Exhaustion & Below Limits
Settlements
Presented By:
Samantha M. Evans
February 25, 2014
For Discussion and Educational Purposes Only
Overview
• Insurance program comprised of multiple
layers of follow form insurance policies
• Coverage dispute between an insured and
lower level insurer settles for less than full
limit of liability
• Attempts to “fill the gap” left by the settlement
before seeking higher level excess coverage
For Discussion and Educational Purposes Only
Issues to Watch
• Does the applicable excess policy contain
ambiguous language, or language the court
deems ambiguous?
• Is “actual payment” required and, if so, who
may make that payment?
• Will public policy favoring settlements change
the outcome for an excess insurer?
For Discussion and Educational Purposes Only
Below Limits Settlements
Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665
(2d Cir. 1928)
• Courts focus on specific policy language in the
excess policies
• Excess policy required that underlying insurance
be “exhausted in the payment of claims to the full
amount of the expressed limits.” (emphasis
added)
• No need to interpret “payment” as “payment in
cash”
For Discussion and Educational Purposes Only
Zeig: Below Limits Settlements
• “Payment” interpreted broadly to mean “satisfaction
of a claim by compromise, or in other ways.”
• Permitted insured to fill the gap then collect from
excess Insurer
• Public policy against inhibiting settlement
• Excess insurer was only called on to pay that portion
of loss in excess of underlying limits
For Discussion and Educational Purposes Only
Zeig: Below Limits Settlements
• New York courts, as well as some courts in other
jurisdictions, adhere to Zeig where policy language is
ambiguous, permitting access to excess coverage if
the insured’s obligations exceed the underlying limits
– See e.g., Lexington Ins. Co. v. Tokio Marine and Nichido Fire
Ins. Co., 2012 WL 1278005 (S.D.N.Y. Mar. 28, 2012)
(applying Zeig to find that “in the absence of unambiguous
language requiring exhaustion via full payment of the
underlying policy, no such exhaustion is required”).
For Discussion and Educational Purposes Only
Recent Trend: Second Circuit
Distinguishes Zeig
Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013)
• Held: Underlying Limits must actually be paid in full before
excess policies attach
• Court focused on policy language, which left open who must pay
• Exhaustion occurs “solely as a result of payment of losses
thereunder.”
• Obligations versus actual payment
For Discussion and Educational Purposes Only
Recent Trend: Second Circuit
Distinguishes Zeig
Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013)
• “Payment of losses” refers to the actual payment of losses, and
not the mere accrual of losses in the form of liability
• While containing similar “payment” language:
– Zeig arose under a first-party policy
– Liability excess carriers have “good reason to require
payment up to the attachment point of the relevant policies,
thus deterring the possibility of settlement manipulation.”
For Discussion and Educational Purposes Only
Liability Alone Insufficient
Estate of Bradley v. Royal Surplus Lines Ins. Co., 647 F.3d
524 (5th Cir. 2011)
• Excess policy required that the underlying insurance
be used in the payment of judgments or settlements
• Fifth Circuit rejected insured’s claim that “the mere
entry of a judgment that exceeded the limits of the
underlying insurance” was sufficient
• Instead, the Fifth Circuit enforced the policy language
requiring actual payments to exhaust the SIR and the
underlying policy’s limits
For Discussion and Educational Purposes Only
Very Recent Trend: Quellos Group
Quellos Group LLC v. Federal Ins. Co., 312 P.2d 734
(Wash App. 2013)
• Two excess policies required: 1) underlying insurers to
“have paid in legal currency the full amount”; 2)”actual
payment of loss”
• Unambiguous language requires “actual payment”
• Not a condition to coverage
• Great American Ins. Co. v. Bally Total Fitness Holding
Corp., 2010 U.S. Dist. LEXIS 61553 (N.D. Ill. 2010)
For Discussion and Educational Purposes Only
What Constitutes “Actual
Payment”?
• Courts will enforce excess policy language which
specifically requires the underlying carrier to “have
paid, in the applicable legal currency, the full amount
of the underlying limit”
– Great American Ins. Co. v. Bally Total Fitness Holding Corp.,
2010 U.S. Dist. LEXIS 61553 (N.D. Ill. 2010)
• Less specific policy language may yield a different
result
– If the excess policy does not specify the manner in which
payment may be accomplished, the execution of a
promissory note in the context of a partial settlement can
constitute “actual payment”
– Chartis Specialty Ins. Co. v. Queen Anne HS, LLC,
867 F. Supp. 2d 1111 (W.D. Wash. 2012)
For Discussion and Educational Purposes Only
Who May Pay?
Trinity Homes, LLC v. Ohio Cas. Ins. Co., 629 F.3d 653
(7th Cir. 2010)
• Insured settled with multiple primary carriers for
approximately 75% of the policies’ limits, and paid the
remainder of the limits
• Umbrella carrier denied coverage, arguing that the
primary policies were not “completely exhausted” or
“otherwise unavailable” as the umbrella policy required
• Seventh Circuit found that the policy was ambiguous
because it did not “clearly provide that the full limit must
be paid out by the CGL carrier alone.”
