Retained Limits, Deductibles, and Self-Insurance

Insurance Law A Fact of Life Retained Limits, Deductibles, and

By Eric Hermanson Self-Insurance and Jonathan Toren

The industry has not The last few years have been challenging for insurers and adopted standard policy policyholders alike. As the economy has faltered and com- language, and the general petitive pressures have increased, many companies have principles affecting tried to restructure their insurance programs to reduce premium outlays. Insurers, meantime, This article outlines the basic features transfer of risk depend have looked for ways to manage their limits of self-insured retentions, describes how more conservatively. In this cost-conscious they differ from deductibles, and discusses on a complex, shifting environment, it has become increasingly some common issues that have arisen in common for policyholders, in exchange for interpreting them, such as how the duty body of case law, which reduced premiums, to agree to forego first- to defend is allocated in policies to which dollar coverage and to self-insure or other- these provisions apply, how retentions are varies from jurisdiction wise to assume some part of the risks that exhausted, who may exhaust them, and they might otherwise transfer to insurers. how a policyholder satisfies retentions to jurisdiction. A retention, or self-insured retention when a single claim triggers multiple poli- (SIR), sometimes known as a “retained cies with retention provisions. limit,” is a feature of an insurance policy under which an initial portion of cov- Retentions and Deductibles: ered risk is borne by the policyholder, not What’s the Difference? the insurer. A deductible is a feature of an Many courts, and some commentators, insurance policy under which the insurer, mistakenly believe that a retained limit after defending a lawsuit and paying a cov- is just a kind of large deductible. While ered loss, may charge part or all of that loss retentions and deductibles both require a to the policyholder to reclaim it. Although policyholder to contribute financially to a the two provisions operate differently and covered loss, they serve fundamentally dif- have different coverage implications, they ferent functions and operate very differ- are often confused with one another. This ently in practice. confusion, combined with a poor under- The International Risk Management standing of how the two features operate Institute (IRMI) definitions of the two in practice, has led at times to complicated terms provide guidance as to the differ- coverage disputes. ences. IRMI defines “deductible” as

■ Eric Hermanson is of counsel, and Jonathan Toren is an associate, with Edwards Wildman Palmer LLP in Bos- ton. Their practice focuses on complex insurance coverage disputes, including construction defect, long-tail environmental, professional liability, and CGL claims. Mr. Hermanson is active in DRI’s Insurance Law Committee.

64 ■ For The Defense ■ May 2013 [a]portion of covered loss that is not icy limits. It is “deducted” from the policy expenses, but this is relatively rare. Under paid by the insurer. Most property [and limits through reimbursement. this arrangement, the insurer would agree some liability] insurance policies con- In contrast, when a retention is involved, to defend the policyholder against any tain a per-occurrence deductible provi- a policyholder must pay its portion of the claims that fell within the scope of the pol- sion that stipulates that the deductible loss up front because that amount is not icy. It would have the right to attempt to amount specified in the policy declara- covered by the policy at all. An insurer’s settle these claims within policy limits. It tions will be subtracted from each cov- coverage obligation begins and its limits would pay for any losses that the policy- ered loss in determining the amount of come into play only after the policyholder holder incurred up to the $5 million aggre- the insured’s loss recovery. satisfies this initial “retained” portion of gate. As indemnity payments were made, In contrast, IRMI defines “self-insured the covered loss. Once the policyholder retention” as satisfies the retention, triggering the pol- [a] dollar amount specified in an insur- icy coverage, however, the insurer is lia- ance policy (usually a liability insurance ble up to its full limits. The retention is not The distinction policy) that must be paid before the in- “deducted” from those limits and does not surance policy will respond to a loss. SIRs reduce the amount of the insurer’s poten- between deductibles and [self-insured retentions] typically apply tial financial obligation. See In re Septem- to both the amount of the loss and related ber 11th Liability Insurance Coverage Cases, retentions has a number of costs, e.g., defense costs, but some apply 333 F. Supp. 2d 111, 124 n.7 (S.D.N.Y. 2004). only to amounts payable in damages, A simple example will illustrate. Sup- ramifications, but one of the e.g., settlements, awards, and judgments. pose that a large company is exposed to In sum, a deductible represents a por- frequent small losses of a type generally largest relates to the timing