By Herron Bond
The dispute arose after a homeowner was injured while climbing the attic stairs in a home constructed by ICI. The homeowner filed suit against ICI and agreed to settle her claim for $1.6 million. Custom Cutting, Inc., a subcontractor who installed the attic stairs, paid $1 million to ICI pursuant to an agreement to indemnify ICI for injuries resulting from Custom Cutting’s negligence. ICI filed suit seeking a declaratory judgment to resolve a disagreement with its insurer, General Fidelity, over who was obligated to pay the remaining $600,000 of the settlement. The dispute, tried in federal courts, was referred to the Florida Supreme Court by the federal Eleventh Circuit for resolution of a question of state law that had no controlling precedent.
ICI argued that General Fidelity should be liable, as ICI had satisfied its SIR obligation out of the indemnification it received from Custom Cutting. General Fidelity argued that ICI could not satisfy the SIR obligation with the indemnification payments from Custom Cutting because the contract requires the payments to be made out of pocket.
The Court disagreed with General Fidelity’s interpretation of the SIR provision, ruling that ICI could apply the payments from Custom Cutting to satisfy its SIR obligation.
In making this determination, the Court looked to the language of the policy and found that the requirement that the SIR payment be “made by the insured” was not sufficient to preclude payments made with funds provided by third parties. The Court distinguished the language in the General Fidelity policy from the language of the policies in three California cases on which the trial court relied. In those cases, California courts determined that an SIR provisions required the insured to pay out of pocket. However, those provisions included clear language limiting the source of SIR payments. Vons Cos. v. United States Fire Insurance Co., 92 Cal. Rptr. 2d 597 (Ct. App. 2000)(the SIR provision stated that the clause was “subject to the limits of liability, exclusions, conditions, and other terms of the policy to which this agreement is attached,” including an “other insurance” provision); Travelers Indemnity Co. v. Arena Group 2000, L.P., 2007 WL 935611 (S.D. Cal. Mar. 8, 2007)(the SIR provision stated that the “Insured shall pay from its own account all amounts within the Retained Amount”); Forecast Homes, Inc. v. Steadfast Insurance Co., 105 Cal. Rptr. 3d 200 (Ct. App. 2010)(the policy specified that “[p]ayments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention”).
The Court also looked to the reasoning of the Eleventh Circuit and agreed that, absent a clear agreement to the contrary, ICI should be permitted to apply the money from Custom Cutting to their SIR obligation because ICI “paid for the indemnity protection in the purchase price of the Custom Cutting subcontract and therefore hedged its retained risk in this manner.”
The second dispute in this case revolved around the subrogation provision, which stated: “If the insured has rights to recover all or part of any payment [General Fidelity has] made under this Coverage Part, those rights are transferred to [General Fidelity].” General Fidelity argued that this clause gave them priority to recover from the indemnification funds.
Pointing to the specific language of the contract, ICI argued that General Fidelity could not have been made whole for payments “[they] have made” because General Fidelity had not paid out any money on the claim when ICI received the money from Custom Cutting. Additionally, ICI claimed that they should be the first party to recover from the indemnification payments under the “made whole doctrine,” which holds that the insured “has priority over the insurer to recover its damages when there is a limited amount of indemnification available,” absent a contractual provision to the contrary.
The Court agreed with ICI that the “made whole” doctrine applies despite the existence of the subrogation clause, stating: “because subrogation is an offspring of equity, equitable principles (such as the ‘made whole doctrine’) apply even when the subrogation is based on contract, unless the contract contains express terms to the contrary.” Thus, the Court held that General Fidelity must pay the remainder of the settlement without recoupment from the indemnification payment.