Overview: An employee working at a home improvement retailer hit a customer with a forklift. The customer brought a negligence suit against the retailer and its employee in state court. At the time, the retailer carried two levels of general liability insurance. The retailer was responsible for the first $2 million per occurrence (a self-insured retention or “SIR”). After $2 million, the primary layer of insurance kicked in, providing up to $1 million of coverage (the primary insurer). Any liability exceeding $3 million fell under an umbrella policy covering additional liability up to $25 million per occurrence (the excess insurer).
The negligence suit did not go well for the retailer. Plaintiff offered to settle the suit for $1,985,000 on the first day of trial. The retailer and its lawyers did not respond to the settlement offer, even after the excess insurer urged them to accept. Just before verdict, the retailed entered into a “high-low” settlement agreement with the plaintiff, promising to pay at least $500,000 regardless of the verdict in exchange for capping its payout at $6 million. The jury returned a $13 million verdict, which was reduced to the $6 million settlement under the agreement. The excess insurer indemnified the retailer for liability in excess of $3 million, while reserving its right to seek reimbursement.
The excess insurer then filed suit against the retailer in Illinois district court. The excess insurer argued that the retailer violated its duties under Illinois law by rejecting the settlement offer and proceeding to trial. The district court initially dismissed the insurer’s claims of breach of contract. Then, it dismissed the insurer’s remaining claims against the retailer.
On Appeal: The excess insurer then filed an appeal. In its appeal, the excess insurer argued that the retailer’s “self-insured retention” made it an insurer – and therefore subjected the retailer to the legal responsibilities of an insurer by bearing some of its own liability. However, the appellate court was not “buying” this argument. Instead, the court said the retailer’s first $2 million in liability was its own responsibility regardless of the circumstances and was not insured. In effect, it was a $2 million deductible. While the court used the terms “deductible" and “self-insured” interchangeable, there are distinct differences, which are not pertinent to the facts of this case and will not be discussed herein.
The excess insurer further argued that the retailer violated its duties outlined in its agreement with the primary insurer by rejecting the initial settlement offer. Yes, the retailer owed a duty to its primary insurer to act in good faith during litigation and try to reach settlements below $2 million, but the retailer owed that duty only to its primary insurer… not its excess insurer (different contractual language in the policies with each respective insurer). If the primary insurer believed that the retailer violated its agreement, it could have refused to pay its $1 million tier of the damages. The excess insurer, however, can not enforce the primary insurer’s contractual rights on the retailer.
The excess insurer insisted that the duty of good faith and fair dealing implied in all Illinois contracts required the retailer to give the insurer the same consideration that the retailer had promised to its primary insurer. But equating the two duties would disregard the difference in the policies’ language. In exchange for different premiums, the retailer received different coverage and took on different duties. In the appellate court’s eyes, it appeared that the excess insurer was arguing that the duty of good faith would transform the insurer’s actual insurance policy into one it would have preferred in hindsight.
The excess insurer did not exercise its right to participate in the defense, which exposed it to the risk that the retailer would make choices that it did not like. The retailer’s negotiation of a high-low settlement agreement with the plaintiff in the underlying trial demonstrated that it took steps to limit its insurers’ eventual liability. For the above reasons, the appellate court affirmed the district court’s dismissal.
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Self-Insured Retentions and High Deductibles: Their Impact on Insurers and Policyholders