For Discussion and Educational Purposes Only
Are Payments for Defense Costs
“Judgments or Settlements”?
Siltronic Corp. v. Employers Ins. Co. of Wausau,
921 F. Supp. 2d 1099 (D. Ore. 2013)
• Question: when excess policies require exhaustion by
“payment of judgments or settlements”, can the
underlying policy be exhausted by defense costs?
• Court considered “judgments or settlements” language,
finding that it includes payments made pursuant to
consent decrees, even if those decrees or orders are
not “final,” but that defense payments do not constitute
exhaustion via “judgments or settlements”
For Discussion and Educational Purposes Only
Are Payments for Defense Costs
“Judgments or Settlements”?
• Delaware Supreme Court recently held that the phrase
“payments of judgments or settlements” cannot be
construed to encompass an insured’s own payment of
defense costs.
• “Judgments” refer to a decision by an adjudicative body
as to the parties’ rights, and “settlements” involve
agreements between parties as to the dispute between
them.
• Defense costs do not fall within the meaning of either
term.
• Intel Corp. v. American Guar. & Liab. Ins. Co., 51 A.3d
442 (Del. 2012) (applying California law).
For Discussion and Educational Purposes Only
Public Policy May Not Carry the
Day
• Excess policy required payment of the full amount of
its $15 million limits, but primary paid only $10 million
• Sixth Circuit enforced excess policy’s plain language,
finding that Goodyear’s settlement public policy
argument was “meritless”
• Goodyear v. National Union Fire Ins. Co., 694 F.3d
781 (6th Cir. 2012); Qualcomm, Inc. v. Certain
Underwriters at Lloyds, 161 Cal. App. 4th 184 (2008)
For Discussion and Educational Purposes Only
Lesson: Policy Language Matters
• In the absence of the clear policy language
interpreted in the foregoing cases, courts may reach
a different result
• If the excess policy does not specify the entity which
must make the underlying payments, courts may
permit insureds to “fill the gap”
For Discussion and Educational Purposes Only
Policy Language Matters
Maximus, Inc. v. Twin City Fire Ins. Co., 856 F. Supp. 2d 797 (E.D.
Va. 2012).
• Insured settled for less than limits with underlying
carriers, and “filled the gap” for the remaining limits,
and excess carrier denied coverage
• Held: policy was ambiguous
• Excess policy language did not specifically require the
underlying insurers to pay, nor preclude the insured
from filling the gap
• Excess coverage could be triggered by the insured
settling for less than limits and then filling the gap.
QUESTIONS?
Contact Information
Samantha M. Evans
Associate, Global Insurance Department
215-665-4106 | smevans@cozen.com
www.cozen.com
Recent Statutes Addressing
Coverage for Construction
Defects: Update on
Legislation and Effective
Claim Management
Practices
Presented By:
Richard C. Mason, Esq.
Cozen O’Connor
New York/Philadelphia
rmason@cozen.com
(215) 665-2717
For Discussion and Educational Purposes Only
Overview
1.
Division in courts regarding defective
construction as an “occurrence”
2.
New statutes declaring construction
defects to be an “occurrence”
3.
Court challenges to new statutes
4.
Legal issues once an “occurrence”
has been found (or deemed) to occur
21
For Discussion and Educational Purposes Only
Traditional General Contracting
Owner
Surety
Architect/Engineer
General
Contractor
Surety
Subcontractor
Material
Supplier
Sub-Contractor
22
For Discussion and Educational Purposes Only
Risk Transfer Illustration
Owner
(Prime Contract)
Indemnity
Tender
Architect /
Engineer
E&O Insurer
Insurance /AI
General
Subcontract)
Tenders
(
Indemnity
GL Insurer
Insurance /AI
Subcontractor
GL Insurer
Third Party Claimant
23
For Discussion and Educational Purposes Only
“Occurrence”
Typical Definition:
“An accident, including continuous or
repeated exposure to substantially
the same general harmful
conditions.”
Note: Standard CGL policies do not
define the term “accident.”
24
For Discussion and Educational Purposes Only
Decisions Finding No “Occurrence”
Pennsylvania
 Damage that is the natural or probable
consequence of the work or supervision of
the insured does not qualify as an
accident.
Millers Capital Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706, 711 (Pa.
Super. 2007)
NEBRASKA
 Faulty workmanship, standing alone, is
neither an “accident” or “occurrence.”
Auto-Owners Ins. Co. v. Home Pride Companies, Inc., 684 N.W. 2d 571 (Neb. 2004)
25
For Discussion and Educational Purposes Only
Courts Deeming Defective Construction to
Constitute an “Occurrence”
 Liberal construction of policy terms
 Focus on business risk exclusions to eliminate
moral hazard and other public policy concerns
Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65 (Wis. 2004); U.S. Fire Ins.
