Understanding SIRs, Deductibles, and Policy Language

1. SIRs, Deductibles and the Importance of Policy LanguageMarch 9, 2011 ERIC ADAMS DUTTON BROCK LLP

2. The Benefits of a Self-Insured Retentions (“SIR”) or Deductible: Lower premiums • Provides for less exposure under the policy • Allows for a better risk rating • Addresses the problem of “moral Hazard”

3. The Benefits of a Self-Insured Retentions (“SIR”) or Deductible: Promotes good risk-management practices • Identify, assess and prioritize risks • Mitigate risks through internal claims-handling

4. Is There a Difference Between a Self-Insured Retention and a Deductible? • “A 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. A policy subject to a SIR, in contrast, obliges the policyholder itself to absorb expenses up to the amount of the SIR, at which point the insurer’s obligation is triggered”. Allianz Ins. Co. v. Guidant Corp., 884 N.E. 2d 405, 410, n.2 (Ind. Ct. App. 2008)

5. Is There a Difference Between a Self-Insured Retention and a Deductible? • “A self-insured retention is similar to a deductible, except that the insurer does not defend the claim unless the insured intends to call upon the policy” Foley-Cornish v. Nabor Drilling Ltd., 2007 CarswellAlta 502 (ABQB)

6. Is There a Difference between a Self-Insured Retention and a Deductible? • “A deductible turns an insured into an ‘insurer’ for the initial portion of the loss. Thus, it is sometimes called a ‘self-insured retention’.” McNaughton Automotive Ltd. v. Co-operators General Insurance Co.2005 CarswellOnt 2500 (Ont. C.A.)

7. The Importance of Policy Wording Consider: • Who bears the duty to handle and defend claims within the SIR/deductible? • Is the SIR/deductible diminished by defence or adjustment costs or simply by payments made to satisfy judgments or settlements?

8. The Importance of Policy Wording Consider: • Is the consent or approval of the insurer required to settle a claim outside of the SIR/deductible? • Is the consent or approval of the policyholder required to settle a claim within the SIR/deductible?

9. Do Defence Costs Diminish the Deductible? • There are generally two ways that an SIR in a liability policy can be exhausted: • through payments made to satisfy settlements or judgments • through the expenditure of legal fees or adjustment costs

10. Do Defence Costs Diminish the Deductible? CONSIDER THE POLICY LANGUAGE! • Under some policies, defence and adjustment expenses diminish the deductible. • Under other policies, defence and adjustment expenses do not diminish the deductible (they are entirely the responsibility of the insurer).

11. Do Defence Costs Diminish the Deductible? • Does your policy expressly excludes defence costs from the deductible? • Defence costs are do not apply against the deductible (Swan Wooster Engineering Co. v. Simcoe & Erie General Insurance Co., [1971] I.L.R. 1-406 (BCSC))

12. Do Defence Costs Diminish the Deductible? • Is your policy silent on the point? • Defence costs likely do not diminish the deductible.

13. “While the retention clause may limit the amount by which Guardian [an excess insurer] must indemnify the respondents where liability is established, it does not diminish Guardian's clearly stated duty to assume the defence of the insured. In my respectful view, the trial judge correctly construed the policy in concluding that the retention clause "addresses only the obligation to pay and does not limit or diminish or, indeed, even address in plain terms the unqualified agreement [of Guardian] ... 'to assume the defence of the insured in any action'" and properly declared that Guardian has an obligation to defend the respondents against the claims in the Lumsden Building action. • Broadhurst & Ball v. American Home Assurance Co(1990), 76 D.L.R. (4th) 80 (Ont. C.A.):

14. Do Defence Costs Diminish the Deductible? • Does the policy seem to suggest that defence costs apply against the deductible? THIS MUST BE CLEAR!

15. Do Defence Costs Diminish the Deductible? • In Alie v. Bertrand & Frère Construction Co. (Ont. C.A.),an excess insurer agreed to pay for that portion of the “ultimate net loss” in excess of the retained limits. “Ultimate net loss” was defined to include “sums paid or payable as… [amount other things]… adjustment, investigation and defence of claims”. • The Ontario Court of Appeal held that defence costs did not count against the retention.

16. Do Defence Costs Diminish the Deductible? • In Pacco Insurance Co. v. Zagora Holdings Ltd., the policy obliged the insured to assume and fund, up until a $5,000 deductible “each and every loss or claim hereunder, from the first dollar of loss including… external adjusters’ fees” and “legal fees and disbursements”. • The Court held that defence costs and adjusting fees applied only against the deductible once a Statement of Claim issued and not for expenses incurred prior to the matter going to litigation.