tion of a covered loss lying within the terms covered by commercial general liability of the policy for which the policyholder policies. These small losses are rela- and receipt of payment. may eventually be obligated to reimburse tively consistent and always total at least the insurer. In contrast, a retention is an $500,000 per year. The company also has initial portion of a loss that lies outside the occasional larger losses, which are less fre- however, the policyholder would have to policy. It is a risk that the policyholder has quent and less predictable. reimburse the insurer until the $500,000 agreed contractually to retain for itself. The company in these circumstances aggregate deductible was reached. More- Acknowledging this distinction, most has several choices. First, it could purchase over, the insurer’s payment of deductibles courts treat retained limit policies as a spe- traditional first-dollar insurance, in which would reduce the limits available to pay cies of excess insurance, meaning that they an insurer agrees to defend and indem- other claims: if the company’s covered loss treat it as secondary coverage in which the nify the company against covered claims in a particular year exceeded the $5 million insurer’s coverage obligation takes effect up to a specified aggregate limit of, say, policy limits, but the policyholder reim- only after the policyholder has first satis- $5 million. This arrangement would cover bursed the insurer for $500,000 of that fied its own obligations with respect to the the company’s expected initial $500,000 amount under the policy’s “deductible” alleged loss. See, e.g., Spaulding Composites of covered loss, plus up to $4.5 million in provisions, the policyholder would ulti- Co. v. Aetna Cas. & Sur. Co., 819 A.2d 410, additional covered claims. The insurer, not mately receive $4.5 million in indemnity. 36 n.4 (N.J. 2003). Under this construction, the company, would defend and settle all Alternatively, the company might choose a policy with a retained limit is analogous of these claims, until the aggregate limits to purchase a $5 million policy with a to “traditional” excess policies in which were exceeded. $500,000 aggregate retention. In that case, coverage begins only after a predetermined This insurance, however, would likely the company would have the obligation to amount of underlying primary insurance be quite expensive. The annual premiums pay, and would have the obligation, under has exhausted. would include, at a minimum, the $500,000 most policies, to defend itself against, the in initial expected loss each year, plus the first $500,000 of covered loss. The insur- Why Does the Distinction Between costs of handling and adjusting that loss, er’s obligations would be triggered only af- Retentions and Deductibles Matter? plus the additional costs that the insurer ter the company’s losses exceeded $500,000 The distinction between deductibles and re- expected to accrue in adjusting, defending, in the aggregate. At that point the insurer tentions has a number of ramifications, but and settling larger claims that exceeded the would take over the company’s defense and one of the largest relates to the timing and $500,000 amount. would pay the next $5 million toward covered receipt of payment. When a deductible is If the company liked the idea of having claims. Notably, however, the retention, un- involved, an insurer generally defends and an insurer defend and settle its claims but like a deductible, would not be deducted from settles the claim, up to the limits of its pol- did not want to pay such high premiums, the policy limits, so the policyholder, after icy, then seeks reimbursement from the pol- it might choose to purchase a $5 million satisfying the retention, would be eligible to icyholder for any amount that falls within policy with a $500,000 aggregate deduct- receive the full $5 million limits of the policy. the deductible. The portion of loss compris- ible, operating indemnity only. A few pol- In another variation on this approach, ing the deductible is covered within the policies also apply deductibles to defense the company might choose to purchase

For The Defense ■ May 2013 ■ 65 Insurance Law a $5 million policy with a $500,000 per ently more favorable than the other. The icyholder paid its $250,000 and the primary occurrence retention or deductible. Under choice is one of preference based on the insurer then contributed the entire $1 mil- this approach, the company would be company’s risk profile, its liquidity, its lion limits of its policy. responsible either to defend and to pay, in desire to control its own defense, its tax The court rejected this argument and held a retention arrangement, or to reimburse accounting, and other factors. To the extent that the primary policy contained “a true de- the insurer for paying, in a deductible that one approach or the other offers finan- ductible, properly subtracted from the policy arrangement, all of the small-dollar claims cial advantages, those advantages generally limits.” The court in part relied on the poli- that were asserted against it. Its obligation will be factored into the policy’s premiums. cy’s use of