Co. v. J.S.U.B., Inc., 2007 WL 4440232 (Fla. 2007)
26
For Discussion and Educational Purposes Only
Courts Deeming Defective Construction to
Constitute an “Occurrence”
West Virginia
 Defective construction can be an “occurrence.”
 Previous court decisions defined an “accident” in a policy as
“not deliberate, intentional, expected, desired or foreseen.”
 Court reasoned that the contractor did not deliberately intend
or desire resulting damages.
 Recognizing a “definite trend in the law” the court reversed
long-standing precedent in the state.
Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508 (W.Va. 2013).
27
For Discussion and Educational Purposes Only
Courts Diverge Over Whether Defective
Construction is an “Occurrence”
 Other Recent Decisions Seem to Expand the
Potential Scope of Coverage
 Pennsylvania: Indalex v. National Union Fire Ins. Co., 201
WL G237312 (Pa. Super., Dec. 3, 2013)
 Georgia: Taylor Morrison Servs. V. HDI-Gerling American
Ins. Co., 746 S.E.2d 587 (Ga. 2013).
 Connecticut: Capstone Building Corp. v. Am. Motorists Ins.
Co., 2013 Conn. LEXIS 187 (Conn. Jun. 11, 2013).
28
For Discussion and Educational Purposes Only
Nationwide Status of “Occurrence” Positions
for Construction Defect Claims
Highest court or state statute deems defective construction to be an occurrence.
Leaning towards coverage; only lower state court or federal court authority exists.
Highest court has deemed defective construction not to be an occurrence.
Tending against coverage; only lower state court or federal court authority exists.
Defective construction only an occurrence when there is damage to third-party property.
Unclear
No decision
29
For Discussion and Educational Purposes Only
Insurance Coverage for Construction
Defects: Statutory Developments
 Between 2010 and 2011, four states enacted
legislation addressing insurance coverage for
construction defect claims.
 Each statute favors coverage, albeit in
different ways and to varying degrees.
 These statutes signal that the battle over
whether construction defects constitute an
"occurrence" may have shifted from the
courts to state legislatures.
30
For Discussion and Educational Purposes Only
Insurance Coverage for Construction
Defects: Statutory Developments
New state statutes are intended to
overrule, at least to some extent, judicial
decisions that denied insurance
coverage for construction defect claims.
The thrust of these statutes is to require
construction defects to be treated as an
accidental "occurrence" within the
meaning of the CGL insurance policy.
31
For Discussion and Educational Purposes Only
State Statutes
State
Effective Date
Colorado
May 21, 2010
Arkansas
March 23, 2011
South Carolina
May 17, 2011
Hawaii
June 21, 2011
32
For Discussion and Educational Purposes Only
Colorado: 2010 Statute
 The Builders’ Insurance Act, C.R.S. 13-20808 codifies interpretive rules for occurrence
based liability policies insuring construction
professionals.
The Act allows courts to consider:
 (1) an insured's objective, reasonable expectations
concerning coverage; and
 (2) insurance industry and internal insurance
company explanatory materials to help interpret
and apply certain policies.
33
For Discussion and Educational Purposes Only
Colorado: 2010 Statute
Property damage, including damage to
construction work performed by an
insured, is presumed to be an "accident"
unless the damage was intended and
expected by the insured.
The Act applies to all insurance policies
in existence or issued on or after the
Act's effective date of May 21, 2010.
34
For Discussion and Educational Purposes Only
Hawaii: 2011 Statute
Chapter 432, Article 1 of the Hawaii
Revised Statutes provides that the term
“occurrence” shall be construed in
accordance with the law as it existed at
the time that the insurance policy was
issued.
35
For Discussion and Educational Purposes Only
Hawaii: 2011 Statute
 This statute still leaves it to the courts to interpret the
applicable law with respect to any particular claim.
 Preamble states: "Prior to the Group Builders decision
... construction professionals entered into …
insurance contracts under the reasonable, good-faith
understanding that bodily injury and property damage
resulting from construction defects would be covered
under the insurance policy. It was on that premise that
general liability insurance was purchased.”
36
For Discussion and Educational Purposes Only
South Carolina: 2011 Statute
South Carolina Code Section 38-61-70
enacted on May 17, 2011
Provides that CGL policies shall contain
or be deemed to contain a definition of
“occurrence” that includes property
damage or bodily injury resulting from
faulty workmanship, exclusive of the
faulty workmanship itself.
37
For Discussion and Educational Purposes Only
Arkansas: 2011 Statute
Arkansas Code Section 23-79-155 (enacted on
March 23, 2011)
 Requires CGL policies offered for sale in
Arkansas to contain a definition of occurrence
that includes "property damage or bodily
injury resulting from faulty workmanship“
 Act also states that it does not limit the
nature or types of exclusions that an insurer
may include in a CGL policy.
