As anyone dealing with insurance knows, a self-insured retention (“SIR”) and a deductible are not the same thing. Although these terms are often used interchangeably, there is a fundamental difference: a deductible is more of a “back-end” mechanism, meaning that when the insurance company pays indemnity on behalf of an insured, it “deducts” the amount of the deductible from the indemnity payout. On the other hand, an SIR is a “front end” mechanism, where the insured must satisfy the SIR amount before the policy has to cover any defense or indemnity.
This difference becomes important in the context of additional insured claims, where the additional insured seeks coverage under someone else’s policy. If the policy is subject to a deductible, the additional insured is protected as the insurance carrier (assuming it accepts coverage for the additional insured), pays for the defense from the first dollar. However, if the policy is subject to an SIR, the issue of how the SIR can be satisfied, and who can pay it, can arise.
Recently, the Ontario Superior Court of Justice ruled that SIRs and deductibles are “similar and functionally related.” In Henry v. Thyssenkrupp Elevator (Canada) Limited,1 a tenant in a residential apartment building sued the property owner (Sunder & Company), the property manager (Greenwin Inc.), and the elevator maintenance company (Thyssenkrupp) after falling while exiting an elevator. The tenant alleged the injuries resulted from uneven leveling between the elevator floor and the ground floor. Sunder and Greenwin sued to enforce an indemnification provision in their contract which required Thyssenkrupp to add them as additional insureds on its insurance policy, and to defend and indemnify them against claims just like the plaintiff’s in this case.
The Elevator Maintenance Agreement (the “Agreement”) between Sunder, Greenwin and Thyssenkrupp included Clause 1.7.5, pursuant to which
...any and all deductibles in [Thyssenkrupp]’s insurance policies shall be borne solely by [Thyssenkrupp] and shall not be recovered or attempted to be recovered from [Sunder].
Thyssenkrupp had a general liability policy through HDI-Gerling. The policy included a Self-Insured Retention Endorsement, pursuant to which any claim under the policy was subject to a $250,000 SIR. While the exact policy language was not quoted in the opinion, the Court helpfully summarized that
…all insureds would assume self-coverage of retained amount of $250,000.00, and none of the coverage under the policy “kicked in” until the full $250,000.00 was exhausted and paid by the insureds.
The Court was unable to see much difference between an SIR and a deductible. It opined that
A self-insured retention is an amount that an insured retains and covers before insurance coverage begins to apply. That is a form of a deductible, or at least akin to a deductible, which allows the insurer to not defend a claim unless the insured intends to call upon the policy. Even if the SIR is not technically a deductible, they are obviously similar and functionally related. Both an SIR and a deductible share many common traits, and any distinction(s) between them do not undermine the purpose of clause 1.7.5 of the Agreement; this clause is quite expansive.
The Court relied on earlier precedent from the Court of Appeal for Ontario which “has treated self-insured retentions and deductibles as effectively one and the same on several occasions,” and stated that it “[saw] no reason to depart from that approach.”
Because the plaintiff’s allegations could result in coverage based on the mere possibility that the elevator maintenance company failed to perform its proper duties, the Court found that Thyssenkrupp indeed had a duty to defend Sunder in accordance with the Agreement. And, because the SIR was functionally equivalent to a deductible, Thyssenkrupp was required to cover any defense costs the defendants have incurred, and would continue to incur, up to $250,000, after which Thyssenkrupp’s insurance would take over.
Although this decision looks at SIRs and deductibles through the lens of a contractual obligation, the two earlier Ontario cases on which the Court relied were in the context of insurance coverage litigation. In any case, this decision highlights the pervasive (though erroneous) interchangeable use of the two terms. This case may prove helpful to Canadian policyholders seeking to trigger additional insured coverage.
This case alert was written with assistance from Warsame Hassan, a summer associate at SDV from California Western School of Law.
1 2018 ONSC 1659.