the term “deductible,” but it also would apply to every occurrence that gave When a claim arises under a policy, how- went further, noting that the policy gave the ever, an insurer and a policyholder some- insurer the right to pay damages within the times dispute whether the policyholder deductible if the policyholder failed to do so purchased a deductible or a retention and and stating that if the insurer did choose to If a policyholder does how the insurer should apply relevant pol- pay this portion of loss, it was entitled to ob- icy provisions to the claim. For example, tain reimbursement from the policyholder. not or cannot satisfy the when a loss exceeds the amount of the pol- This is, of course, exactly how a true deduct- icy limits, the policyholder may wish to ible is meant to operate. retention, the insurer may characterize the policy as containing a retention. This characterization would allow Who Defends and How? not have any coverage the policyholder, after satisfying the reten- One key distinction between retentions and tion, to access the full stated limits of the deductibles relates to the defense and hand- obligations whatsoever. policy. The insurer, in contrast, may prefer ling of claims under each of the two types to construe the provision as a deductible be- of policies, which can lead to difficult con- cause a deductible would oblige the insurer flicts between policyholders and insurers. rise to claims not exceeding the $500,000 to pay less than it would with a retention. As a general rule, while the terms of a pol- threshold. The insurer’s obligations would On the other hand, in some circum- icy always control, insurers have immediate be limited to large or catastrophic events, stances an insurer may prefer to construe obligations to defend claims that are subject meaning occurrences that led to claims a policy as containing a retention rather to deductibles. Moreover, in most jurisdic- exceeding the $500,000 amount. than a deductible. This is because policies tions, the insurer controls the settlement One final variation on this theme con- with retentions typically require the policy- of these claims, subject only to its limited sists of “matching deductibles,” or front- holder to pay the entire retention up front as obligation of good faith toward the policy- ing policies. These policies have deductibles a precondition to receiving coverage under holder. Unless the policy language provides equal to the policy’s limits. Thus, in our hy- the policy. Under a strict application of this otherwise, the insurer does not need to ob- pothetical, the company would purchase language, if a policyholder does not or can- tain the policyholder’s consent, and it can a $5 million policy with a $5 million de- not satisfy the retention, the insurer may settle a claim for an amount within the deductible. The effect, in most cases, would not have any coverage obligations whatso- ductible if it believes that a settlement is ap- be that the insurer would defend and han- ever. See Pak-Mor Manuf. Co. v. Royal Sur- propriate even if the insurer knows that in dle claims but would not be required to pay plus Lines Ins. Co., 2005 WL 3487723 (W.D. the end the policyholder will need to pay the any indemnity at all. Fronting policies have Tex. 2005); Insurance Co. of the State of Pa. settlement amount due to the policy’s de- their own specialized body of case law and v. Acceptance Ins. Co., 2002 WL 32515066, ductible provisions. See, e.g., American Pro- lie outside the scope of this article. In gen- at *3 (C.D. Cal. Apr. 29, 2002). tection Ins. Co. v. Airborne, Inc., 476 F. Supp. eral, they may be useful devices for sophis- Finally, the retention versus deductible 2d 985 (N.D. Ill. 2007); Hartford Accid. & ticated policyholders that have the financial issue may arise when excess coverage is at Indemn. Co. v. U.S. Natural Resources, 897 capacity to cover their own losses but that play. The case of Tokio Marine and Fire Ins. F. Supp. 466 (D. Or. 1995). need to satisfy state financial responsibility Co., 693 N.Y.S.2d 520 (N.Y. App. Div. 1999), In contrast, under an excess policy that laws “guaranteeing… third persons who are is illustrative. There, a primary insurer is- sits above a retained limit, the insurer injured that their claims against [the poli- sued a $1 million policy with a $250,000 “de- generally has no obligation to defend the cyholder] will be paid.” Columbia Cas. Co. ductible,” which was defined a bit vaguely as policyholder until the policyholder has v. Northwestern Nat. Ins. Co., 231 Cal. App. “the amount of damages under this policy exhausted the retention by paying covered 3d 457 (Cal. Ct. App. 1991). which the insured has a duty to pay.” The claims. In these types of policies, the pol- policyholder contributed $250,000 and the icyholder is permitted to handle its own Are We Dealing with One or the Other? primary insurer contributed $750,000 to- defense and to make its own settlement When a company wishes to buy insur- ward a settlement. The excess insurer ar- decisions—a feature that some policyhold- ance and wishes to retain some risk in gued, however, that the $250,000 amount ers find desirable. See, e.g., National Union exchange for lower premiums, it may plau- was not a true deductible but a form of self- Fire Ins. Co. of Pittsburgh, PA v. Lawyers’ sibly choose to employ either a retention insured retention. It argued that its excess Mutual Ins. Co., 885 F. Supp. 2d 202 (S.D. or a deductible. Neither approach is inher- policy was not triggered until after the pol- Cal. 1995) (“unlike a deductible, ‘the excess

