Insurer Did Not Breach Any Duty Where No One Had Ever Satisfied Policy’s Self-Insured Retention And The Underlying Action Resulted In A Default Judgment Against The Insured
Lexington Insurance Company v. Energetic Lath & Plaster, Inc., 2016 U.S. Dist. LEXIS 118450 (E.D. Cal. Aug. 31, 2016)
Categories: Bad Faith – Duty to Defend – Duty to Pay – Self-Insured Retention Not Satisfied
In Lexington Insurance Company v. Energetic Lath & Plaster, the district court considered if a self-insured retention -- which had never been satisfied by anyone -- precluded breach of contract and “bad faith” claims against the insurer in connection with underlying construction defect litigation in which the insured’s default was entered before the insurer proffered a defense, which counsel assigned by the insurer was later unable to be set aside, followed by a default judgment against the insured in excess of the self-insured retention amount.
The insurer issued commercial liability policies to a builder of a residential home development. One of the home buyers sued the policyholder alleging numerous construction defects. After the policyholder’s default was entered, the insurer assigned counsel to defend. It was disputed whether the insurer had been aware of the underlying action before the default. The state court in the underlying action held a bench trial, found in the claimants’ favor, and assigned the policyholder’s rights under the subject policies to claimants. In the coverage action, the Eastern District of California, granted the insurer’s motion for summary judgment on the breach of contract claim under California law, and on the related “bad faith” claim under Nevada law.
The insurer successfully argued that it never had and never breached any duty because each potentially relevant policy was subject to a retained limit or self-insured retention (“SIR”) that was never satisfied. Each policy included the following (or substantially similar) provisions: “’we’ do not have the duty to investigate or defend any ‘occurrence,’ claim or ‘suit’ unless and until the Retained Limit is exhausted with respect to that ‘occurrence,’ claim or ‘suit.’ However, we may, at our discretion and expense, participate with you in that investigation of any such ‘occurrence’ and the defense of any such claim or ‘suit’ that may result. … Once the Retained Limit is exhausted, with respect to any specific ‘occurrence,’ claim or ‘suit,’ we shall thereafter have the right and duty to defend that ‘occurrence,’ claim or ‘suit.’ … Your bankruptcy, insolvency, inability to pay, failure to pay, or refusal to pay the Retained Limit will not increase our obligations under the policy. In the event there is insurance, whether or not applicable to an ‘occurrence,’ claim or ‘suit’ within the Retained Limit, you will continue to be responsible for the full amount of the Retained Limit before the limits of insurance under this policy apply. In no case will we be required to pay the Retained Limit or any portion thereof.” The court found that the policy was unambiguous and, although it did not expressly require that the policyholder pay the SIR, someone had to pay the SIR before coverage under the policy applied.
The court rejected the argument that the insurer had waived its right to rely on the SIR provisions by assigning defense counsel when the policyholder had apparently not received a reservation of rights letter. The insurer had issued a reservation of rights letter but it was returned as undeliverable. The court cited California cases for the proposition that providing a defense under a primary policy does not require a reservation of rights under the excess policy, and will not prevent an insurer from contesting excess coverage. In the context of the case at hand, the court stated SIRs are the equivalent of primary liability insurance, and that policies subject to SIRs are “excess policies” with no duty to defend or pay until the SIR is exhausted.
Also, the court rejected the notion that the SIR can be fulfilled through a reduction in damages when the default judgment is paid, as it “would essentially obliterate the SIR provision in the policy. If an SIR limit can be satisfied by the result obtained through litigation, then the words ‘[w]e do not have the duty to investigate or defend any ‘occurrence’, claim or ‘suit unless and until the Retained Limit is exhausted’ would be meaningless. The satisfaction of the SIR is required before Energetic is eligible for coverage under the policies, and the requirement has not been met here.” Neither the assignee nor the policyholder satisfied the SIR, and the court therefore granted the insurer’s motion on the breach of contract. The court concluded there was no basis for the “bad faith” claim either, and granted summary judgment on that as well.
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