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Insured Need Pay Only ONE Self Insured Retention Where Multiple Claims are Made in a Single Lawsuit


On July 7, 2010 the Fourth Appellate District agreed to publish its earlier June 15, 2010 decision addressing the frequent issue of how a self insured retention ("SIR") should be applied to multiple claims contained in a single lawsuit. There are substantial variations in how SIR's are worded in general liability policies, some are described as "per claim," some as "per claimant" and many are described as "per occurrence." Some policies recite that coverage will be afforded only "excess" an SIR. Sometimes the insurance is described as "indemnity" for losses other than defense costs which are recited to be "excess" an SIR.

Each of the many variations is meaningful because how an insurance policy will be interpreted depends first and foremost on what language is actually used in the insurance policy contract itself. While insurance coverage common law established by the published appellate opinions set out basic rules of construction and how those rules should apply to specific facts of the case under consideration, each case ultimately turns on its facts.

In Clarendon American Insurance Company v North American Capacity Insurance Company (2010) 2010 DJAR 10549, the Fourth District Court of Appeal addressed the issue of how many SIR's should apply in the context of a contribution action between insurance companies. Clarendon had defended and settled a construction defect lawsuit brought by 43 homeowners against its insured, the developer, Tanamera Homes and Resort Communities, LLC (Tanamera) and thereafter sought declaratory relief against the non-defending insurer North American Capacity Insurance Company, ("NAC").

NAC filed a motion for summary judgment on the basis that it never had a duty to defend the insured, Tanamera, because Tanamera never paid a $25,000 "per claim" SIR for each of the eight homes involved in the construction defect action relevant to its policy years. Clarendon argued that the $25,000 SIR applied to the lawsuit as a whole, so only one SIR was required as to the eight homes at issue. NAC convinced the trial court, however the appellate court reversed the summary judgment in favor of NAC.

NAC had the burden of showing there was no potential for coverage. According to this opinion, NAC failed to show that its insured Tanamara had no reasonable expectation of coverage because despite the careful wording of its SIR endorsement, the SIR provisions were ambiguous. How did this happen?

The Court of Appeal began the opinion by quoting the policy language at issue including the following: "The Self-Insured Retention….applies to each and every claim made against any insured…regardless of how many claims arise from a single "occurrence" or are combined in a single "suit"….the Limits of Insurance will apply only in excess of the Self-Insured Retention hereinafter referred to as the "Retained Limit". We will have no duty to defend or indemnify unless and until the amount of the "Retained Limit" is exhausted by payment …" This sounds clear enough, however, the Court of Appeal then reviewed the facts proffered by each of the insurers.

In support is its motion for summary judgment, NAC quoted its policy language, that Tanamera paid only one $25,000 amount as to the underlying action and that eight of the homes at issue in that action would be subject to its policy (as completed after the effective date of the policy). Clarendon's additional facts in opposition to NAC's motion for summary judgment included that the underlying action was a "collective" action involving common questions of fact and law and that the plaintiffs did not seek damages on a "per-home" basis, did not present separate settlement demands; the action was defended in its entirely and "only one settlement" was paid to resolve the homeowners portion of the lawsuit.

After setting out the facts as argued by the parties, the Court reviewed the rules including that NAC was required to show no potential for coverage to establish it had no duty to defend citing to established precedent. The Court noted that NAC relied on its policy language, thus the court reviewed the rules of contract interpretation including that an insurance policy may be ambiguous where its language is subject to two or more reasonable constructions, the language is to be interpreted as a whole, and per the circumstances of the case.

If ambiguous, the insurance policy terms are to be interpreted pursuant to "the sense the insurer believes the insured understood them at the time of formation. Even language that may be plain and clear may be found to be ambiguous where read in the context of the policy and the circumstances of the case, and in order to give effect to the insured's objectively reasonable expectations, construed in the insured's favor. AIU Insurance Co. v. Superior Court (1990) 51 Cal 3d 807, 833 and E.M.M.I. Inc. v. Zurich America (2004) 32 Cal 4th 465, 470,-471.

That latter rule was applied here because the NAC policy used the word "claim" in its SIR endorsement but does not define the term. Clarendon proffered two reasonable definitions: "demand for payment" and "assertion of liability" both of which could apply to the underlying action as a whole—one action—one demand for payment—thus one SIR. Even though NAC argued that its policy clearly distinguished "claim" from "suit" and that more than one "claim" may be contained in a single "suit", the Court found a "Defense of Claims or Suit" provision in the NAC policy using the terms synonymously, thus creating the requisite ambiguity. Once finding an ambiguity existed in the undefined term "claim" used different ways in the different parts of the policy, the court then analyzed the "reasonable expectations" of the insured.

The Court noted it may consider not only the face of the contract but extrinsic evidence citing to American Alternative Insurance Corp. v. v. Superior Court (2006) 135 Cal App 4th 1239,1246. The record contained no evidence of Tanamera's "objectively reasonable expectations" as to how many SIR's would be expected if a single suit involved multiple homeowners. However the policy did potentially cover 450 homes defined as the "project" insured, and the premium was $404,320. If the $25,000 SIR applied to each home, the insured would have paid $404,320 for a $2 million aggregate limit policy which would only provide a defense after it paid $11.25 million in SIR's if all the homeowners sued in a single suit and an SIR applied to each homeowner. Contemplating these possibilities lead the Court to the logical conclusion that it is indeed likely a reasonable insured would expect only one SIR would apply to a single construction defect lawsuit.

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