66 ■ For The Defense ■ May 2013 insurer’s [defense] obligations do not arise using the insurer’s money for a defense, in ute its retained limit to allow the insurer to until after the amount of the self-insured the hope of avoiding liability altogether. enter an otherwise reasonable settlement. retention has been paid.’”). The insurer, in contrast, may be tempted Harbor Ins. Co. v. City of Ontario, 282 Cal. Sometimes policyholders, accustomed to reach a settlement, cutting off its own Rptr. 701 (Cal. Ct. App. 1991). to the proposition that the duty to defend ongoing expenditures for a defense with is broader than the duty to indemnify, will the knowledge that the policyholder will Can’t Get No Satisfaction argue that an insurer that issued a policy largely or entirely need to pay the settle- As noted, in policies that are written excess with a retained limit has an immediate ment. See, e.g., American Protection Ins. Co. of a retained limit, the satisfaction of the duty to defend any claim that could exceed v. Airborne, Inc., 476 F. Supp. 2d 985 (N.D. retained limit is generally viewed as a the amount of the retention. Most courts Ill. 2007). To help mitigate these tensions, have rejected this argument, although a few some policies now contain provisions that courts have accepted it. E.g., Cooper Labora- give a policyholder the right to participate tories, Inc. v. International Surplus Lines Ins. in the settlement decision when claims fall Under an excess policy Co., 802 F.2d 667 (3d Cir. 1986). The reject- within the deductible amount. ing courts observe, correctly, that a policy In policies with retained limits, the that sits above a retained with a retention provision is a type of excess opposite tensions may exist. The policy- policy. Similar to an excess policy, such pol- holder is responsible for defending the limit, the insurer generally icies generally require exhaustion of an un- claim, but it knows that its liability will be derlying amount—the retained limit—as a capped at the amount of the retained limit, has no obligation to precondition to generating any obligation. and the insurer will pay for any judgment So, regardless of the severity of the under- or settlement beyond that amount. Thus, defend the policyholder lying claim, the policyholder must satisfy if a claimant offers to settle with the pol- that condition to trigger the insurer’s de- icyholder for the amount of or an amount until the policyholder has fense obligations. See Hormel Foods Corp. near the retention, the policyholder may v. Northbrook Property and Cas. Ins. Co., have an incentive to roll the dice and will exhausted the retention by 938 F. Supp. 555 (D. Minn. 1996); United decide to try the case, knowing that its own States Fire Ins. Co. v. Scottsdale Ins. Co., exposure will not increase further with an paying covered claims. 264 S.W.3d 160 (Tex. App. 2008); Allianz adverse judgment and that its exposure Ins. Co. v. Guidant Corp., 884 N.E. 2d 405 may decrease, perhaps to zero, if it can (Ind. App. 2008); City of Oxnard v. Twin City avoid liability altogether. These tensions precondition to coverage. This raises two Fire Ins. Co., 37 Cal. App. 4th 1072 (1995). are exacerbated by the fact that a policy- issues: who can satisfy the retention, and In general, when courts have departed from holder, in contrast to an insurer, has no how the retention must be satisfied. this principle, they have done so only after generally recognized good-faith obliga- These issues can arise in various con- finding the retention provisions of a policy tion to consider an excess insurer’s inter- texts. However, they most commonly occur to be ambiguously or vaguely worded. See, ests in engaging in settlement discussions. when a policyholder becomes insolvent and e.g., Legacy Vulcan Corp. v. Superior Court, See Commercial Union Assurance Co. v. is unable to satisfy the retention with its 185 Cal. App. 4th 677 (Cal. Ct. App. 2010). Safeway Stores, Inc., 610 P.2d 1038, 1042 own assets. In those circumstances, can a In some high-deductible policies, ten- (Cal. 1980) (“a policy providing for excess third party, an additional insured, or per- sions may arise when a defending insurer insurance coverage imposes no implied haps another insurer, step forward to sat- has the chance to settle a claim for less duty upon the policyholder to accept a set- isfy the retention on the policyholder’s than the amount of the deductible but fails tlement offer which would avoid exposing behalf? Conversely, can the insurer avoid to do so. In that case, if a larger judgment the insurer to liability”). any of its coverage obligation if the policy- is entered, and the policyholder ultimately To remedy these tensions, many policies holder, for whatever reason, has not prop- has to pay the