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Third Party Can Satisfy Insured’s Self Insured Retention Obligations

By: Michael T. Fraser, Esq., Associate, Saxon, Gilmore, Carraway & Gibbons, P.A.

MFraser3-cropped-sThe Florida Supreme Court, in Intervest Construction of Jax, Inc. v. General Fidelity Insurance Co., recently held that a third party was permitted to satisfy an insured’s self-insured retention obligation pursuant to a general liability insurance contract, thereby triggering the insurance carrier’s coverage obligations. In that case, Intervest Construction of Jax, Inc. and ICI Homes, Inc. (collectively, “ICI”) had entered into a general liability insurance contract with General Fidelity Insurance Co. (“General Fidelity”), which contained a $1 million self-insured retention endorsement (“SIR”). The policy stated that General Fidelity would not be liable for providing coverage to ICI until the $1 million SIR was exhausted.

In 2000, Custom Cutting, Inc. (“Custom Cutting”) contracted with ICI to provide trim work and to install attic stairs in a residence ICI was building at the time (the “Subcontract”). The Subcontract contained an indemnification provision, which provided that Custom Cutting would indemnify ICI for any damages caused by Custom Cutting’s negligence. In 2007, Katherine Ferrin, the owner of the subject home, was seriously injured when she fell from the attic stairs that Custom Cutting had installed. Ms. Ferrin sued ICI, but not Custom Cutting. ICI sought indemnification from Custom Cutting, pursuant to the Subcontract.

Ms. Ferrin, ICI, General Fidelity, Custom Cutting, and North Pointe Insurance Company (Custom Cutting’s insurance carrier) all eventually participated in mediation of Ms. Ferrin’s claims. The parties agreed to a $1.6 million settlement, in which North Pointe agreed to pay ICI’s $1 million SIR. ICI and General Fidelity then each paid Ms. Herrin $300,000, the balance remaining under the settlement. Thereafter, ICI sued General Fidelity for recovery of the $300,000 it had paid to Ms. Ferrin and both parties ultimately filed motions for summary judgment on the issue of liability. The district court granted General Fidelity’s motion for summary judgment and denied ICI’s motion. ICI appealed the district court’s order to the Eleventh Circuit, which certified the question to the Florida Supreme Court.

The pertinent language in the General Fidelity policy stated that:

3. We have no duty to defend or indemnify unless and until the amount of the “Retained Limit” is exhausted by payment of settlements, judgments, or “Claims Expense” by you.

6. The “Retained Limit” will only be reduced by payments made by the insured.

Id. at *4 (emphasis in original).

The Florida Supreme Court held that there is a fundamental difference between paying the SIR from the insured’s “own account” and paying the SIR “by the insured.” The Court concluded that ICI had paid the SIR in the purchase price of the Subcontract by requiring Custom Cutting to agree to indemnify ICI for Custom Cutting’s negligence, thereby effectively hedging its retained risk the same as if it had paid for a loan or paid for an insurance premium. The Court held that General Fidelity’s coverage obligations were triggered upon the payment of the SIR, and General Fidelity was liable to ICI for the $300,000 payment ICI made to Ms. Ferrin.

This decision makes clear that Florida law permits a third party to pay the SIR of an insured, but only if the policy language is similar to the language used in the instant case. Indeed, the Court suggested that the outcome might have been different had the General Fidelity policy used the “own account” language that was used in three California cases. The language in a policy will determine how an insured can satisfy an SIR, and even whether an insured is required to pay the SIR out of his or her “own account” or from some other source, such as a third party. Since general contractors often require their subcontractors to indemnify them in the event of a lawsuit arising out of the subcontractor’s negligence, the importance of Inverest cannot be overstated. Indeed, if the policy in question requires the general contractor to pay any SIR out of its “own account,” then the general contractor’s attempts at hedging potential losses will be made significantly more difficult and possibly less effective.


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