Arizona: Excess Insurers Had No Defense or Indemnity Obligations Where Settlement Did Not Exceed SIR, District Court Concludes

A federal district court in Arizona has granted summary judgment in favor of insurers that had issued excess and umbrella policies to a city because the city’s settlement of an asbestos personal injury action did not exceed the amount of its self-insured retention (“SIR”).

The Case

From 1981 to 1985, various insurance companies issued excess and umbrella policies to the City of Phoenix insuring it against liability for bodily injury occurring during that time. The insurance applied only to liability incurred above the city’s $500,000 SIR.

In 2013, a third party sued the city for bodily injury allegedly caused by asbestos exposure that had occurred from 1967 to 1993. The city settled the lawsuit for $500,000 and spent more than $1.4 million in attorneys’ fees and costs. The insurers denied coverage for these expenses, and the city sued.

The insurers moved for summary judgment.

The District Court’s Decision

The district court granted summary judgment in favor of the insurers.

In its decision, the district court first explained that, under the policies, the insurers had to indemnify the city for “ultimate net loss” incurred in excess of a $500,000 “retained limit.” Because the city had settled the asbestos claim for $500,000, within its retained limit, the insurers had no obligation to indemnify the city for any of the settlement, the district court ruled.

The district court then rejected the city’s argument that its pre-settlement defense costs of more than $500,000 had “eroded” the retained limit, such that all of the settlement was in excess of the retained limit. According to the district court, the policy “clearly” excluded defense costs from counting toward satisfaction of the retained limit.

Moreover, it continued, even when excess policies were silent on whether underlying defense costs satisfied the underlying policy limit, it was “unreasonable for a sophisticated insured to assume” they did so.

The district court also pointed out that the excess policies did not “merely exclude defense costs from satisfying the retained limit,” but “explicitly” disclaimed responsibility for all such costs when, as in this case, the claim was adjusted within the retained limit.

The court further stated that even if all of its rulings were wrong, the claimed defense costs still would not exceed the retained limit when allocated across all triggered policies.

Therefore, the district court ruled, the insurers had no duty to pay any of the city’s defense costs because the city had settled within its retained limit.

The district court also decided that the insurers had no duty to indemnify the city under the umbrella policies. Because the city had not exhausted excess policy coverage, it could not access any umbrella coverage, the district court concluded.

The case is City of Phoenix v. First State Ins. Co., No. CV-15-00511-PHX-NVW (D. Ariz. Sept. 2, 2016).