The Florida Supreme Court, on questions certified by the Eleventh Circuit Court of Appeals, determined that a policyholder need not pay out of pocket to exhaust its policy’s self-insured retention (“SIR”), but could instead rely on payments made by another insurance company. The decision, Intervest Constr. of Jax, Inc. v. General Fid. Ins. Co., No. SC11-2320 (Feb. 6, 2014 Fla. Sup. Ct.), arose out of a serious injury that occurred when a homeowner fell from attic stairs that were installed in her newly-constructed home. She sued the general contractor, who sought indemnification from the subcontractor that built the stairs.
The parties settled the case for $1.6 million. The subcontractor’s insurer contributed $1 million, which it paid to the general contractor to resolve the indemnification claim. The general contractor’s policy had a $1 million SIR. The general contractor paid the plaintiff the $1 million, plus another $600,000 (which came jointly from the general contractor and its insurer, pursuant to a non-waiver agreement). The general contractor then sued its insurer to establish that its insurer was responsible to pay the $600,000.
The insurer asserted that its policyholder was responsible to pay the $600,000 because the $1 million SIR was never exhausted. The SIR clause provided that the $1 million SIR was to be paid by “you” or “the insured”. The insurer took the position that, since the $1 million was paid by the subcontractor’s insurer, and not directly by the general contractor, the SIR was not exhausted and its coverage was never triggered. The general contractor argued that the $1 million was paid, in effect, on its behalf by the subcontractor’s insurer, and that it did not have to be out of pocket to satisfy the SIR.
The Florida Supreme Court sided in favor of the policyholder. It held that the SIR provision did not clearly provide that the general contractor had to satisfy the SIR out of its own pocket. In doing so, the Court cited to a series of California cases, and used the cases as a roadmap to help navigate differences in SIR language.
While the Court reached the correct result, its analysis was lacking. It is puzzling as to why the Court would analyze only California cases, when this issue has been addressed in several jurisdictions through the country. In a recent CLE program that I taught for Strafford Publications (Self-Insured Retentions and Deductibles: Key Coverage Issues – presentation materials can be found here), we surveyed this caselaw as well as the variations in the policy language. The Florida Supreme Court’s decision puts Florida among the majority of jurisdictions that allow policyholders to exhaust SIRs with other insurance and proceeds from other parties.
All coverage cases start with an analysis of the specific policy language, as insurance policy language varies, and coverage cases are, at their heart, contract cases. There is no doubt that many of the courts that have addressed this issue have based their decision on the specific policy language at issue. But there are public policy concerns at issue here as well. What if the policyholder was insolvent and there were no funds available to satisfy the SIR? Most courts hold as a matter of public policy that the injured party should not suffer from the defendant’s inability to satisfy its SIR, so long as the insurer gets the benefit of its attachment point.
What if the policyholder settles with its primary insurer for less than the policy limits, but its excess coverage does not attach until the primary coverage is fully exhausted? This is a similar question that frequently arises in coverage cases. It is analogous to the question at issue in the Intervest case, since an SIR essentially acts like a primary layer of insurance. Florida courts follow the “Zeig” rule on exhaustion of primary coverage, named after the seminal Second Circuit decision in Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2d Cir. 1928). See Reliance Ins. Co. v. Transamerica Ins. Co., 826 So.2d 998 (3rd DCA 2001). The Florida appeals court in Reliance, quoting Zeig, reasoned that the insurer had “no rational interest in whether the insured collected the full amount of the primary policies, so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies.”
The Florida Supreme Court similarly should have reasoned from this line of cases that an SIR need not be paid by the policyholder, so long as the insurer is not asked to contribute before its attachment point. This would have been a better justification for the rule set forth by the Court than trying to find justification in some California cases.
The Intervest and Zeig rules are consistent with ordinary contract principles. I am not referring to contra proferentem, or reading a contract against the drafter, although that is an important rule of contract interpretation that plays a role here. Rather, I am referring to the basic tenet of contract law that parties are only relieved of their obligations due to a material breach by the other side. That is, a mere technical, non-material breach does not relieve the other party from performance.
Take the example of a college student who signs a lease. The lease requires him to pay the landlord $1,000 per month in rent. If the student materially breaches the lease, the landlord can evict him. Now imagine the landlord receives the first month’s rent payment on a check written out by the student’s parents. May the landlord declare the student in breach, because the check did not come from the student’s bank account? It may seem obvious that this does not constitute a material breach of the lease, and the landlord cannot use this as an excuse to avoid its obligations under the contract. So why should an insurer be let off the hook from performing if the SIR is satisfied by a party other than the insured? Why does it matter to the insurer, so long as the SIR is paid and the attachment point of the policy is honored? Does the insurer not receive the benefit of the bargain regardless of who pays the SIR?
Ultimately, the Florida Supreme Court came away with the right result. But the Intervest decision leaves open the possibility that insurers could modify their policy language to require payment from the policyholder’s bank account, and such a policy revision may change the result. That would be unfortunate, to deny the policyholder the benefit of the bargain over a non-material breach, regardless of how specific the policy language may be.
Policy language matters. Cases turn on it. Insurance lawyers get paid to parse it out. But ultimately coverage disputes should be decided by giving policyholders and their insurers the benefit of the bargain. Coverage should not be forfeited based on non-material breaches, regardless of the language of the contract. There are enough ‘gotchas’ written into insurance policies already.