When Can a CGL Policy Do a Disappearing Act?


In Evanston Insurance Company v North American Capacity Company, 2014 U.S. LEXIS 92682, Evanston Insurance Company sued in U.S. District Court to seek contribution from North American Capacity Insurance Company where both insurers defended their insured, a developer, against multiple construction defect lawsuits.  Both companies had been defending and settling the lawsuits, but Evanston asserted North American did not pay a fair share.  On July 2, 2014, the U.S. District Court Judge Ishii issued an Order, finding that the “per claim” self-insured retention (“SIR”) provision in the North American CGL policy applied to each and every home purportedly damaged, even where the owners of the homes sued together in five separate lawsuits each of which alleged damage to multiple homes.  The number of homes involved in each of the underlying lawsuits ranged from a low of 13 homes to a high of 172 homes—the total of such claims was well over 400 homes, and thus according to this ruling, 400 “claims.”  As a result the $10,000 “per claim” SIR would balloon into a $4 million SIR which had to be paid out before North American needed to participate in the defense!

The North American policy had a precisely worded SIR which informed the insured that its insurer had no duty to defend until the retained limit has been exhausted by paying settlements, judgments or defense costs.  This SIR provision allowed the North American policy to vanish, as the hundreds of claims came in multiplying the SIR to a level which easily swallowed the policy limits. The Court granted summary judgment to North American finding it had no duty to defend, until the per-home SIR was met. The Court did not address the practical application of its ruling.

Although both insurers Evanston and North American defended and were setting the claims, now the homeowners may be caught short on settlement funds.  The developer may face an ominous future where North American might seek to get back any money it already spent on its insured’s behalf.

This is a lesson to the unwary: Pay attention to SIR provisions in any proposed CGL policy—if your company is at all vulnerable to multiple claims, as any contractor working on large scale projects, manufacturer, distributor or retailer may be.  We have seen policies with “per claimant” SIR provisions which, if applied in this case, might double the already huge SIR (assuming multiple owners of the homes in question.)  Insurance agents and brokers should be wary of selling such policies to their clients, but may be focused on securing reduced premiums in return for expandable SIR provisions. The insureds should be warned that the SIR is potentially expandable well beyond the stated amount. This is why it is useful to have coverage counsel consult on insurance placement before such poison pills are inserted into what otherwise would have been a reasonable risk transfer transaction. Such terms are negotiable, and reasonable limits can be placed on expandable SIR’s.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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