In Deere & Co. v. Allstate Ins. Co., 2019 WL 912151 (Cal. Ct. App. Feb. 25, 2019), a California Court of Appeal recently held that an insured’s self-insured retention (SIR) was considered part of the underlying limit of liability such that it need not be satisfied again and again just to access excess insurance policies. This case represents another example of the California appellate courts shooting down an insurance company’s attempt to overreach. Nonetheless, insurance companies will continue to look for ways to avoid providing the coverage they contracted to provide, and policyholders must always be vigilant.
This particular dispute arose over insurance coverage for several asbestos personal injury claims made against manufacturer Deere & Company arising from products it manufactured from 1958 to 1986. During that period, Deere had coverage in place via a series of first-layer umbrella policies for personal injury claims; several layers of excess insurance provided additional coverage above the limits of the first-layer umbrella policies. In all, there were 49 policies at issue representing $200 million in policy limits. In all of its first-layer umbrella polices, Deere contracted to pay an SIR before the coverage limits would be reached. Deere’s excess policies “followed form” to the first-layer policies, except the excess policies had different limits of liability.
The excess insurers argued that their higher-layer excess coverage was conditioned on Deere paying an additional SIR before their excess coverage attached. Thus, the excess insurers sought to treat Deere as an underlying umbrella insurer or treat its SIR in the underlying policies as insurance that must be exhausted a second time to invoke coverage, even though it had already been exhausted once to trigger the first-layer umbrella policies. At trial, the excess insurers prevailed. The trial court reasoned that, although the SIR was not “limits of liability,” it could be considered a part of the underlying limit of liability such that it necessitated repayment to reach excess coverage.
On appeal, the appellate court found the trial court’s reasoning “enigmatic.” The appellate court held that SIRs are not insurance, but rather “the antithesis of insurance” because the essence of insurance is shifting risk away from the insured. Further, after rejecting the trial court’s articulation of the issue, the appellate court reframed the issue simply to determine whether coverage under Deere’s higher-layer excess polices was triggered after the aggregate underlying limits had been satisfied – without Deere paying additional SIRs for subsequent claims submitted. The appellate court answered affirmatively.
For example, the court stated:
Assum[ing] that a certain first-layer policy provides coverage to Deere in excess of $5,000 (SIR) and up to $200,000, with a $20,000 per occurrence limit; the second layer would kick in once the $200,000 had been expended. Assum,[ing] further, that numerous claims have been lodged against Deere. For each claim, Deere pays $5,000, with the first layer paying $20,000 per occurrence. After 10 claims, the first layer’s $200,000 aggregate limit would be exhausted, and the aggregate limits of the higher excess policies would be triggered. The issue is whether for the eleventh claim Deere must pay another $5,000 before the higher levels are triggered. The answer to this question is no.
The appellate court reasoned that when Deere paid its SIR it triggered coverage for its first-layer polices’ coverage. What triggered coverage for the excess layers was not Deere’s repayment of an SIR, but rather exhaustion of the first-layer policies. The Court of Appeal held that, although the excess policies followed form to the first-layer policies, the excess policies had different limits of liability. The court ruled that SIRs are written in terms of limits of liability, and therefore, they are not encompassed by the follow form provisions in the excess policies.
To further accentuate this win for the insured, the Court of Appeal also rejected the excess insurers’ arguments that they did not have to pay attorney fees for claims that were dismissed. The court held, relying on the plain language of the policies, that a “covered occurrence” is an occurrence “arising within the scope of the insurance, as opposed to an actual adjudication of the merits of an underlying claim.” The court noted that the excess policies insured for the “ultimate net loss,” which included “damages direct or consequential and expenses.” Accordingly, the court found that Deere was entitled to repayment of attorney fees for claims that were ultimately dismissed because the products-liability asbestos lawsuits fell squarely within scope of coverage of excess policies – irrespective of an actual liability determination or settlement.
In sum, Deere & Co. reaffirms that there is no basis in insurance contracts or insurance law to conclude that an insured’s SIR obligations survive the exhaustion of its first-layer of coverage where incorporated into the higher-layer policies. That concept was rightly upheld by the Court of Appeal.
 An SIR is similar to a deductible or an amount of money that the insured must pay before reaching the insurer’s limits..
 An umbrella policy is an insurance policy that provides coverage in addition to that provided by the underlying insurance.