38
For Discussion and Educational Purposes Only
New State Statutes: Overview
Recent legislation generally will make it
easier for policyholders in the affected
states to establish potential coverage for
a construction defect claim.
The statutes generally do not alter the
exclusions that already apply to
construction defect claims, and they
leave the interpretation of the meaning
of these exclusions to the courts.
39
For Discussion and Educational Purposes Only
Insurer Challenges to Statutes: South Carolina
 Harleysville Mutual filed a complaint in the South
Carolina Supreme Court seeking injunctive relief and
a declaration that the new statute violates the U.S.
and South Carolina constitutions.
 Court held:
 It is within the legislature’s power to define
“occurrence.”
 Provision in statute which applies new law
retroactively is unconstitutional.
 The remaining provisions of the statute are upheld
and its effective date is May 17, 2011.
40
For Discussion and Educational Purposes Only
Post-Legislation Case law: South Carolina
Bennett & Bennett Construction, Inc. v. Auto Owners
Ins. Co., 747 S.E.2d 426 (S.C. 2013).
 Decided by South Carolina Supreme Court after it upheld the
constitutionality of South Carolina Code Section 38-41-70.
 “The plain language of exclusions j(5) and n each
independently exclude coverage when, as here, a
subcontractor acting on behalf of the insured directly
damages the insured's work product, necessitating its
removal and replacement.”
 “[A] CGL policy does not insure the insured’s work itself but
consequential risks that stem from the insured’s work. CGL
coverage is for tort liability for injury to persons and damage
to other property and not for contractual liability of the insured
for economic loss….”
41
For Discussion and Educational Purposes Only
Post-Legislation Case law: Hawaii
Nautilus Ins. Co. Co. 3 Builders, Inc., 2013 WL
3223743 (D. Haw. Jun. 24, 2013).
 Not a direct challenge to statute, but decided after Haw. Rev.
Stat. § 431:1-217(a) was enacted.
 Policy was in effect in 2008. The court did not follow Group
Builders, Inc. and instead relied on 9th Circuit’s analysis in
Burlington v. Oceanic, which was decided in 2007.
 Following Burlington, as a matter of Hawaiian state law,
construction defect claims do not constitute an occurrence
under a CGL policy.
42
For Discussion and Educational Purposes Only
Post-Legislation Case law: Hawaii
Illinois National Ins. Co. v. Nordic PCL Construction,
Inc., 2013 WL 3975668 (D. Haw. Jul. 31, 2013).
 The court reasoned that even if § 431:1-217(a)
nullified Group Builders by “restoring” pre-Group
Builders law, the statute did not nullify pre-Group
Builders decisions.
 Following those decisions, construction claims do
not involve accidents or “occurrences.”
43
For Discussion and Educational Purposes Only
Insurer Challenges to Statutes: Colorado
Colorado Pool Systems, Inc. v. Scottsdale Ins. Co.,
2012 WL 5265981 (Colo. App. Oct. 25, 2012).
 Court recognized that if it were to apply C.R.S. 13-20-808,
the CGL policy at issue would cover the insured’s defective
workmanship, including the damage to insured’s own work.
 However, the negotiation and execution of the policy, the
faulty workmanship and resulting damage, and the denial of
coverage all occurred before the statute’s effective date.
 The court held that retroactive application of the statute was
unconstitutional.
 Court held that injuries flowing from the faulty workmanship
were only an occurrence if the resulting damage was to nondefective property and were unexpected.
44
For Discussion and Educational Purposes Only
Insurer Challenges to Statutes: Colorado
Colorado Pool Systems, Inc. v. Scottsdale Ins. Co.,
2012 WL 5265981 (Colo. App. Oct. 25, 2012).
 On September 3, 2013, the Supreme Court of
Colorado granted a petition for writ of certiorari.
 The court will address:
 Whether the court of appeals erred in holding
that CRS 13-20-808 would be unconstitutionally
retrospective as applied to the CGL policy at
issue
 Whether the court of appeals erred in its
interpretation of the CGL policy under common
law
45
For Discussion and Educational Purposes Only
Common Coverage Issues in
Construction Defect Cases
 The “legally liable” requirement
 The “Your Product” exclusion
 The “Your Work” exclusion
46
For Discussion and Educational Purposes Only
The “Legally Liable” Requirement
 CGL policies typically cover only “sums that the
insured becomes legally obligated to pay as damages
because of ‘bodily injury’ or ‘property damage’…”
 Precludes coverage for property damage for which
the insured is obligated to pay damages by reason of
the liability in a contract.
 If the damage does cause a breach of contract, courts
may find coverage only if Insured would have been
liable anyway; i.e., damages were caused by the
insured’s negligence.
