Failure to Exceed SIR Releases the Excess Insurers: No Cover Available from Excess and Umbrella Policies.

• Author: Zalma, Barry
• Position: [ON MY RADAR]

Insurers use a self-insured-retention (SIR) to avoid the expense of dealing with small claims and avoid the expense of defending or indemnifying an insured until the SIR or underlying insurance is exhausted. As a result the excess insurer can charge a small premium because its exposure is limited.

In City Of Phoenix v. First State Insurance Company, a foreign insurer; No. 16-16767, United States Court of Appeals For The Ninth Circuit (April 4, 2018) the City of Phoenix ("the City") appealed an adverse summary judgment in favor of First State Insurance Company, Twin City Fire Insurance Company, New England Reinsurance Corporation, and Nutmeg Insurance Company (collectively, "Hartford") on the City's declaratory judgment, breach of contract, and bad faith claims, and from the denial of the City's motion for partial summary judgment.

FACTS

The City's insurance coverage action against Hartford arose from an underlying personal injury and wrongful death lawsuit brought by Carlos Tarazon and his wife. Mr. Tarazon was exposed to asbestos through his work as an underground pipe layer in the City from 1968 to 1993 and died of mesothelioma in 2014. The City settled the Tarazon family's claims against it for $500,000. The City's legal defense expenses amounted to over $1,400,000.

From July 1, 1981 to July 1, 1985, the City was covered by four successive excess liability policies ("Excess Policies") issued by Hartford, each of which provided $500,000 in liability coverage in excess of a $500,000 self-insured retention ("SIR"). The City also purchased three successive umbrella policies ("Umbrella Policies") from Hartford, covering periods

from July 1, 1981 to July 1, 1984.

THE POLICY WORDING

The Excess Policies' basic insuring agreement states that Hartford "will indemnify the [City] for ultimate net loss in excess of the retained limit [of $500,000.]" "Ultimate net loss" is defined in the Excess Policies to "exclude[] all loss adjustment expenses.... " The parties agree that defense costs are "loss adjustment expenses." The plain language of this provision is unambiguous. Hartford only has to indemnify the City if the City's ultimate net loss (i.e., not including defense costs) exceeds $500,000. The City settled its claim for $500,000 and is not entitled to indemnity.

The Excess Policies also contain a "No Costs" provision, which states: "Should any claim arising from such occurrence be adjusted prior to trial court judgment for a total amount not more...