A Washington state appeals court recently ruled that an insured’s self-insured retention is not primary insurance for purposes of subrogation, and that the insured was therefore entitled to apply settlement amounts it received to its own defense costs prior to the insurer recovering any of the settlement funds.  Bordeaux, Inc. v. American Safety Ins. Co., No. 59947-0-1 (Wash. App. Ct., July 7, 2008).  The court also held that an insured need only satisfy a single self-insured retention when a single claim is allocated between two policies.

A condominium developer was sued in connection with alleged construction defects, and tendered the defense to two insurers that had issued it policies covering concurrent time periods.  Each policy contained a self-insured retention of $100,000 per claim.  After mediating the claim, the parties to the underlying suit agreed to a settlement of $630,000, which was allocated between the insurers.  At that point, the insured had paid just over $100,000 in defense costs, satisfying the SIR on the first insurer’s policy.  The second insurer took the position that the insured was required to satisfy a second $100,000 retention before the second insurer would contribute to the settlement.  The insured paid the $100,000 SIR under a reservation of rights.

Subsequently, the insured obtained settlements from certain third-party contractors.  The second insurer asserted its subrogation right to recover the third-party settlement funds before the insured.  The settlement funds were held pending the outcome of the insured’s suit to determine its rights to the settlement funds and to recoup the second $100,000 retention payment.

The insurer argued that the insured’s self-insured retention was primary insurance, the two insurance policies were excess insurance and, therefore, the insurer’s right to subrogation was superior to the insured’s right to be made whole.  The court disagreed, finding that the SIR did not constitute primary insurance because: (1) since the insured is not engaged in the business of making contracts for insurance and is not subject to regulation by the Washington State Insurance Commissioner, it is not an insurer; and (2) a self-insured retention involves risk retention, rather than risk shifting.  The court then concluded that, because the self-insured retention is not primary insurance, the insured had the superior right to be made whole by the third-party settlement funds.

On the issue of the two retentions, the court further held that the insured was entitled to reimbursement of the second $100,000 retention.  The court noted that no right of allocation exists for the defense of non-covered claims that are reasonably related to the defense of covered claims.

For a complete copy of the case, click here.