Insured Can Use Third Party Payments to Satisfy SIR Provision, Florida Supreme Court Holds

February 28, 2014 | Insurance Coverage

The Florida Supreme Court, answering a question certified by the U.S. Court of Appeals for the Eleventh Circuit, has ruled that an insured general contractor could use payments to it from a third party subcontractor under a contractual indemnity obligation to satisfy its own insurance policy’s self-insured retention (“SIR”) provision. The circuit court also decided that the policy’s subrogation provision did not alter this result.

The Case

ICI Homes, Inc., contracted with Custom Cutting, Inc., to provide trim work, including installation of attic stairs, in a residence that ICI was building. The contract between ICI and Custom Cutting contained an indemnification provision requiring Custom Cutting to indemnify ICI for any damages resulting from Custom Cutting’s negligence.

Katherine Ferrin, the owner of the residence, sued ICI (but not Custom Cutting), alleging that she had fallen while using attic stairs installed by Custom Cutting. ICI sought indemnification from Custom Cutting under the terms of their agreement.

At the time, Custom Cutting maintained a commercial general liability (“CGL”) insurance policy with North Pointe Insurance Company. ICI was not an additional insured under Custom Cutting’s policy with North Pointe but held a policy with General Fidelity Insurance Company that included a $1 million SIR endorsement that stated that General Fidelity would provide coverage only after ICI had exhausted the $1 million SIR. The policy included a transfer of rights clause granting General Fidelity some subrogation rights.

ICI, Custom Cutting, North Pointe, General Fidelity, and Ferrin participated in a mediation of her claim. At the mediation, the parties agreed to a $1.6 million settlement of Ferrin’s claim. As part of the settlement, North Pointe agreed to pay ICI $1 million to settle ICI’s indemnification claim against Custom Cutting. ICI, in turn, would pay that $1 million to Ferrin.

ICI then sued General Fidelity to have it pay Ferrin the remaining $600,000.

The district court ruled that ICI could not use the $1 million indemnification payment to satisfy the SIR. ICI appealed to the Eleventh Circuit, which certified two questions to the Florida Supreme Court:

  1. Does the General Fidelity policy allow the insured to apply indemnification payments received from a third party towards satisfaction of its $1 million self-insured retention?
  2. Assuming that funds received through an indemnification clause can be used to offset the self-insured retention, does the transfer of rights provision found in the General Fidelity policy grant superior rights to be made whole to the insured or to the insurer?

The Florida Supreme Court’s Decision

The court answered the first certified question in the affirmative, ruling that the General Fidelity policy allowed the insured to apply indemnification payments received from a third party toward satisfaction of its $1 million SIR.

The court reasoned that the contract between Custom Cutting and ICI, which included the right to indemnification, was entered into six years before the General Fidelity policy was purchased by ICI. “ICI paid for the indemnity protection in the purchase price of the Custom Cutting subcontract and therefore hedged its retained risk in this manner,” the court found. It added that, “ICI bargained for and paid for this right to indemnification and, without an express policy provision to the contrary, should be able to use it to satisfy the SIR.”

Then, the court found that the “made whole doctrine,” which provides that, absent a controlling contractual provision that stated otherwise, the insured had priority over the insurer to recover its damages when there was a limited amount of indemnification available, was not abrogated by the policy’s transfer of rights clause. The court explained that the clause did not address the priority of reimbursement and did not provide that it abrogated the “made whole doctrine.” Thus, the court concluded, the made whole doctrine preserved ICI’s right of priority.

The case is Intervest Construction of Jax, Inc. v. General Fidelity Ins. Co., No. SC11-2320 (Fla. Feb. 6, 2014).

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