47
For Discussion and Educational Purposes Only
Nucor Silo Collapse, Port Lisas, Trinidad
48
For Discussion and Educational Purposes Only
“Your Product” Exclusion
 Precludes coverage for “property damage” to “your
product” arising out of it or any part of it
 “Your Product” means:
 Any goods or products, other than real property,
manufactured, sold, handled, distributed or
disposed of by:
 You;
 Others trading under your name; or
 A person or organization whose business or assets you
have acquired; and
49
For Discussion and Educational Purposes Only
“Your Product” Exclusion
 “Your Product” may also mean
 Warranties or representations made at any time
with respect to the firmness, quality, durability,
performance or use of “your product;” and
 The providing of, or failure to provide, warnings or
instructions.
50
For Discussion and Educational Purposes Only
“Your Product” Exclusion
■
Can bar claims by installers and
homebuilders …
■
But does it apply only to the
actual component?
■
Can entire structure be
deemed the “product?”
51
For Discussion and Educational Purposes Only
“Your Work” Exclusion
“Your work” is defined as:
 Work or operations performed by you or on your
behalf; and
 Materials, parts or equipment furnished in
connection with such work or operations
 Warranties or representations made at any time
with respect to the fitness, quality, durability,
performance or use of “your work”
52
For Discussion and Educational Purposes Only
“Your Work” Exclusion
Limitation
 The “Your Work” exclusion does not apply if
the damaged work or work out of which the
damage arises was performed by a
subcontractor.
Spears v. Smith, 690 N.E.2d 557, 560 (Ohio Ct. App. 1996).
 Even if the work was performed by a
subcontractor, plaintiff must allege that a
subcontractor performed the work in order to
trigger the duty to defend.
Pine Oak Builders’ Inc. v. Great American Lloyds Ins. Co., 279 S.W.3d 650 (Tex. 2009).
53
Changing Times,
Shifting Risks:
SIRs and Large
Deductible
Policies
Deborah M. Minkoff
dminkoff@cozen.com
215.665.2170
Abby J. Sher
asher@cozen.com
215.665.2761
For Discussion and Educational Purposes Only
Risk Management: Risk Retention and Transfer
• Insurance is risk management: risk retention and risk
transfer.
• Thoughtful programs define the precise point at
which the transfer occurs:
• on a per occurrence/per claim and aggregate level,
• for defense (ALAE),
• for damages (settlements and judgments).
• In today’s economic climate, many accounts are
considering methods of cost-saving and risk retention.
• Insured accounts are working with brokers and
underwriters to develop and implement risk retention and
risk transfer objectives.
55
For Discussion and Educational Purposes Only
• The challenge for insureds and the underwriters is to
capture, in writing, the intended risk transfer protocol.
• The sophisticated insureds that use retention
mechanisms are the same insureds that find themselves in
litigation presenting issues involving multiple claimants,
several defendants, additional insureds, and excess
insurance.
• The precise risk transfer point impacts on each of these
issues, in claims handling and claims resolution.
– The time to understand the risk transfer point is from
the point when the claim comes in the door.
56
For Discussion and Educational Purposes Only
Retention Mechanisms, Litigation Issues
The Three Common Risk Retention Mechanisms:
Deductibles
Matching Deductibles
Self-Insured Retentions
Discussion Steps:
1. The characteristics of each risk retention mechanism
2. Comparisons between the risk retention mechanisms
3. Litigation topics (some warm, some hot)
1.
2.
3.
4.
5.
Duty to defend
Control of Settlement
Satisfaction of SIR
Impact of Insured’s Insolvency
Allocation/Other Insurance
57
For Discussion and Educational Purposes Only
Key Attributes: Deductibles
• Deductibles: most common type of risk retention
mechanism.
• A deductible applies to damages, not defense.
• The insurer defends upon “dollar one.”
• A deductible sits within the policy’s limit of liability.
• The insurer “deducts” the retained amount from the
damages it pays.
• If a large deductible is $500,000, and the policy limit is
$1,000,000, the insurer’s indemnity obligation is
$500,000.
58
For Discussion and Educational Purposes Only
Large Deductibles: General Rules
• Most of the same rules apply to large deductibles.
– The deductible does not relieve the insurer of its
defense obligation.
– Insurer is obligated to defend additional insureds from
notice.
– Insurer does not need insured’s consent to settle using
the deductible.
– Insurer’s obligations remain intact if the insured is
insolvent and not able to satisfy its deductible
obligation.
– Defense costs usually erode a large deductible.
• Collateral agreements: provide security if the insured does
not pay deductible. Otherwise, insurer is in a “pay and chase”
situation.
59
For Discussion and Educational Purposes Only
Fronting Policies
• A deductible that matches the policy’s limit of liability is
called a “matching deductible” policy or a “fronting
policy.”
• Insureds are able to conduct business without meeting
formal requirements for qualifying as a self-insurer.