entire amount of its deduct- now require a policyholder to report to the erly satisfied the retention? ible, it may second-guess the insurer’s deci- insurer claims that meet a specified thresh- sion not to settle earlier for a lower amount. old deemed likely to exceed the retention, Who Must Satisfy the Retention? Roehl Transport, Inc. v. Liberty Mut. Ins. and they give the insurer “the right, but not There is no standard language for retained Co., 325 Wis. 2d 56, 115, 784 N.W.2d 542, the duty” to associate in the defense and set- limit policies. Each policy is different, and 571 (Wis. 2010). tlement of these claims. Once an insurer in- each contains slightly different require- Alternatively, in some high-deductible vokes that right, the policyholder has a duty ments for satisfying the specified retention. policies, tensions may arise when an to cooperate. For example, the policyholder While some policies allow the retained insurer has an opportunity to settle a claim may not refuse to convey the insurer’s pro- limit to be satisfied by third parties or for an amount close to or just above the posed settlement terms to the plaintiff, New other insurance, other policies have reten- deductible amount. In that case, the pol- York City Housing Auth. v. Housing Auth. tions that are explicitly “self-insured.” In an icyholder might prefer to pass up the set- Risk Retention Group, Inc., 203 F.3d 145 (2d effort to ensure that the policyholder keeps tlement and to try the case to a verdict, Cir. 2000), and it may not refuse to contrib- its own “skin in the game,” these policies

For The Defense ■ May 2013 ■ 67 Insurance Law require that the policyholder itself, or the holder to show that its liability on a par- the policyholder to pay the full amount of named insured specifically, “actually pay” ticular claim exceeds or might exceed the a self-insured retention before coverage the retention amount. retention amount? Or must the policy- under the policy was triggered. The poli- In general, the rule is that “the insured holder show some actual judgment or set- cyholder, however, was bankrupt and was may purchase other insurance to cover tlement in excess of the retained limit has unable to satisfy this obligation. Thus, the an SIR unless the policy clearly requires occurred? Assuming that satisfying the insurer argued, the policyholder did not the insured itself, not other insurers, to retention requires some judgment or set- have coverage under the policy. An indem- pay this amount.” Forecast Homes, Inc. v. tlement, must the policyholder, or some nitee argued that this interpretation ren- Steadfast Ins. Co., 181 Cal. App. 4th 1466, other party if permitted, actually pay the dered coverage illusory: since the retention liability before the insurer’s obligations are could never be satisfied, as a result of the triggered? What if the party responsible for policyholder’s insolvency, coverage never paying the retention is insolvent and can- could exist. The indemnitee asserted, fur- The question becomes not make the payment? Can an insurer be ther, that this interpretation was contrary required to “drop down” to cover the poli- to the “bankruptcy or insolvency” clause of more difficult… when a cyholder’s retention obligations? the policy, which said that the policyhold- The last of these questions is the easi- er’s bankruptcy or inability to pay would policyholder faces liabilities est, particularly when the amount of the not relieve the insurer of its obligations. settlement or judgment does not exceed The court rejected the indemnitee’s argu- exceeding the retention but the amount of the retention. Analogizing ment. Since the retention had not been sat- to traditional excess policies, most courts isfied, it held that the insurer did not have has not yet incurred any hold that an insurer that sits excess to a an obligation that was being “relieved” by retained limit is not required to “drop the policyholder’s bankruptcy. The court direct financial obligation. down,” or to pay amounts falling within explained: “[The insurer] is not attempting the retention even when the policyholder to avoid its obligations because of [the pol- becomes insolvent. As one court has stated, icyholder’s] inability to pay. Rather, it ar- 1474 (Cal. Ct. App. 2010); National Fire the “self-insured retention is… not an gues that it does not have any obligations Ins. Co. v. Federal Ins. Co., 843 F. Supp. 2d amount that is owed by the [policyholder] because [the policyholder] has not satisfied 1011, 1017 (N.D. Cal. 2012). When the pol- to [the insurer] but, rather, represents the the SIR.” The court also rejected the indem- icy does require this, courts will gener- threshold of [the insurer’s] liability to the nitee’s argument about the “illusory” na- ally enforce that language. For example, [policyholder].” Home Ins. Co. of Illinois v. ture of the coverage. The court pointed out in Forecast Homes, the policy stated that Hooper, 691 N.E.2d 65 (Ill. App. Ct. 1998). that companies in Chapter 11 bankruptcy “you,” a term that the policy defined nar- The question becomes more difficult, are limited but not entirely precluded from rowly to mean only the Named Insured, however, when a policyholder faces liabili- paying funds, and it noted that the policy- had to satisfy a self-insured retention as ties exceeding the retention but has not yet holder had benefited from the contract be- a precondition to coverage. 