1994) (holding that insurer is not entitled, pursuant to right of equitable subrogation or contribution, to recover from another insurer costs of defending mutual insured); Sloan Constr. Co. v. Cent. Nat’l Ins. Co. of Omaha, 269 S.C. 183, 236 S.E.2d 818, 820 (1977) (an insurer is not entitled to divide duty to defend nor require contribution from another absent specific contractual right); Auto-Owners Ins. Co. v. Travelers Cas. And Sur. Co. of Am., No. 4:12-cv-3423, 2014 WL 3687338 (D.S.C. July 22, 2014 aff’d, 597 (4th Cir. 2015). As a result, where two or more insurers insure the same risk for the same insureds (be it a named insured or an additional insured) and the policies at issue provide for a defense, the insured is entitled to seek its costs of defense from any or all of the insurers but, absent other contractual rights, the defending insurer(s) cannot require contribution from the other carriers or seek to subrogate the expenses of that defense.
South Carolina and Florida, along with a few other states, find themselves in the minority in the refusal to grant insurers a right to recover portions of the defense costs paid from other carriers. Id.; Fid. & Cas. Co. of N.Y. v. Ohio Cas. Ins. Co., 482 P.2d 924, 926 (Okla. 1971). These minority courts recognize that each insurer contracted to defend, at its own expense, any suit within the terms of its policy. Sloan, 269 S.C. at 186 (finding that an insurer’s duty to defend is irrelevant to the rights and duties existing between the insured and another carrier). As a result, compelling each carrier to provide a full defense to its insured requires no more of the insurer than what it was obligated to do under its insurance contract with the insured. While potentially draconian from the carriers’ perspective, the minority rule protects the insured’s rights to the full benefits of the insurance policy and entitles the insured to recover 100% of its defense costs from any one carrier. Moreover, because insurers cannot sue one another seeking a pro-rata share of attorneys’ fees incurred in providing a defense to the mutual insured there is a corresponding reduction in the number of lawsuits and burden on the judiciary. Cont’l Cas. Co., 637 So.2d at 273. Courts in South Carolina and Florida also have reasoned that the threat of bad faith actions, and the corresponding exposure of policy limits and extra-contractual damages, are sufficient to prevent additional carriers from shirking their defense obligations after one carrier picks up the defense of the shared insured.
The majority of courts which recognize an insurer’s right to contribution or to have defense costs shared in some way include the following: (1) Alaska, Marwell Constr., Inc. v. Underwriters at Lloyd’s, London, 465 P.2d 298, 313 (Alaska 1970); (2) Arizona, Nat’l Indem. Co. v. St. Paul Ins. Cos., 150 Ariz. 458, 724 P.2d 544, 545 (1986); (3) California: Cont’l Cas. Co. v. Zurich Ins. Co., 57 Cal.2d 27, 17 Cal.Rptr. 12, 366 P.2d 455, 460-62 (1961); (4) Colorado: Nat’l Cas. Co. v. Great Sw. Fire ins. Co., 833 P.2d 741, 747-48 (Colo.1992); (5) Connecticut: Travelers Cas. & Surety Co. of Am. V. Netherlands Ins. Co., 312 Conn 714 (2014); (6) Cargill, Inc. v. Ace American Ins. Co., 784 N. W. 2d 341 (2010); (7) New Jersey: Marshall v. Raritan Valley Disposal, 398 N.J. Super. 168, 940 A.2d 315, 320 (2008); (8) North Carolina: Medical Mut. Ins. Co. of NC v. American Cas. Co. of Reading, PA, 721 F. Supp.2d 447, 464 (E.N. N. C. 2010); (9) Pennsylvania: J.H. France Refractories Co. v. Allstate Ins. Co., 534 Pa 29, 626 A.2d 502, 209 (1993); (10) Utah: Sharon Steel Corp. v. Aetna Cas. & Sur. Co., 931 P.2d 127, 137-38 (Utah 1997); and (11) Washington: Mut. Of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wash.2d 411, 191 P.3d 866, 872-74 (2008). These cases suggest that permitting contribution and/or subrogation between insurers guarantees that co-carriers honor their obligations to defend their mutual insured and that no one carrier is unfairly saddled with the burden of funding the entire defense. Specifically, such courts conclude that permitting coinsurers to recover from one another creates strong incentives for prompt and proactive involvement by all responsible carriers, reduces the incidence of carriers that avoid their duty to defend in the hope that other insurers will defend and relieve them of the expense, and promotes the efficient use of resources of insurers, litigants, and the court.
Insurers in South Carolina, Florida and like-minded states continue to look for opportunities to create a cause of action for equitable contribution, permit subrogation, or to otherwise alter the minority rule. However, the South Carolina District Court for the Charleston Division recently affirmed the Sloan rule in FCCI Insurance Company v. Island Pointe, LLC, et al., Case No. 2:17-cv-1976. In that declaratory judgment action arising out of the construction of a condominium complex in Charleston, South Carolina, FCCI sought declarations regarding the coverage available to its named insured and general contractor for the project, Complete Building Corporation (“Complete”). While FCCI agreed to defend Complete in the underlying action, FCCI also sought a declarations that Complete qualified as an additional insured under policies issued to Complete’s subcontractors and that the carriers for Complete’s subcontractors were required to contribute to Complete’s defense fees and costs. In granting motions to dismiss filed by the carriers for Complete’s subcontractors, the court determined that the doctrines set forth in Sloan and Auto-Owners applied and precluded FCCI’s claims. Specifically, the court opined that because “FCCI is not a party to any contract between [Complete’s subcontractors and their insurers]” FCCI “cannot compel the [subcontractors’ insurers] to defend Complete in the underlying suit. FCCI at *8-9. Importantly, while insurers may not have the right in South Carolina to compel participation of the other carriers in the defense of a shared insured, the Island Pointe case does not hold that a policyholder is prohibited from all implicated insurers even when another carrier is already defending it.
Ultimately, under either the majority or minority rule, the insured is entitled to payment of 100% of its defense costs per its policy/policies. However, the differences in the law can have practical and meaningful effects on the number and scope of the lawsuits to which the policyholder may be a party, its duties in those cases, and potentially even its tender obligations.