The Road Less Traveled: In a Case of First Impression, Indiana Court of Appeals Holds SIR Applicable to Additional Insureds
In Walsh Construction Co. v. Zurich American Insurance Co., 2017 Ind. App. LEXIS 137 (Mar. 28, 2017), the Indiana Court of Appeals affirmed the trial court’s grant of summary judgment in favor of Zurich American Insurance Company and against Walsh Construction Company. In a case of first impression, the Court of Appeals held that a self-insured retention (SIR) applied not only to the insurer’s relationship with the named insured, but also, to any additional insureds. Thus, because the named insured failed to fulfill its obligation under the subject SIR endorsement, its insurer was under no contractual obligation to provide cover to the additional insured.
As background, Walsh (general contractor) hired Roadsafe as its subcontractor in the construction of a traffic exchange between Interstates 65 and 80. Roadsafe was obligated to provide a safe traffic pattern through the work zone. The parties’ contract required Roadsafe to obtain a CGL policy naming Walsh as an additional insured on a primary and noncontributory basis. Roadsafe procured said policy from Zurich, subject however to a $500,000 SIR. The policy also contained an endorsement conferring Walsh additional insured status.
Maczuga was injured while driving his vehicle through the work zone’s traffic pattern, and he filed suit against Walsh. Walsh filed a third-party complaint against Roadsafe, alleging that Roadsafe failed to indemnify Walsh in breach of the parties’ contract. Walsh notified Zurich of Maczuga’s lawsuit and requested that Zurich defend it. Zurich refused, and Walsh instituted this declaratory action, seeking a declaration that Zurich had a duty to defend and indemnify it. The trial court granted Zurich’s motion for summary judgment, finding it had neither a duty to defend nor a duty to indemnify. The trial court reasoned no claims for negligence had been made against Roadsafe, and Roadsafe had not paid anything toward the satisfaction of the SIR.
On appeal, Walsh argued that the SIR applied only to Zurich’s relationship with Roadsafe, but not its obligations to Walsh. Conversely, Zurich maintained that Roadsafe had to satisfy the SIR before any of its obligations arose under the Policy. In rejecting Walsh’s argument, the Court of Appeals recognized long-standing Indiana precedent that satisfaction of an SIR is a condition precedent to coverage. However, the court acknowledged that whether the SIR applied to the insurer’s duties to an additional insured was a matter of first impression. The Court of Appeals held that the SIR shifted the initial cost burden from Zurich to Roadsafe, not just for its defense costs, but also for any additional insured’s damages and defense costs. Thus, the SIR amended Zurich’s obligation under the policy to defend Walsh by placing the first $500,000 of that burden on Roadsafe. Notably, the court found compelling that the SIR enabled Roadsafe to obtain the policy at a reduced premium. Therefore, when looking at all the provisions of the policy together, the intent of the parties was clear – Roadsafe assumed all the costs and liability for the first $500,000 of any claim that might be made under the policy, whether the claim was against Roadsafe or an additional insured. Moreover, the court held that Roadsafe, and not Zurich, must be the one to satisfy the SIR.
This decision illuminates the dangers of risk shifting and creation of a sophisticated insurance program. Policyholders prior to purchasing or renewing a policy should be well aware of their contractual obligations and ensure that the policy they are negotiating for comports with such obligations.