No SIR Insurer Cant Avoid Payment if Insured Files for Bankruptcy
SIR is the amount of risk that the insured has retained or kept to cover its own liability. Basically, the insured acts as the insurer of its own risk for a specific monetary amount. As primary insurance, it typically provides for both the defense and indemnification of the insured as a result of an occurrence or upon receipt of a claim. An insured maintains a SIR in order to reduce the cost of premiums on its insurance policy.
Self-insured retention is defined as "[t]he amount of an otherwise-covered loss that is not covered by an insurance policy and that must be paid before the insurer will pay benefits...."1 Following is an example of a self-insured retention endorsement to a commercial general liability policy:
We shall be liable only for the amount of damage in excess of the self-insured retention amount shown in the schedule above for "per occurrence" up to the applicable limit of insurance shown in the declarations of this policy. In the event of your refusal to respond for any reason, the insurance provided by this policy shall not replace the self-insured retention provided by you. In no event shall we be required to substitute for you as respect to your responsibility within the self-insured retention.
If a claim falls within the SIR, the third-party claimant must look for payment of damages directly from the insured up to the specified level of retention. The insured typically will assume responsibility for the handling of those claims falling within the SIR and will report to the insurer only those claims that may potentially fall within the excess layer of coverage.
One or more insurance companies may provide specific layers of coverage above the SIR level. Typically, the excess insurer's obligations do not arise until the primary limits or the SIR have been exhausted.
Even though the insured may have filed for bankruptcy, the obligation of the insurer to pay any covered claim remains.
Exhaustion of the SIR and the Impact of Bankruptcy
Underlying coverage must be exhausted before excess coverage may be reached.2 Further, when there are claims that span several different periods of coverage, each with a different SIR, all SIRs must be exhausted before looking to the insurers for coverage.3 This is referred to as "horizontal exhaustion" and is required because excess coverage carries a smaller premium than primary coverage due to the lesser risk insured. To hold otherwise would allow the insured to avoid the consequences of its decision to become self-insured.4
When the insured who files for bankruptcy maintains a SIR, many issues arise with regard to the payment and defense of claims that fall within the SIR and what constitutes satisfaction of the SIR. Even when the insured has filed for bankruptcy, an excess insurer will only be liable for any amounts that exceed the SIR. A SIR is not an amount that the debtor owes the excess insurer, but rather is the "threshold" of the excess insurer's liability to the debtor.5
What constitutes satisfaction of the SIR is altered when the insured files bankruptcy. A typical policy provision provides that it shall be a condition precedent to the insurer's liability that the insured make "actual payment, by way of settlement or judgment of damages," of the SIR.
An insurer may argue that it is not required to provide coverage until there is "actual payment" of the SIR. One court observed that the unambiguous language of the self-insured provision contained in the policy would release the insurer from the obligation of payment under the policy due to the insured's bankruptcy.6
The appellate court in Home then held that the insurer was obligated to indemnify the insured for that portion of the judgment or settlement exceeding the SIR. The inability of the insured to pay the SIR was irrelevant. The SIR of an insured in bankruptcy can be considered "satisfied" without actual payment. The filing of bankruptcy by the insured is intended to provide relief to the insured; it does not relieve the obligations of the insurer under the policy.
Including a claim as a general unsecured claim in a debtor's reorganization plan constitutes "satisfaction" of the SIR condition.7 While the policy may require "actual payment" of the SIR, in the bankruptcy context, the SIR is considered "satisfied" by including the claim in the debtor's bankruptcy. As one court noted, "it makes no sense to allow an insurer to escape coverage for injuries caused by its insured merely because the insured receives a bankruptcy discharge."8 The protection from liability afforded the debtor under the Bankruptcy Code does not affect the liability of the debtor's insurer.9
With a SIR, it is the third-party claimant that must seek the payment of its claim from the insured directly. That portion of the claim falling within the SIR will be treated as a general unsecured claim by the insured/debtor. The debtor will eventually receive a discharge for the total amount of any claim; however, the insurer will remain obligated to the extent required by the insurance policy.
A deductible is the amount of risk undertaken by the insured under a traditional liability insurance policy. It is the specific monetary amount set by the insurance policy for which the insured is responsible. The deductible, however, does not prevent the triggering of coverage by the policy. Following is an example of a "deductible" provision contained in a commercial general liability policy:
If an Annual Aggregate Deductible Amount (aggregate) is shown in the schedule, that amount is the most you must reimburse us for all damages...that we pay under this policy and all other policies listed in Part I of the schedule.
The policy language of the deductible indicates that the deductible is that amount for which the insured must reimburse the insurer. The insurer has a duty to indemnify without regard to the deductible provision. Under this scenario, the insurer would be responsible for payment of a claim from "dollar one" and then must seek reimbursement for the amount of the deductible from the insurer. This differs from a SIR, where the insurer would only be liable for the amounts due above the limits of the SIR.
Treatment of a Deductible in Bankruptcy
It is generally accepted that the deductible is the amount the insured must reimburse the insurer.10 Even though the insured may have filed for bankruptcy, the obligation of the insurer to pay any covered claim remains. Most insurance policies must contain a provision stating that bankruptcy, insolvency or inability to pay by the insured or an underlying insurer does not relieve the insurer from payment of any claim covered by the policy. The inability of the insured to reimburse the insurer for the deductible does not excuse the insurer from paying any claims under the policy.11
The insurer would have a claim against the insured for the amount of the deductible paid. The question then is whether the insurer is entitled to an administrative expense claim or has a general unsecured claim. For those amounts paid for claims that occurred post-petition, the insurer may be entitled to the allowance of an administrative expense claim.12 However, if the injury or claim arose pre-petition, regardless of when the insurer paid the claim and the deductible, it would be considered a pre-petition claim and classified as a general unsecured claim.
An insurer is typically not required to drop down and pay any amounts that fall within a SIR. In the bankruptcy context, it is the third-party claimant, with a claim falling within the SIR, who is left "in the cold" with a general unsecured claim against the insured in bankruptcy. In contrast, if the insured maintains a deductible, the insurer may be responsible from "dollar one" and will be the one holding a claim against the insured/debtor. Finally, an insurer's obligations to pay pursuant to the policy provisions are not impacted by the filing of bankruptcy by the insured, even when the insured has not paid amounts due within a SIR, dollar for dollar.
1 Blacks Law Dictionary (8th Ed. 2004).
2 See, e.g., Missouri Pacific Railroad Co. v. International Insur. Co., 288 Ill. App. 3d 69, 679 N.E.2d 801 (1997).
5 Amatex Corp. v. Aetna Cas. & Sur. Co., 107 B.R. 856 872 (E.D. Pa. 1989).
6 Home Insurance Co. of Illinois v. Hooper, 294 Ill. App. 3d 626, 691 N.E.2d 65 (1st. Dist. 1998).
7 Keck, Mahin & Cate, 241 B.R. 583 (N.D. Ill. 1999).
8 Matter of Edgeworth, 993 F.2d 51, 54 (5th Cir. 1993).
9 First Fidelity Bank v. McTeer, 985 F.2d 114 (3rd Cir. 1993).
10 In re The Eli Witt Co., 213 B.R. 396 (M.D. Fla. 1007); In re International Fibercom Inc., 311 B.R. 862 (Ariz. 2004). This conclusion may differ depending on the actual language of the policy.
11 International Fibercom Inc., supra.
12 See, e.g., Eli Witt Co.; Id.