We know that most of our clients, manufacturers of prescription medical products (for purposes of this post), if they have insurance at all, have coverage that is subject to large self-insured retentions (“SIRs”). While the Blog doesn’t usually follow insurance matters, the decision discussed in this guest post is very good news for insureds with SIRs, and appears to be a matter of first impression. Thus, we invited David Weiss, Cristina Shea, and Connor O’Carroll from Reed Smith’s Insurance Recovery Group (who were writing the case up anyway) to provide this guest post. If this case starts a trend, pharmaceutical and medical device insureds (like many other insureds) will be much better off.

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In Deere & Co. v. Allstate Ins. Co., ___ Cal. Rptr.3d ___, 2019 WL 912151 (Cal. Ct. App. Feb. 25, 2019), a California Court of Appeal recently held that an insured’s SIR was considered part of the policy’s underlying limit of liability, and thus only had to be satisfied once.  SIRs are similar to deductibles, in that they represent a sum of money that the insured must pay before it is able to access its coverage.  The insurers’ rejected position in Deere was that the SIR had to be satisfied again and again to access each layer of excess insurance.  This case represents another example of the California appellate courts shooting down insurance companies’ attempts to overreach.  Deere is only binding in California, so insurance companies will continue to argue for multiple SIRS in other states to avoid providing the coverage they contracted to provide.  Policyholders must always be vigilant.

This particular dispute arose over insurance coverage for several asbestos personal injury claims made against manufacturer Deere & Company (“Deere”) arising from products it manufactured from 1958 through 1986.  For that period of time, Deere had coverage in place via a series of first-layer umbrella policies (providing primary coverage) for personal injury claims; above which were several layers of excess insurance that provided additional coverage.  In all, 49 policies were at issue representing $200 million in contracted for coverage.  Every one of Deere’s its first-layer umbrella polices required it to pay an SIR before the coverage would be available.  Deere’s excess policies “followed form” to the first-layer policies, except for the excess policies’ different limits of liability.

The excess insurers argued that “follow form” meant that their higher-layer excess coverage was also conditioned on Deere paying an additional SIR before each level of their excess coverage attached.  Thus, the excess insurers sought to treat Deere effectively as an underlying self-insurer or else to treat its SIR for the underlying policies as “insurance” that must be exhausted a second time to invoke coverage, even though Deere had already paid the full SIR to trigger the first-layer policies.  At trial, the excess insurers’ position prevailed.  The trial court reasoned that, although the SIR was not “limits of liability,” it could be considered a part of the underlying limit of liability such that it necessitated repayment to reach excess coverage.

The appellate court reversed.  It found the trial court’s reasoning “enigmatic.”  Instead, it held that SIRs are not insurance, but “the antithesis of insurance” because the essence of insurance is shifting risk away from the insured.  Further, after rejecting the trial court’s articulation of the issue, the reframed issue became:  to determine whether coverage under Deere’s higher-layer excess polices was triggered after the aggregate underlying limits have been satisfied—without Deere paying additional SIRs for all subsequent claims submitted.  The appellate court answered affirmatively.

Assum[ing] that a certain first-layer policy provides coverage to Deere in excess of $5,000 (SIR) and up to $200,000, with a $20,000 per occurrence limit; the second layer would kick in once the $200,000 had been expended.  Assume further, that numerous claims have been lodged against Deere.  For each claim, Deere pays $5,000, with the first layer paying $20,000 per occurrence.  After 10 claims, the first layer’s $200,000 aggregate limit would be exhausted, and the aggregate limits of the higher excess policies would be triggered.  The issue is whether for the eleventh claim Deere must pay another $5,000 before the higher levels are triggered.  The answer to this question is no.

Deere, 2019 WL 912151, at *8.

The appellate court reasoned that when Deere paid its SIR, it triggered coverage for its first-layer polices’ coverage.  The triggering event for the excess layers was not Deere’s payment of any SIR, but rather exhaustion of the first-layer policies.  The Court of Appeal held that, although the excess policies followed form to the first-layer policies, the excess policies had different limits of liability.  The court ruled that SIRs are written in terms of limits of liability, and therefore, they are not encompassed by the follow form provisions in the excess policies.  Deere cited analogous precedent from California and elsewhere in reaching this result, but none of these other cases involved excess insurance.  Thus, Deere appears to be a matter of first impression as to the type of insurance most commonly held by prescription medical product manufacturers.

In sum, Deere reaffirms that there is no basis in insurance contracts or insurance law to conclude that an insured’s SIR obligations survive the exhaustion of its first-layer of coverage to be incorporated into higher-layer policies.  Every company with an SIR and excess insurance stands to benefit from this decision by the Court of Appeal.

This month’s edition of For the Defense magazine focuses on insurance law.  That makes sense.  It is difficult to do much defending without bumping against insurance issues.  Our torts professor constantly emphasized the relevance, sometimes even the primacy, of insurance considerations.  But law school being law school, we learned precious little of the mechanics of insurance.  Some companies self-insure, some use captive insurers, and some have some/several/many complicated insurance policies where the scope of coverage becomes a question of theoretical majesty.  A colleague of ours, Rick Berkman, probably knows as much as about settling cases and dealing with insurers as anyone on the planet.  He once told us that insurance policies seem to contain a clause written in invisible ink:  “Void upon claim.”  There are lawyers who devote their careers to representing insurers.  There are lawyers who devote their careers to harassing insurers — come to think of it, quite a few of these folks have offices quite close to us. And then there are lawyers (we count ourselves among them) who often do a delicate dance of collaboration and conflict with insurers.  Whether there is insurance overage, or what is the extent of such coverage, plays a huge role in case disposition.  Think of the simplest auto accident case and how the policy limits drive the settlement numbers.

We have not represented an insurer for a good long while.  As a summer associate, we had a case where the issue was whether an auto insurance policy covered the death of a man who, after experiencing car trouble, entered a phone booth (remember those?) to call for road service and was then shot by a street criminal.  We do not remember how that one turned out.  You name a bizarre fact pattern, and there is probably an insurance case that comes close to it.  Insurers naturally would rather pay less or not at all, but they are in a sticky spot, particularly when the insured seeks litigation defense.  If the insurer denies coverage, including denial of a defense, and then turns out to be wrong, that insurer is in a heap of trouble.  After all, when someone buys insurance, what they are really buying is peace of mind. Otherwise, just based on the actuarial numbers, it is a dodgy investment.  But if the insurer wrongly denies coverage, there is a betrayal of that peace of mind. It is one of the areas of the law (along with mishandling of corpses) where psychic injury damages cropped up relatively early in our jurisprudence and did not seem entirely nonsensical.  The rational thing for an insurer to do – and insurers are nothing if not rational – is to tender a defense whilst reserving rights. In the meantime that defense can turn out to be terribly expensive. Consequently, there is something else an insurer can do: file a declaratory judgment action seeking a ruling that the underlying case is outside coverage.  One wonders whether that fairly typical maneuver by the insurer might exhaust a penurious insured, at least giving the insurer some leverage in the coverage dispute.  But we hate to indulge our cynical side.

Continue Reading Insurer Declaratory Action: To Stay or Not to Stay?