Chapter 14, E. Must the Insured Pay the SIR in Full?

• Jurisdiction: United States

E. Must the Insured Pay the SIR in Full?

Insurance policies provide coverage for those sums that the insured becomes legally obligated to pay as damages. For a policy that contains a SIR, the coverage part would contain a provision similar to the following:

We will only pay that portion of the "Ultimate Net Loss" to which this insurance applies that is in excess of the "Self-Insured Retention" shown in the Schedule above. Before we have any obligation to pay any of the "Ultimate Net Loss," you must pay the full amount of the applicable "Self-Insured Retention" Amount shown in the Schedule regardless of Insolvency or bankruptcy....

This SIR provision makes it clear that the insurer has no liability or responsibility for amounts owed within the SIR, regardless of bankruptcy or insolvency. Most policies also contain a provision that provides that the bankruptcy or insolvency of the insured does not relieve the insurer of its obligations under the policy. Frequently, the inclusion of such a clause is mandated by statute. For example, New York Insurance Law Section 3420(a) provides:

No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property, shall be issued or delivered in this state, unless it contains in substance the following provisions or provisions that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors: (1) A provision that the insolvency or bankruptcy of the person insured, or the insolvency of the insured's estate, shall not release the insurer from the payment of damages for injury sustained or loss occasioned during the life of and within the coverage of such policy or contract.³⁶⁷

A typical insolvency provision would provide as follows: "Bankruptcy or Insolvency of the insured will not relieve us of our obligations under this coverage Part." This type of provision is included in most policies and is intended to ensure that the filing of bankruptcy, or the insolvency of the insured, will not impact the obligations of an insurer under the insurance policy. The question, then, is what impact the inability of the insured to fulfill its SIR obligations has on the insurer's policy obligations.

While the filing of bankruptcy typically will not relieve the insurer of its obligations under the policy, likewise the obligations of the insurer should not increase due to the insured's bankruptcy. The language of the policy must be...