Who’s Paying the Bill? Liability Insurance Proceeds and Self-Insured Retention Obligations When Insureds File for Bankruptcy
Liability insurers require an insured to bear some of the primary risk. This is accomplished through a deductible or a Self-Insured Retention (“SIR”). Policies with a deductible require the insurer to pay a specified amount of money before the insurance company will pay a claim. On the other hand, a SIR is a dollar amount specified in a liability insurance policy that must be paid by the insured before the insurance policy will respond to a loss. Both a deductible and SIRs accomplish the same thing: the insured is responsible to pay part of the bill. Notably, with SIRs the insurer’s obligation under the policy does not begin until the SIR is satisfied. This means that the insurer is an excess insurer until the SIR is satisfied. For example, if Company A obtains an insurance policy from Insurer B that provides $10,000 in coverage and contains a $1,000 SIR, the Insurer B’s obligation under the policy does not arise until Company A has paid the $1,000 SIR.
What happens when Company A files for bankruptcy? Filing for bankruptcy raises the question of whether there will be liability coverage if the insured cannot pay the SIR, or whether the inability to pay the SIR negates coverage. Some courts have held the former, while other courts have held the latter. It is important to have counsel review the specific language of the insurance policy.
Further, depending upon the language, coverage may start as soon as a claim is made, or may not be triggered until the SIR is satisfied. If the policy language is unambiguous about the insured having to exhaust its SIR in order to provide coverage, then courts will hold the same. However, if the policy is not so clear cut about the SIR needing to be fulfilled prior to a claim for its insurer, courts are more than likely to find the policy provides coverage either for amounts above the SIR or for the entire judgment. This is even if the insured does not satisfy its SIR obligation. Nevertheless, if the insurer must pay the full amount of coverage, the insurer has the right to submit a claim in bankruptcy for reimbursement of the SIR.
Let’s take the above example of Company A and Insurer B. If the policy language is crystal clear about Company A having to satisfy its $1,000 SIR before a claim can be covered by Insurer B, then Company A must pay its SIR even in a bankruptcy proceeding. However, if the language is ambiguous, then Insurer B would have to pay above the $1,000 SIR or the entire $10,000 coverage amount. Insurer B’s only remedy is to file a claim for the $1,000 amount in Company A’s bankruptcy proceeding and nothing more.
Hoagland Longo has represented numerous parties whose insurance policies contain SIRs. If your insurance policy contains a SIR, please contact Joseph V. Leone, Joshua A. Filzer or Stephen M. Hennessy or call us at (732) 545-4717 to discuss the impact of the SIR and bankruptcy on your case.