Skip to content Insurer Owed Duty to Defend When Self-Insured Retention Provision Expressly Applied Only to Indemnity Obligation


Search Publications

March 2014

Insurer Owed Duty to Defend When Self-Insured Retention Provision Expressly Applied Only to Indemnity Obligation

The California Court of Appeal, Fourth Appellate District, recently held that an insurer was obligated to defend its insureds who had not satisfied a $250,000 self-insured retention (SIR) because the SIR provision expressly applied only to the insurer’s indemnity obligation.

In American Safety Indemnity Co. v. Admiral Insurance Co., homeowners in Santa Clarita sued a developer, a grading subcontractor and certain developer-related entities for damages caused by improper sloping at a housing development.  The developer and the developer-related entities tendered their defense to their insurer, Admiral.  The developer also tendered its own defense as an additional insured under the subcontractor’s policy with American Safety Indemnity Co. (ASIC).  

ASIC initially denied the developer’s tender and the developer sued for bad faith.  ASIC settled the bad-faith action by agreeing to defend the developer in the construction defect action.  ASIC ultimately paid the attorneys’ fees for the developer and the developer-related entities because their joint defense counsel refused to separate its bills.  The construction defect action settled for $4.9 million.  Admiral and ASIC contributed their respective $1 million policy limits to the settlement.   

ASIC then sued Admiral seeking a declaration that it was obligated to contribute to the developer’s defense fees on a pro rata basis.   Admiral defended by arguing the subcontractor had agreed to indemnify the developer for any claims arising out of the subcontractor’s work, including claims involving the developer’s own negligence.  The trial court granted summary judgment in favor of Admiral.  However, the ruling was reversed on appeal because the subcontractor’s negligence had not been established.

ASIC filed a second lawsuit against Admiral seeking to recover the complete cost of defending the developer-related entities.  ASIC filed a motion for summary judgment on its causes of action for subrogation, indemnity and contribution.  Admiral opposed the motion by arguing that the developer-related entities had not satisfied the SIR in Admiral’s policy.  The trial court found that Admiral’s duty to defend was independent of the SIR provision. The trial court also rejected Admiral’s argument that ASIC was a volunteer or that it had waived its right to seek subrogation.  Admiral appealed.

The appellate court upheld the trial court’s ruling and found that the SIR provision in Admiral’s policy specifically limited its duty to pay “damages” and did not mention its duty to defend.  The appellate court further held that a reasonable insured would expect to receive a defense under a primary policy unless the SIR coverage limitation was clear and conspicuous. The court supported its interpretation of the Admiral policy by comparing the SIR endorsement with the “other insurance” provision, which expressly limited Admiral’s duty to defend.

Lastly, the appellate court upheld the trial court’s finding that ASIC had not waived its right to subrogation or acted as a volunteer.  The court found that the developer-related entities were not named insureds under the ASIC policy and ASIC had never agreed to defend them as part of the bad-faith action.

Click here for the opinion in American Safety Indemnity Co. v. Admiral Insurance Co. (2013) 220 Cal.App.4th 1.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at


Steven R. Inouye