Separation of Insureds Applies to Deductible Payments
Often on a construction project an insurer will point to the conduct of one insured contractor to exclude coverage for a different insured contractor under the same policy. Inevitably the innocent contractor points to the Separation of Insureds provision, which is a common provision in many insurance policies, to argue that each insured must be treated as the only insured and, therefore, the conduct of one should not impact coverage for another. A fight then ensues over the scope of the provision.
A recent Seventh Circuit decision provides further support for separation of insured principles. In St. Paul Fire & Marine Ins. Co. v. Schilli Transp. Servs., No. 11-2307 (Feb. 13, 2012), the court held that multiple named insureds on the same policy were not jointly and severally liable to pay the basket deductible. Rather, each insured was liable only for the deductible arising from claims specifically brought against it.
St. Paul issued insurance to Schilli Transportation, Atlantic Inland Carriers, Inc. and WVT of Texas, Inc., and several other companies involved in the freight and trucking business. The policy required St. Paul to defend any claim or suit for bodily injury or property damage made or brought against any insured, even if any of the allegations of such claim or suit were groundless or fraudulent. The limits of coverage under the policy were $1,000,000 per accident subject to a $100,000 deductible.
The payment of the deductible was addressed in the "Repayment of Expenses" provision. This provision, which was included in the policy as part of the "Basket Deductible Endorsement," provided that although St. Paul would be responsible to pay all expenses to settle a claim or suit, the insured would be responsible for the amount of expenses within the deductible. Specifically, the policy provided that "[y]ou agree to repay us up to this deductible amount for all damages caused by any one accident, as soon as we notify you of the judgment or settlement." "You" was defined as the "insured named here, which is a CORPORATION." The policy then listed Schilli Transportation, along with eight more companies, including Atlantic and WVT.
Over the course of the policy period, six different claims were asserted under the policy, all of which St. Paul defended and settled. Of the six claims asserted, only two exceeded the $100,000 deductible. Three of the six claims arose from the liability of Schilli Transportation. One claim arose from the liability of Atlantic. Another arose from the liability of WVT. The sixth claim arose from the liability of both Schilli Transportation and Atlantic. After payment of the claims and related expenses, St. Paul sent Schilli Transportation invoices for the amounts, up to the $100,000 deductible, it advanced in defending and settling each case. St. Paul argued that as a named insured under the policy, Schilli Transportation was jointly and severally liable for reimbursement of the deductible for all six claims. According to St. Paul, a position with which the District Court agreed, the policy clearly defined "you" as all corporations specifically listed as named insureds. Therefore, "all of the listed corporations [were] liable under the repayment of expenses provision," and could be held jointly and severally liable for payment of the deductible.
On appeal, the Seventh Circuit reversed. The court ruled that although it agreed that St. Paul has valid claims against one or more of the insureds for the deductible amounts St. Paul spent to settle and defend the claims in question, it did not agree that the insureds were joint and severally liable for the deductible. The court explained that the manner in which the named insureds are listed in the policy creates an ambiguity as to whether they are to be considered jointly or separately for purposes of defining "you." One reasonable interpretation, the court found, was to interpret the definition of "you," which was defined as "a Corporation" followed by the listing of the names of nine individual corporations, to mean each corporation will be treated individually. Another reasonable interpretation, advanced by St. Paul, was that "you" refers to all corporations listed. Therefore, an ambiguity existed and the language would be interpreted against St. Paul, as the drafter, and in favor of the insureds.
The court relied on the "Separation of Protected Persons" clause to find additional support for its holding. This clause, which provided that St. Paul would apply the insurance agreement "to each protected person named in the Introduction as if that protected person was the only named one there; and separately to each protected person," created further ambiguity as to whether defendants were jointly and severally liable for the deductible payments. The court recognized that although separation of insured provisions are typically applied in the context of coverage, rather than in the payment of deductibles, there is nothing in the language that prohibits such an application. Therefore, at the very least, the provision creates further ambiguity as to whether all named insureds are jointly and severally liable for each other's claims.
St. Paul Fire & Marine Ins. Co. v. Schilli Transp. Servs. provides further support for separation of insured principles, applying the rule beyond the context of coverage to the payment of deductibles.
The complete opinion can be accessed here.