Whose Money Is It? The Interplay of the SIR & the Made-Whole Doctrine

A self-insured retention or “SIR” typically refers to a dollar amount stated in a liability policy that the insured must satisfy before the insurer is required to defend or indemnify a claim. In most instances, the insured satisfies the SIR by paying the initial defense costs up to the amount of the SIR. Many liability policies state that the insured must pay the SIR from its own funds. Other policies state only that the insured must pay the SIR but do not specify where those funds must come from. For the latter type of policies, the Florida Supreme Court has held that an insured may satisfy the SIR using funds received from a third party. Intervest Construction of Jax, Inc. v. General Fidelity Ins. Co., 133 So. 3d 494 (Fla. 2014).

In Intervest, the insured general contractor received settlement funds of $1.6M from a third party subcontractor in a personal injury case brought against the general contractor by a homeowner. The general contractor had a $1M SIR under its commercial general liability policy, so it paid $1M of the funds to the plaintiff and claimed that the funds satisfied its SIR obligation. At that point a dispute arose between the insurer and the general contractor as to which party was responsible for payment of the additional $600,000. The Florida Supreme Court held that the general contractor could satisfy the SIR by payment of funds received from the subcontractor. The court further held that the policy language did not trump Florida’s “made-whole doctrine” which entitled the general contractor to be made whole for its losses before its insurer had a right to any funds received from third parties.

Recently, the Middle District of Florida also dealt with the interplay of the made-whole doctrine and the SIR under a commercial general liability policy. Summit Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 8:13-CV-295-T-17TGW, 2015 WL 628761 (M.D. Fla. Feb. 12, 2015). There, the court held that the made-whole doctrine does not support an affirmative claim by an insured against an insurer to recover settlement payments obtained by an insurer from third parties in excess of the insured’s SIR.

In that case, the general contractor was sued for construction defects on three apartment projects. The general contractor’s commercial general liability insurance policies had either a $50,000 or $100,000 per-claim SIR, below which the insurer had no defense or indemnity obligation. In each of the lawsuits, once the general contractor exhausted the SIR by payment of defense costs, the insurer defended the suits. The insurer eventually settled all three of the cases on behalf of the general contractor, and the total amount recovered by the insurer from third parties exceeded the SIR amount the general contractor had paid. The general contractor sought to recover the excess amounts from the insurer based upon the Florida Supreme Court’s decision in Intervest. Essentially, the general contractor argued that it had priority over the funds under the made-whole doctrine.

The court rejected the general contractor’s argument and reliance on Intervest. First, the court pointed out that other cases applying the made-whole doctrine involved circumstances where there was a limited pool of money and competing claims by the insured and insurer. The general contractor had failed to present evidence to suggest that it was unable to recover from the third parties. Second, the court noted that there was no precedent upon which to allow an affirmative claim under the made-whole doctrine. The typical use of the doctrine is as a defense to a claim by an insurer to recovery obtained by an insured.

So what do these cases mean for your company? First, depending on the language of your company’s liability policy, it may be possible to satisfy the SIR with funds received from a third party. Second, your company should consider pursuing recovery from potentially responsible third parties so that it has full rights to any recovery obtained. Finally, companies should always carefully review the language contained in their insurance policies. The provisions governing SIRs and deductibles are often overlooked as boilerplate language. As these cases illustrate, however, such provisions can be very important and should be discussed with an attorney because they may impact your litigation strategy. These issues are especially relevant in the construction industry where lawsuits are often subject to third party claims against subcontractors, subconsultants and suppliers.