The insured has the benefit of the insurer’s filing and
licensing, but retains all of the risk.
• Because a policy is issued, a fronting policy is
interpreted as any other policy of insurance.
60
For Discussion and Educational Purposes Only
Key Attributes: Self-Insured Retentions
•
An SIR is the amount of risk retained by the insured until
“true” insurance is reached.
•
•
•
The insured is required to exhaust the SIR before the
insurer is obligated to respond in any way: to the defense,
to indemnity demands, to tenders by additional insureds.
For these reasons, courts analogize SIRs to primary
insurance.
An SIR sits below the policy’s limit of liability. If an SIR equals
$500,000 and the policy limit is $1,000,000, the $1,000,000
limit applies over the SIR.
61
For Discussion and Educational Purposes Only
$1M Limit of Liability: Deductible vs. SIR
• $ 500,000 Deductible,
$1,000,000 Limit
• $ 500,000 SIR,
$1,000,000 Limit
1M
LIMIT
1M
LIMIT
500K
DEDUCTIBLE
500K
SIR
62
For Discussion and Educational Purposes Only
SIR Considerations: Insured’s Perspective
An SIR may be beneficial in situations where defense costs are
more predictable, and the insured has sufficient assets to respond
to claims management and liabilities/losses.

Cost of excess insurance can decrease with an increased
attachment point.
 A second-layer excess policy (excess of the layer above the
SIR) can be less expensive than the umbrella/excess above a
primary policy subject to the deductible.

63
For Discussion and Educational Purposes Only
SIR Considerations: Insurer’s Perspective:
No Initial Risk, And . . .
• Downside to the insurer: little information from insured
on claims within SIR (change in frequency or severity)
• “Timing” issues: when the insurer’s obligations begin and
end.
– If multiple claims are brought against the insured, the
insurer’s defense obligation may arise mid-stream
once the insured settles claims within the SIR. The
insurer must know when its control begins.
– At the same time, the insurer may be asked to
indemnify for a claim that exceeds the SIR. The insurer
must keep abreast of when its obligations arise, and
know when its obligations are exhausted.
64
For Discussion and Educational Purposes Only
Comparing SIRs and Deductibles
(subject to policy language)
SELF-INSURED RETENTION
DEDUCTIBLE
Duty to Defend
Insured responsible for defense until
exhaustion of retained amount. Issue
is whether defense costs erode SIR
Insurer’s duty to defend arises at
“dollar one” (assuming prompt
notice)
Indemnity
Insurer has no obligation to
indemnify, or pay on behalf of, until
SIR is satisfied
Insurer obligated to pay deductible
amounts and seek reimbursement
(“pay and chase”)
Policy Limits
Policy limits apply in excess of SIR
Deductible sits within the policy
limits
Additional
Insureds
Additional insureds cannot seek
coverage from insurer for defense or
indemnity of claims within the SIR
Additional insureds can seek
coverage from insurer under policy
(defense) before deductible satisfied
“Insurance”
May be considered “insurance” for
certain purposes, particularly for
vertical or horizontal exhaustion of
policies issued to the same insured
Generally will not be considered
“insurance” for any purpose
65
For Discussion and Educational Purposes Only
Application Issue:
Interpreting SIRs and Deductibles
• Large deductibles and SIRs are controlled by an
endorsement.
– Understand the endorsement in its entirety. If you
don’t understand, call the underwriter.
– The title of the endorsement does not control.
– Courts interpret the particular policy language to
effectuate the intended risk retention and transfer.
• Courts and some counsel often do not appreciate the
differences. It’s your job to get (and keep) the judge on
the right track.
66
For Discussion and Educational Purposes Only
Litigation Issue 1:
Defense Control Issues
• When a policy is subject to a deductible, the insurer has a
duty to defend the insured from the time the claim is
presented. See Zurich Specialties London Ltd. v. Century
Surety Co., No. G042920, 2011 Cal. App. Unpub. LEXIS
7192 (4 Dist. Sept. 22, 2011).
• When a policy is subject to an SIR, the insurer’s defense
obligation does not arise until after the SIR is exhausted
by damages/settlements. See Axis Specialty Ins. Co. v. The
Brickman Group, 458 Fed. Appx. 220 (3d Cir. 2012).
67
For Discussion and Educational Purposes Only
Litigation Issue 2: Settlement Issues
The Devil in the Details
– Insureds and insurers want to control how they
spend their dollars.
– Insurer faces exposure if insured could, but doesn’t,
settle within SIR (insured spends insured’s money).
– Insured faces exposure when insurer settles within
high deductible (insurer spends insured’s money).
 General rule: The insurer controls settlement of
claims within the deductible, even a high deductible,
without the insured's consent.
 American Protective Ins. Co. v. Airborne, Inc., 476
F. Supp. 2d 985 (N.D. Ill. 2007) (insurer did not
need insured’s consent to settle using $1 M
deductible).