181 Cal. App. incurred any direct financial obligation. In fore it became insolvent. See also Rosciti v. 4th at 1466. Applying the policy’s defini- these circumstances, while the policy lan- Liberty Mut. Ins. Co., 659 F.3d 92 (1st Cir. tion of “you,” the court held that payments guage will ultimately control, most poli- 2011) (concluding that a policy required made by additional insureds under the pol- cies require that the liabilities be reduced actual payment of the retention before the icy did not satisfy the retention and did not to actual obligations in the form of “judg- insurer’s obligations were triggered but trigger the excess insurer’s coverage obliga- ments or settlements” before the retention holding the policy language unenforceable tion. In other words, the payments made by can be satisfied. Moreover, many insur- as a matter of state public policy). the additional insureds did not exhaust the ers argue that the policyholder, or another retention, and the insurer’s coverage obli- party authorized by the policy, must actu- How Does Allocation Work? gations were not triggered until the named ally pay the amount owing, as a precon- Questions may also arise when multiple insured had made payments exceeding the dition to coverage. See Pak-Mor, 2005 WL policies are triggered by the same claim retention amount. See also Virginia Sur. Co. at 3487723. Construing these provisions and some of the policies contain deduct- v. Lexington Ins. Co., 2011 WL 2653374, at strictly, most courts hold that when a pol- ibles or retentions. Under these circum- *4 (N.D. Cal. July 6, 2011) (enforcing policy icyholder has not satisfied and cannot sat- stances, does a retention qualify as “other language that precluded “another insured isfy the retention, the policyholder does not insurance” within the meaning of the pol- or an insurance company [from] attempt- have coverage even though the policyhold- icies’ “other insurance” clauses? When ing to ‘pay’ or satisfy the SIR on [the Named er’s liability would exceed the SIR amount. more than one policy applies to the same, Insured’s] behalf”) (emphasis added). For example, in Insurance Company long-tail loss, how many retentions or of the State of Pennsylvania v. Acceptance deductibles should the policyholder have How Must the Retention Be Satisfied? Insurance Company, 2002 WL 32515066, to pay? These kinds of questions are often A related issue is how a retention must at *3 (C.D. Cal. Apr. 29, 2002), the court extremely complicated, and disputes may be satisfied. Is it sufficient for a policy- dealt with a policy that clearly required take place not only between the policy-

68 ■ For The Defense ■ May 2013 holder and its various insurers, but also be uninsured under the first policy, which be satisfied before the policyholder can between the various insurers themselves. would require the second carrier to defend? recover. Thus, all else being equal, the pol- When the second policy is a primary icyholder will generally choose to trigger Is “Self-Insurance” Considered policy, excess only to “other insurance,” policies in years with low or no deductibles “Other Insurance”? many courts hold that the retention is or retentions and with the fewest other lim- In many cases, when a policyholder has not “other insurance” and that the second itations on recovery. purchased several insurance policies that insurer has a first-dollar duty to defend. If the insurer from the triggered year in provide concurrent coverage for a particu- Commonwealth Edison Co. v. Nat’l Union an “all sums” jurisdiction then seeks equi- lar loss, some or all of the policies will con- Fire Ins. Co. of Pittsburgh, PA, 752 N.E.2d table contribution from policies in other tain “other insurance” clauses that specify 555 (Ill. App. Ct. 2001). The rule has excep- that the policy provides excess insurance tions, however, and a different outcome will over “other insurance,” or “all underly- result when the “other insurance” clause ing insurance,” that may be available to has been drafted to address this situation. A majority of states, respond to the loss. Insurers intend these Thus, in Nabisco, Inc. v. Transport Indem- provisions to make clear that the policy nity Company, 192 Cal. Rptr. 207 (Cal. Ct. known as “pro rata” containing the “other insurance” clause App. 1983), the policyholder had one pri- will only respond to the loss after the pol- mary policy with a $50,000 retention and jurisdictions, allocate icyholder’s other applicable coverage is was an additional insured under a second exhausted. In such cases, is the policy with primary policy, which contained an “other coverage for long-tail claims the “other insurance” clause also excess insurance” clause, rendering the second over an unsatisfied, self-insured reten- primary policy excess over “other insur- across all years in which tion that appears in a different but other- ance or self insurance.” Id. at 208 (empha- wise applicable policy? Courts