An SIR is not Insurance

Posted on October 6, 2020 by Barry Zalma

“Other Insurance” Clause does not Apply to an SIR

The First Circuit Court of Appeal was faced with an “other insurance” clause claim that sought to hold an insurer whose policy contained a $2 million self-insured-retention (SIR) as other insurance requiring payment even though neither the insured nor the additional insured expended the $2 million SIR, in Scottsdale Insurance Company v. United Rentals (North America), Inc., No. 18-1588, No. 18-1593, United States Court of Appeals For the First Circuit (October 2, 2020).

FACTS

In a bodily injury claim Mr. and Mrs. Ayotte sued United Rentals, Gomes, and others in Rhode Island state court asserting one count of vicarious liability against United Rentals for Gomes’ negligence in operating a lift and two counts of direct liability for United Rentals’ own negligence in maintaining the lift and renting the lift to Gomes. The gist was that the lift’s “travel alarm” failed to emit any audible sound to warn Ayotte that he was about to be run over by the lift.

At the time of the accident, United Rentals was insured by ACE American Insurance Company (“ACE”) under two relevant policies, the ACE CGL Policy and the ACE Ultimate Net Loss Policy and Gomes was insured by Scottsdale Insurance Company (“Scottsdale”) under the Scottsdale Policy. The Scottsdale Policy extended coverage to any party that Gomes was required by written contract to add as an “additional insured.” The rental contract between Gomes and United Rentals obligated Gomes to carry adequate liability insurance and, upon request, to supply United Rentals with “proof of such insurance” by a certificate of insurance “naming United [Rentals] as loss payee and additional insured.”

On August 24, 2011, United Rentals requested that Scottsdale defend and indemnify United Rentals, as an additional insured, against the claims raised in the Ayotte Action. After correspondence between Scottsdale and United Rentals–including a September 25, 2012 letter that described United Rentals as an additional insured — the parties sought a declaratory judgment in federal court on Scottsdale’s duty to defend and indemnify United Rentals in the Ayotte Action.

The Massachusetts district court held, on summary judgment, that United Rentals was entitled to defense costs from Scottsdale as an additional insured under the Scottsdale Policy. After the Ayotte Action settled, Scottsdale and United Rentals again cross-moved for summary judgment on Scottsdale’s duty to indemnify. On March 30, 2018, the district court held that the Scottsdale Policy affords additional insured coverage to United Rentals for both its direct and vicarious liability in the Ayotte Action but that this coverage was excess above United Rentals’ own coverage under the ACE CGL Policy.

Both parties appealed.

ANALYSIS

Additional Insured Status Appeal Waived

Scottsdale contests the district court’s December 23, 2015 ruling that United Rentals is an additional insured under the Scottsdale Policy. However, Scottsdale agreed in writing to settle a lawsuit in return for certain obligations has a right to expect a fairly literal interpretation of the bargain that was struck and approved by the court and where the wording is unambiguous, its terms will be strictly enforced. Here, paragraph four contains two separate promises from Scottsdale: (1) to “forego any appeal” of the district court’s December 23, 2015 decision. Because Scottsdale’s challenge to United Rentals’ status as additional insured violates the first promise, its challenge was barred.

Scope of Additional Insured Coverage.

The Scottsdale Policy’s Additional Insured Endorsement (“AI Endorsement”) provides additional insured coverage “only with respect to liability for ‘bodily injury,’ . . . caused, in whole or in part, by [Gomes’] acts or omissions[] or [t]he acts or omissions of those acting on [Gomes’] behalf.” The parties’ dispute centers on the phrase “caused, in whole or in part, by” and whether it modifies the word “liability” or the words “bodily injury.”

Scottsdale had a duty to indemnify United Rentals in the Ayotte Action for both its direct and vicarious liability.

Self-Insured Retention

United Rentals also appealed from the district court’s March 30, 2018 ruling that the Scottsdale Policy’s coverage was excess over United Rentals’ own ACE CGL Policy. United Rentals argues that because both of its ACE Policies are forms of self-insurance, neither provides other “valid and collectible insurance” for the purposes of a priority-of-coverage determination.

The ACE Ultimate Net Loss Policy has a $2M self-insured retention (“SIR”) and a $3M policy limit. Under this policy, United Rentals is not entitled to any coverage from ACE until it pays the full $2M SIR, and once the SIR is paid, United Rentals is entitled to up to $3M of coverage.

A clear majority has held that self insurance is not insurance. A retained self-insurance under a deductible, or in some analogous situation, does not constitute insurance for the purposes of an other insurance clause.

The status of being self-insured means the assumption of one’s own risk, instead of transferring it to a third-party insurer by means of purchasing insurance coverage. The term self-insured is a manner of referring to a decision not to be insured by a third party.

The ACE Ultimate Net Loss Policy provides insurance coverage for claims above $2M, but the SIR itself does not provide insurance coverage because ACE has no obligation to pay any claim within the $2M limit. “Insurance,” by definition is about risk shifting and “self-insurance”—a perfectly good phrase in other contexts – is the opposite of “insurance.”

Because United Rentals had no other valid and collectible insurance, the Scottsdale Policy affords coverage to United and the “other insurance” clauses are irrelevant.

ZALMA OPINION

Insurance is a risk transfer device. Self-insurance is a risk taking device. The self insured exposes its own assets. In this case United Rentals agreed to fund every claim up to the first $2 million before it will ask for the benefits of the policy. Since self-insurance is not “insurance” it is not “other insurance” and the insurer has no obligation to deal with a claim until the insured spends $2 million of its own money. That is why it required to renter of the equipment make it an additional insured of its policy to avoid paying its own money in the event of a loss and transferring the risk of loss to the renters insurance.

? 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at https://www.zalma.com and [email protected].

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