68
For Discussion and Educational Purposes Only
Settlement of Claims (High Deductible Policy)
 Roehl Transport Inc. v. Liberty Mut. Ins. Co., 784 N.W. 2d
542 (Wis. 2010).
 The insurer settled a third-party liability claim under high
deductible policy. The insured established that the
settlement was in bad faith.
 (1) the insurer missed opportunities to settle for lower
amounts, and
 (2) did not obtain the insured’s consent in violation of
the claims agreement.
Roehl take-away lessons: (1) Roehl signals that we will
see more of this argument, and (2) policy language can
require the insured’s consent to settle using a large
deductible.
69
For Discussion and Educational Purposes Only
Other Side of the Coin:
Insured’s Failure to Settle
Issue: Insurer argues that insured caused exposure to insurer by
litigating rather than settling within the SIR.
Older cases: insured has no duty to protect interest of insurer,
although the insured must act within the bounds of “equity.”
Safeway v. Int’l Ins. Co. v. Dresser Indus. Inc., 841 S. W. 2d 437
(Tex. App. 1992)
Insurers now use language giving the insurer the right to learn of,
and settle, claims that may exceed the insured’s SIR. N.Y.
Housing Authority v. Housing Auth. Risk Retention Group, 203 F.
3d 145 (2d Cir. 2000); Methodist Hosp. v. Zurich Am. Ins. Co., 329
S. W. 3d (Tex. App. 2009).
Lesson: Check the SIR endorsement.
70
For Discussion and Educational Purposes Only
Litigation Issue 3:
Payment/Satisfaction Issues
• Two payment satisfaction issues: (1) who can
satisfy the retained amount, and (2) what
payments satisfy the retained amount. Both
are practical consequences of the deal struck.
• Typical context presenting the “who” issue: an
additional insured may want to pay the
retained amount to access the coverage.
71
For Discussion and Educational Purposes Only
What Payments Satisfy the SIR
• The policy language controls. Compare: Vons Companies Inc. v.
U.S. Fire Ins. Co., 92 Cal. Rptr. 2d 597 (Cal. Ct. App. 2000) (no
restriction on who can satisfy the SIR) and Forecast Homes, Inc.
v. Steadfast Ins. Co., 105 Cal. Rptr. 3d 200 (Cal. Ct. App. 4th Dist.
2010) (under SIR endorsement, additional insureds were not
entitled to coverage unless the named insured satisfied SIR).
• This is a “warm” issue: general acceptance that the policy
language controls.
• The Supreme Court of Florida recently permitted an insured to
apply indemnification payments from a third-party to satisfy the
policy’s SIR, even where the SIR endorsement required “payment
of settlements, judgments, or ‘Claims Expense’ by you.” Intervest
Constr. of Jax, Inc. v. Gen. Fid. Ins. Co., 2014 Fla. LEXIS 568 (Fla.
2014)
72
For Discussion and Educational Purposes Only
What Payments Satisfy the SIR
• Second “satisfaction” issue: do only judgments and settlements
satisfy the SIR, or do defense costs as well?
– As the size of the SIR increases, the likelihood that the SIR will
be eroded by defense costs increases.
• The endorsement will specify if defense costs erode the SIR, or if
the SIR applies only to damages.
• Defense costs that erode the retention amount (“inside”)
accelerate risk transfer from the insured to the insurer.
• Defense costs outside the SIR slow down risk transfer to the
insurer.
– If the SIR applies only to damages, defense costs are borne by
the insured until the SIR is exhausted by damages.
73
For Discussion and Educational Purposes Only
SIR Satisfaction Considerations
• Considerations that bear on defense costs as “inside” or
“outside” the SIR:
• An insured that needs certainty in its uninsured exposure will
look for defense costs within limits. The SIR serves a true cap.
• An insured that wants long-term control over claims will look
for defense costs outside the SIR.
• An insurer that desires decreased exposure may insist on an
SIR eroded by damages only.
• ALAE may be outside the SIR but within (erodes) limits, or
vice versa.
• Compare the insuring agreement to the SIR endorsement.
74
For Discussion and Educational Purposes Only
Litigation Issue 4:
Impact of Insured’s Insolvency
• Insolvency confounds many issues. Application of SIRs
and deductibles is no exception.
• In the context of a high deductible policy, or a fronting
policy, the insured’s insolvency does not change the
insurer’s obligations. Under a high deductible or
fronting policy issued to an insured that becomes
insolvent, the insurer has to perform under the policy
(defend and pay) even if the insured cannot reimburse
the insurer for the deductible amount.
• General Rule: insurers are not required to “drop down”
to satisfy an unpaid SIR. There is scant authority for the
proposition that an insured’s inability to satisfy its SIR
due to insolvency relieves the insurer of its obligations
excess of the SIR.
