Walsh Construction Company v. Zurich American Ins. Co. finds a place on this list for two reasons. First, the case involves an issue that has the potential to arise with some frequency, but has not been the subject of much case law. Second, the decision provides a lesson in policy drafting for insurers (as well as risk management for general contractors – any who actually read this).

At issue in Walsh is whether a self-insured retention, and a large one at that, applies to an additional insured. The Court of Appeals of Indiana characterized the decision as one of first impression in the state, as well as noting that the four foreign cases cited by the parties were not on all fours. Thus, clearly, the issue has not been the subject of much judicial review. Yet, it certainly has the potential to arise with some frequency when you consider how common additional insured issues are in general.

Walsh grows out of a common claim scenario. Walsh, a general contractor, hired Roadsafe Holdings, to be Walsh’s subcontractor on a traffic project. Walsh’s contract required Roadsafe to procure a commercial general liability insurance policy and name Walsh as an additional insured on a primary and noncontributory basis. Roadsafe obtained a CGL policy from Zurich. An endorsement named, as additional insureds, “any person and organization where required by written contract.” However, Roadsafe’s policy with Zurich contained a $500,000-per-occurrence self-insured retention.

Boguslaw Maczuga was injured while operating his motor vehicle through the work zone’s traffic pattern. Maczuga sued Walsh. Walsh notified Zurich and sought a defense from the insurer on the basis of being an additional insured. Zurich denied Walsh’s tender and Walsh filed a complaint for declaratory judgment.

Among other things, Zurich asserted that, based on the SIR endorsement, Walsh was required to pay the first $500,000 of costs. [I suspect that Walsh was unaware that Roadsafe’s CGL policy contained an SIR, especially such a significant one. If that’s the case, Walsh certainly could have found that out before it got in this situation.]

The trial court found for Zurich. On appeal, Walsh and Roadsafe argued that the SIR endorsement amended only Zurich’s relationship to Roadsafe and did not amend Zurich’s obligations with respect to Walsh.

The appellate court also found for Zurich. The court based its decision on the following language from the policy:

“Self-insured retention” means: the amount or amounts which you or any insured must pay for all compensatory damages and “pro rata defense costs” which you or any insured shall become legally obligated to pay because of damages arising from any coverage included in the policy.

The “self-insured retention” amounts stated . . . apply as follows: 1. If a Per Occurrence Self Insured Retention Amount is shown in this endorsement, you shall be responsible for payment of all damages and “pro rata defense costs” for each “occurrence”[] until you have paid damages equal to the Per Occurrence amount .

With “you” meaning the named insured – Roadsafe – the court concluded that “[t]he SIR endorsement shifts the initial cost burden from Zurich to Roadsafe, the named insured, not just for Roadsafe’s damages and defense costs but also for any additional insured’s damages and defense costs. As such, the SIR endorsement amends Zurich's obligation under the CGL policy to defend Walsh by placing the first $500,000 of that burden on Roadsafe.”

Thus, not only did the court conclude that the SIR could not be avoided for Walsh as an additional insured, but that Roadside was obligated to pay it.

In addition to this “plain reading of the SIR endorsement,” the court found support in other provisions of the policy, such as “the SIR endorsement unambiguously conditions Roadsafe’s compliance with its provisions as a ‘condition precedent to coverage’ from Zurich. And there is no rational basis to apply the SIR endorsement as a condition precedent to Zurich’s coverage of the named insured but not to Zurich’s coverage of additional insureds.” The court also noted that the SIR enabled Roadsafe to obtain the CGL policy from Zurich at a reduced premium.

Held: “Taken together, those provisions unambiguously manifest the intent of the parties to the contracts, Zurich and Roadsafe, for the SIR endorsement to control their relationship such that Roadsafe assumed all costs and liability for the first $500,000 of any claim that might be made under the CGL policy, regardless of whether that claim was against Roadsafe or an additional insured.”

The decision is very much tied to the policy language. And policies can vary widely in how they address SIR obligations. But that does not diminish the potential significance of the decision. As it is still just one of few in the area, it simply means that parties will address whether their language is sufficiently similar to that at issue in Roadsafe or distinguishable, such that a different result is warranted. Of significance, while the court noted that the SIR enabled Roadsafe to obtain the policy from Zurich at a reduced premium, that alone would not have likely made a difference in the face of policy language that did not support Zurich’s position.

Because the decision turns on policy language it is also a cautionary tale for insurers to address their SIR terms to ensure that a policy, priced for an SIR, does not become “dollar one” for an additional insured.