17. Do Defence Costs Diminish the Deductible? • In Kansa General Insurance Co. v. Elbow Skiing Ltd. the deductible applied to “all damages … including legal expenses and adjusters fees”. • The Court held that legal expenses and adjusting fees incurred by the insurer could not be characterized as “damages” and, thus, did not count against the deductible.

18. Read the policy’s claims-handling provisions carefully! Consider: • who is responsible for adjusting and defending claims • when and how this responsibility is trigged • whether the expenses incurred to adjust and defend the claims apply against the SIR or deductible.

19. Settlements • As SIRs and internal claims-handling becomes more common, we will likely see an increase in litigation over control of the settlement process.

20. Settlements • If a policyholder assumes responsibility for handling claims within the retention… • Is the policyholder is entitled to settle claims for amounts in excess of the retention without the approval or consent of the insurer? • If the insurer bears responsibility for claim-handling… • Is the insurer entitled to settle claims within the limits of the retention without the approval or consent of the policyholder?

21. Settlements • If a policyholder assumes responsibility for handling claims within the retention… “The insured owes no duty to defend or indemnify the excess carrier; hence, the carrier can possess no reasonable expectation that the insured will accept a settlement offer as a means of ‘protecting’ the carrier from exposure. The protection of the insurer’s pecuniary interests is simply not the object of the bargain.” Commercial Union Assurance Companies v. Safeway Stores, Inc 610 P.2d. 1038 (Cal. Sup. Ct.)

22. Settlements • If a policyholder assumes responsibility for handling claims within the retention… • The insured failed to report on the progress of the litigation, to convey offers to settle, to inform the insurer of the theory of the defence and to advise that the action had proceeded to trial. The Court held that the insured’s failures were a substantial breach of the policy and that the insurer was absolved from its obligation to indemnify. Canadian Newspapers Co. v. Kansa General Insurance Co.1996 CarswellOnt 3227 (Ont. C.A.)

23. Settlements • If the insurer bears responsibility for claim-handling… • In American Protection Insurance Co. v. Airborne, Inc., a federal district court, applying Illinois law, held that a policy permitting the insurer to investigate and settle and claims, “unambiguously gave [the insurer] the right to settle the third party claim involve here without [the insured’s] consent”

24. Settlements • If the insurer bears responsibility for claim-handling… • In Stan Koch & Sons Trucking, Inc. v. Great West Casualty Co., a federal district court, applying Minnesota law, held that the policy provided the insurer the “unfettered right to settle claims despite the substantial retention in the policy”.

25. Settlements • If the insurer bears responsibility for claim-handling… • In United Capitol Insurance Company v. Bartolotta’s Fireworks Company, Inc., the Wisconsin Court of Appeals, rejected the suggestion that the existence of a retention “somehow separates this single policy into two, leaving [the insured] with absolute authority over small claims (those less than $25,000) and [the insurer] with power over the remainder”.

26. Settlements • If the insurer bears responsibility for claim-handling… • In American Home Assurance Co., Inc. v. Hermann’s Warehouse Corp., the Court held that an insurer owes no duty of good faith to the insured when settling a claim requiring a substantial contribution from the insured’s retention or deductible. It held that the insurer can settle without bone fide regard to the insured’s interests and still recover the deductible.

27. Settlements • If the insurer bears responsibility for claim-handling… • In Canada it is clear that an insurer must consider the policyholder’s interests when settling claims outside of the upper limits of the policy

28. Settlements • Shea v. Manitoba Public Insurance Corp reads: • “[A]n insurer may owe duties to its insureds which are fiduciary in nature, but that it is not a true fiduciary since the commercial nature of the relationship between the insured and insurer does not require the latter to act solely for the benefit of its insureds, and does not demand a duty of undivided loyalty. The insurer is held however, to a duty of good faith, and fair dealing, and to give equal consideration to its insured’s interests with its own.”

29. Settlements THE IMPORTANCE OF POLICY LANGUAGE Consider: • Express language imposing a duty upon an insured to attempt to resolve claim within an SIR • Express language stipulating that where a policyholder refuses to settle a claim within a SIR, the insurer’s liability is limited to the extent of the offer

30. THE IMPORTANCE OF POLICY LANGUAGE CONSIDER: • Who is responsible for adjusting and defending claim • When and how this responsibility is trigged • Whether the expense incurred to adjust and defend claims applies against the SIR/deductible • Whether the consent or approval of the insurer is required to settle claims outside of the SIR/deductible • Whether the consent or approval of the policyholder is required to settle claims within the SIR/deductible

31. Questions?

32. Thank you!