75
For Discussion and Educational Purposes Only
Litigation Issue 5:
Allocation and “Other Insurance”




Deductibles and SIRs add complexity to matters involving
damage or injury that implicate multiple policies.
Two contexts: consecutive coverage and concurrent coverage.
Allocation: When injury or damage spans consecutive policy
periods, courts must consider if/how the damages should be
allocated across the policies.
Issue is whether the insured must pay a separate
SIR/deductible for each triggered policy.
 Most courts find the insured must satisfy each policy’s
deductible or SIR.
 Only a few courts hold that the insured is responsible for a
single, pro-rated deductible.
76
For Discussion and Educational Purposes Only
Context Determines Result
(dmm reconciliation)
• In the single insured/allocation context, SIRs qualify as
“other insurance.”
• Successive insurers get the benefit of the insured’s SIR
because each of these insurers issued policies to the
same insured that decided to retain risk.
• In the “additional insured/other insurance” context, SIRs
do not qualify as “other insurance.”
• These insurers did not issue policies to an insured that
decided to retain risk.
• Courts find that the insurers must respond to the risk
transferred by their own insured.
• Policy language trumps the general rules
77
For Discussion and Educational Purposes Only
Lessons Learned
• Large deductibles and SIRs are becoming prevalent.
• Large deductibles and SIRs present challenges for
claims professionals and their counsel.
– When an account or case is assigned to you, read
the deductible or SIR endorsement.
– Determine the precise transfer point(s), including
if defense costs erode the retention, and if/when
the language gives the insurer the right to step in.
– As the claim progresses, re-visit the language to
address issues involving payment and control of
settlement.
– If stumped, call.
78
Deborah M. Minkoff
dminkoff@cozen.com
215.665.2170
Abby J. Sher
asher@cozen.com
215.665.2761
Data Privacy Risk
Presented By:
Matthew Siegel
Attorney At Law
Cozen O'Connor
(215) 665-3703
msiegel@cozen.com
Kurtis. E. Suhs
Privacy Practice Leader
Ironshore
(404) 845-7549
kurtis.suhs@ironshore.com
For Discussion and Educational Purposes Only
The Gravity of Cybersecurity
“The diverse threats we face are increasingly cyber-based. Much
of America’s most sensitive data is stored on computers. We are
losing data, money, and ideas through cyber intrusions. This
threatens innovation and, as citizens, we are also increasingly
vulnerable to losing our personal information. That is why we
anticipate that in the future, resources devoted to cyber-based
threats will equal or even eclipse the resources devoted to noncyber based terrorist threats.”
- FBI Director James Comey
For Discussion and Educational Purposes Only
Who Is At Risk?
• Individuals
• All types of companies:
–
–
–
–
Financial firms (37%)
Retailers and restaurants (24%)
Information and professional firms (20%)
Manufacturing, transportation and utility industries (19%)
• Governmental entities
There are now only two types of companies: Those
that have been hacked and those that don’t know
they’ve been hacked.
For Discussion and Educational Purposes Only
What Type of Information
Is At Risk?
•
•
•
•
Personal
Corporate
Financial
Healthcare
For Discussion and Educational Purposes Only
Who Are The Perpetrators?
• Insiders
– Malicious insiders
– Unintentional mistakes
• Outsiders
–
–
–
–
–
Organized crime
Former employees
Contractors
State-affiliated entities
Hacktivists
For Discussion and Educational Purposes Only
Causes of Data Breaches
• Advance Persistent Threats
– Internet Malware Infections
• Drive by downloads
• Email attachments
• File sharing
• Pirated software
• Spear Phishing
• DNS & Routing Mods
– Physical Malware Infections
• Infected USB memory sticks
• Infected CD’s and DVD’s
• Infected memory cards
• Infected applications
• Backdoored IT equipment
For Discussion and Educational Purposes Only
Causes of Data Breaches
• Advance Persistent Threats
– External Exploitation
• Professional Hacking
• Mass vulnerability exploits
• Co-location Host Exploitation
• Cloud Provider Host Exploitation
• Supply Chain Partner Exploitation
• Rogue Wi-Fi penetration
• Human Error
For Discussion and Educational Purposes Only
First Party Coverage
•
•
•
•
Damage to Digital Assets
Business Interruption
Extortion
Privacy Breach Expenses
For Discussion and Educational Purposes Only
Third Party Coverage
•
•
•
•
•
Privacy Liability
Network Security Liability
Internet Media Liability
Regulatory Liability
Contractual Liability
For Discussion and Educational Purposes Only
Why Cyber Risk Policies?
• Each data breach is different
• Prevention consultation
– Strong security decreases downstream costs
• Assistance with incident response plans
– Incident response plans save $42/record (Ponemon)
• Response consultation
– Consultants decrease costs and increase remediation effectiveness
– Consultants can save $13/record (Ponemon)
• Crisis management and public relations to mitigate fallout