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Know SIR (Self-Insured Retention) Know SIR (Self-Insured Retention)

Know SIR (Self-Insured Retention)

Not all additional insured endorsements are equal. A recent Indiana Court of Appeals decision highlights the risks to a party named as an additional insured where the named insured’s underlying commercial general liability insurance policy has a self-insured retention (“SIR”) (as compared to a deductible). As outlined in more detail below, an insurer owes no obligation to an additional insured to defend or pay damages unless and until the SIR has been paid. As a result, the additional insured may end up having to bear the entire amount of the SIR or may even be left with no coverage at all from such commercial general liability policy if the SIR was not paid.
Deductible Versus Self-Insured Retention

There appears to be a fairly common misconception that a deductible and SIR are essentially the same thing or at least relatively comparable—that is not true. One key difference is that an insurance “policy with a deductible obliges the insurer to respond to a claim from ‘dollar one’ (i.e., immediately upon tender), subject to the insurer’s right to later recoup the amount of the deductible from the insured.”  Allianz Ins. Co. v. Guidant Corp., 884 N.E.2d 405, 410 n.2 (Ind. App. 2008). Conversely, an insurance policy subject to a SIR “obliges the policyholder itself to absorb expenses up to the amount of the [SIR], at which point the insurer’s obligation is triggered.”  Id. 
Effect of Self-Insured Retention on Additional Insureds

In Walsh Construction Company v. Zurich American Insurance Company, a general contractor (“Contractor”) was retained to construct a new highway traffic exchange in northwest Indiana. The Contractor hired a subcontractor (“Subcontractor”) to provide a safe traffic pattern through the work zone of the project. The Contractor’s subcontract required the Subcontractor to procure a commercial general liability insurance policy that named the Contractor as an additional insured on a primary and noncontributory basis (“CGL Policy”). 
A motorist was injured while operating his vehicle through the work zone’s traffic pattern, and the motorist filed suit against the Contractor alleging that the Contractor had negligently created an unsafe traffic pattern. The Contractor requested the Subcontractor’s insurer (“Insurer”) who issued the CGL Policy that named the Contractor as an additional insured to defend the Contractor against the lawsuit filed by the motorist. However, the Insurer refused to defend the Contractor, because the Subcontractor had a $500,000 per occurrence SIR endorsement and argued that the Insurer didn’t owe any obligations to the Contractor as an additional insured under the CGL Policy until the full $500,000 SIR amount had been satisfied by the Subcontractor. On appeal and after analyzing the applicable insurance policy language and case law, the Indiana Court of Appeals agreed with the Insurer and held that the SIR endorsement “shifts the initial cost burden from [the Insurer] to [the Subcontractor], the named insured, not just for [the Subcontractor’s] damages and defense costs but also for any additional insured’s damages and defense costs.” Accordingly, the SIR endorsement amended the Insurer’s obligations under the CGL Policy to defend the Contractor by placing the first $500,000 of that burden on the Subcontractor. Thus, the Contractor was not successful in obtaining a defense and coverage from the Insurer despite being named as an additional insured on the Subcontractor’s CGL Policy.
Additional Risk to Additional Insureds

Many parties may incorrectly conclude that they will be sufficiently protected by simply receiving a certificate of insurance naming themselves as an additional insured. That is not the case as evidenced by the Walsh Construction decision. Although not an issue nor addressed in the Walsh Construction decision, what would have happened to the rights of the additional insured under the Subcontractor’s CGL Policy if the Subcontractor didn’t have the ability to pay the $500,000 SIR? For example, could the Contractor (instead of the Subcontractor) have paid the SIR itself in order to then avail itself as an additional insured under the Subcontractor’s CGL Policy? This was not specifically addressed by the court, but it may make sense to review the commercial general liability insurance policy itself in order to determine if the policy requires that the SIR be paid solely by the named insured (and not the additional insured).
Addressing Self-Insured Retentions

Too often parties fail to focus on the insurance requirements that are specified in their contracts or to verify that these insurance requirements are being complied with until after a claim arises, and then it may be too late. As specifically noted by the court in the Walsh Construction decision, if a contractor disapproves of a subcontractor obtaining a SIR endorsement, the contractor “can manage its contractual relationships with its subcontractors accordingly.” As a result, a contractor may, in its subcontracts, contractually require the subcontractor to maintain insurance policies with deductibles and specifically preclude the use of SIR endorsements. To verify that the subcontractor is in compliance with such requirements, the contractor should obtain a copy of the subcontractor’s commercial general liability policy to confirm that it provides for a deductible and not a SIR. Parties should also be aware that such a contractual prohibition of SIR endorsements may have an additional cost associated with it, and for example, subcontractors may try and pass the additional cost of deductibles to the contractor.
All parties should be aware of SIRs and consult with their legal counsel and insurance representatives including in the drafting of appropriate insurance requirements in their subcontracts and other contracts.
Steven Jones is a partner with Ice Miller LLP. Ice Miller's Construction Practice Group is ranked as a National Tier 1 Practice in U.S. News & World Reports' Best Law Firms. Steven practices construction law with a focus on assisting clients in preparing and negotiating construction and design contracts as well as handling construction disputes. Steven can be reached at or (317) 236-2436.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances. 
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