Another Important SIR Decision

By: Brendan J. Coughlin

The recent California case of American Safety Indemnity Co. v. Admiral Insurance Co. (2013) 220 Cal. App. 4th 1, confirms that policy language must be unambiguous when an insurer seeks to limit its obligations under an insurance policy. In this matter, the Court of Appeal found that while the language at issue clearly imposed a $250,000 Self-Insured Retention ("SIR") on damages paid to third parties, this SIR was inapplicable to the insurer's duty to defend claims made.

The case began with a landslide or two. It ended with an insurer or two, disputing who should pay for the years of intervening litigation. The facts reach back over a decade, when a grader contracted with developer D. R. Horton, Inc. [Los Angeles Holding Company] ("Holding") for housing construction in Santa Clarita.

Grading began in 2002. However, backcut slope failures resulted in landslides and tension cracks that visibly extended to within 50 feet of existing upslope homes. The slides caused physical damage to the property of several of these adjacent homeowners, who sued Holding, developer related entities D. R. Horton, Inc. and D. R. Horton, Inc. - Los Angeles ("Horton,") the grader and others in 2003.

The underlying subsidence lawsuit settled in 2007 for a total of nearly $5 million. The grader had been insured by American Safety Indemnity Co. ("ASIC.") Holding and Horton had been insured by Admiral Insurance Co. ("Admiral.") Holding was also an additional insured under the grader's ASIC policy.

During the underlying litigation, Holding tendered its defense to ASIC. This was declined. A bad faith lawsuit followed. In settlement of the bad faith action, ASIC agreed to defend Holding. ASIC also paid the defense fees of Horton, unaware of Horton's Admiral coverage.

The instant case arises from ASIC's declaratory relief action for indemnity and subrogation against Admiral. ASIC sought to recover its payment of Horton's defense costs. Admiral's principal defense was that because Horton had not paid the SIR on the Admiral policy, Admiral's duty to defend was not triggered.

The trial court granted ASIC's motion for summary adjudication, and eventually awarded ASIC $1.9 million plus interest. In reviewing the trial court's ruling, the Court of Appeal confirmed, and found that the SIR clause in the Admiral policy failed to expressly and unambiguously make payment of the SIR a condition precedent to Admiral's duty to defend. Instead, the language of the policy gave the Horton a reasonable expectation of defense upon tender. In subrogation, ASIC steps into the shoes of Horton's rights against Admiral. Principles of equitable subrogation required Admiral to reimburse ASIC for Horton's defense fees.

Contract provisions between parties, and insurance policy language, evolve and are often updated year-to-year. Contractual interpretation also evolves, is redefined, and may be reconfirmed or modified. This particular case illustrates that these can be complicated, precise issues. An insurance policy written years ago may simply not mean today what the insured or insurer think that it does.

Brendan J. Coughlin is an Associate with Kring & Chung, LLP's Irvine, CA office. He can be contacted at (949) 261-7700 or bcoughlin@kringandchung.com .