have split on sis added). The plaintiff argued that its bodily injury or property the answer to this question. Some courts $50,000 retention made it “uninsured” for hold that a self-insured retention does not that amount. Thus, it argued, the “other damage has occurred. constitute “other insurance” and that an insurance” clause did not apply. The court insurer’s policy, written to be excess over rejected this argument, finding that the “other insurance,” must respond on a pri- policyholder “made a risk management years in which injury or damage occurred, mary basis: paying the loss even though decision not to buy coverage for the first can those insurers avoid paying by relying the SIR in another policy has not been sat- $50,000” of exposure and that it could not on the fact that the retentions underlying isfied. See Wake County Hospital System, have had any reasonable expectation of their policies remain unsatisfied? In gen- Inc. v. National Cas. Co., 996 F.2d 1213 (4th coverage for that amount. eral, they cannot. In the context of equita- Cir. 1993); American Nurses Ass’n v. Pas- ble contribution claims among successively saic General Hospital, et al., 484 A.2d 670 How Many Retained Limits triggered insurers, courts generally hold (N.J. 1984). Other courts, however, hold Must Be Exhausted? that policies that have retentions must con- that “self-insurance,” falling within the A final issue related to deductibles and tribute to liabilities exceeding the unsat- terms of a self-insured retention, should be retentions arises in “long-tail” cases, which isfied SIR, along with policies that do not treated as “other insurance” because a con- involve a single occurrence that produces contain any SIR whatsoever. See Aerojet- trary holding would “allow[] the insured bodily injury or property damage in multi- General Corp. v. Transport Indem. Co., 948 to ‘manipulate the source of its recovery ple, successive policy periods. In a minority P.2d 909 (Cal. 1997). The reason for this is and avoid the consequences of its decision of states, known as “all sums” jurisdictions, that an equitable contribution claim is not to become self-insured.’” Atchison, Topeka coverage for these claims is allocated on a derivative of the policyholder’s rights. Id.; & Santa Fe Railway Co. v. Stonewall Ins. joint and several basis. The policyholder is Fireman’s Fund Ins. Co. v. Maryland Cas. Co., 71 P.3d 1097, 1131 (Kan. 2003) (quot- allowed to select a particular policy year Co., 65 Cal. App. 4th 1279 (Cal. Ct. App. ing Missouri Pac. R. Co. v. Int’l Ins. Co., 679 and allocate all of its loss to that year. The 1998). It is, instead, a matter “between N.E.2d 801, 810 (Ill. App. Ct. 1997)). insurer in the selected year must pay the insurers” that are co-obligors on the risk. A related question can arise concerning loss, up to the limits of its policy, and then Aerojet, 948 P.2d at 929. Even if an insurer the duty to defend. If one policy contains a seek contribution from the other insur- might be able to deny coverage to its pol- self-insured retention, and a second policy ers of the other years when injury or dam- icyholder on the grounds that a retention contains a duty to defend provision but that age took place. See, e.g., State of California remained unsatisfied, the insurer cannot policy is excess to “other insurance,” is the v. Continental Ins. Co., 55 Cal.4th 186 (Cal. necessarily use that argument to defeat an first policy’s retention considered “other 2012). As a rule, however, in these “all equitable contribution claim brought by insurance,” which essentially would obli- sums” states, if the policyholder elects to another insurer. gate the policyholder to defend the claim allocate losses to a year in which it is sub- In sharp contrast to these “all sums” as long as the retention remains unsatis- ject to substantial deductibles or reten- jurisdictions, a majority of states, known fied? Or is the policyholder considered to tions, the deductibles and retentions must Limits, continued on page 90

For The Defense ■ May 2013 ■ 69 Environmental, from page 36 • Have steps been taken to ensure that all I used it as an effective tool to educate entrenchment in protecting that invest- of the necessary parties on both sides the mediator and to show the oppos- ment. The best time to mediate a dispute participate? Counsel should not leave ing party that I have an understanding is as soon as possible after things have set- it to chance that opposing counsel will of its point of view and a willingness to tled down a bit, the lawyers have a basic ensure that all necessary participants compromise? understanding of the underlying facts and are at the mediation. Despite everyone’s best efforts, medi- evidence, the parties have a clear under- • Have I prepared my own client to come ations do not always succeed on the day standing of what lies ahead both in terms to the mediation with the requisite read- of the mediation session. It is sometimes of cost and commitment, if they take their iness to compromise? necessary for one or more of the parties case further, but well before the incurred • Have I explained to my own client the to have some time to reflect on and absorb costs have escalated beyond the point of nature of the process and how it is dif- the day’s efforts. Some mediators make it no return. ferent from litigation? a practice to follow-up with the parties’ • Have I ensured that my client has an counsel following a failed mediation, after Conclusion accurate understanding of the media- a few days have passed, in an attempt to As noted at the outset, well-managed medi- tor’s role? move the settlement process forward. In ations can be extremely effective at set- • Have I explained the confidentiality of other instances, while the mediation does tling environmental disputes, in whole the process to my client so he or she feels not result in a complete resolution of the or in part. Summarizing the highlights of free to participate openly? issues, it can sometimes resolve the mat- this article, legal counsel will ask the fol- • Have the parties exchanged all of the ter between two or more parties in a multi- lowing questions in organizing, preparing necessary documents and materials to party dispute. And, finally, even when none for, and participating in a successful medi- ensure that there is no knowledge deficit of the issues can be settled, a mediator may ation effort: that will impede a successful outcome? be able to assist the parties in designing a • Is this the right time for a mediation? • What efforts have been made to narrow more cost efficient and time effective -dis • Have we selected a skilled mediator with the gap before the mediation? pute resolution process than protracted lit- requisite industry knowledge of envi- • Is my mediation brief more than a sim- igation. ronmental issues? ple restatement of my pleading? Have

Limits, from page 69 for the particular “chunk.” Indeed, some carry out this proration, but one possibility as “pro rata” jurisdictions, allocate cover- courts have reached exactly that conclu- might be to allocate to the policyholder, for age for long-tail claims across all years in sion and required the policyholder to ex- each policy year, a fraction of the retention which bodily injury or property damage haust the retention in each triggered year. or deductible that would otherwise apply has occurred. In these jurisdictions, the See, e.g., Benjamin Moore & Co. v. Aetna to that year, corresponding to the ratio that policyholder’s liability for a single trigger- Cas. & Sur. Co., 843 A.2d 1094, 1105 (N.J. that policy year bears to the total number ing occurrence is divided by the number of 2004) (“[O]nce the amount of loss allocable of years of potential coverage. years triggered, and liability is apportioned to the policy period is determined, it is to among the various insurers, most often be treated exactly as any actual loss during Conclusion based on each insurer’s time on the risk, that period would be treated in accordance Over the last several years, retentions and most often with the policyholder retaining with the policy provisions, including lim- deductibles have become a fact of life in liability for self-insured periods, deduct- its and exclusions.”); Liberty Mut. Fire Ins. many insurance markets. But these provi- ibles, and the like. See Boston Gas Co. Co. v. J.T. Walker Indus., Inc., 817 F. Supp. sions, which require policyholders to bear v. Century Indemn. Co., 910 N.E.2d 290 2d 784, 790 (D. S.C. 2011) (“The majority of or to reimburse an initial portion of cov- (Mass. 2009). courts to adopt a pro rata allocation method ered risk, can pose significant interpretive In pro rata jurisdictions, when a single for liability based on progressive damage challenges. The industry has not adopted occurrence produces injury or damage over have agreed that an insurer is entitled to a standard policy language, and the general multiple policy periods, should the policy- full deductible for each triggered policy.”). principles affecting transfer of risk depend holder pay one retention or deductible? Or In Boston Gas, however, the Supreme on a complex, shifting body of case law, should it pay multiple retentions, specifi- Judicial Court of Massachusetts, perhaps which varies from jurisdiction to jurisdic- cally one for each policy year? Logic sug- sensitive to the potential harshness of the tion. Policyholders, insurers, and attorneys gests one possible answer: since the pro pro rata rule, opted to split the baby. It held need to examine the policy language care- rata approach divides the policyholder’s that “unless the policy language unambig- fully. If the policy language is unclear, it liability into distinct “chunks,” each as- uously provides otherwise, a policyholder’s may be necessary to hire specialized cov- signed to a different policy year and in- self-insured retention should be pro-rated erage counsel or other experts to navigate surer, the policyholder should be obligated on the same basis as an insurer’s liability[.]” the legal pitfalls and to guide the parties, to satisfy the applicable retention or deduct- See Boston Gas, 910 N.E.2d at 316. The court or the courts, toward a satisfactory result. ible before accessing coverage in that year did not offer concrete guidance on how to

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