Some insurers issue liability policies with self-insured retentions and provide that the insurer has no duty to defend the insured.  Putting aside all kinds of specifics, the insurer’s potential coverage obligations generally come into play after damages and defense costs exceed the SIR.

These SIRs can be in the millions of dollars.  Or they can be in the tens of thousands or hundreds of thousands of dollars. While certainly not millions, for some insureds, that’s still a lot of money.

Of course, implicit in this arrangement is that the insured will in fact undertake its own defense as required.  But what if it doesn’t?  Perhaps it cannot afford to do so.  Or perhaps having the SIR seemed like a good idea at the time of the policy’s purchase -- but now, with a claim at hand, buyer’s remorse has set in.  For whatever reason, an insured may not comply with its obligation to defend itself.

That’s what happened in Ausborn v. Illinois Union Insurance Company, No. 24-11315 (11th Cir. Dec. 4, 2024) (unpublished).  And the consequences were significant.
 
A wrongful death action was brought against officers of the City of East Point, Georgia jail following the death of an individual while in a holding cell.  Illinois Union issued a general liability policy to City of East Point that provided coverage for up to $7 million.  The policy was subject to a $150,000 self-insured retention and the insured, and not the insurer, had the duty to defend.  But neither the City nor the officers defended – no reason given why -- and a default judgment was entered against the officers in the amount of $7 million.  

Donna Ausborn, the daughter of the decedent, filed a direct action against Illinois Union in state court seeking to collect the default judgment.  Following removal to federal court, Illinois Union argued that no coverage was owed because the City breached the policy condition that it was obligated to defend the underlying wrongful death action.  The insurer also asserted other defenses to coverage – no “occurrence” and some exclusions.  The District Court granted Illinois Union’s motion to dismiss.

On appeal, Ausborn argued as follows: “[C]ontrary to the district court’s conclusion, the more reasonable interpretation of the duty to defend condition imposes a duty on the insured to defend and pay defense costs only up to the retained limit of $150,000. Under Ausborn’s interpretation, Illinois Union has exposure for all amounts over the retained limit regardless of whether the City provides a defense. In addition, Ausborn argues that under the policy, Illinois Union has an implied duty to defend when there is a foreseeable risk that the underlying claim will result in damages that exceed the retained limit.”

But the Eleventh Circuit was not convinced.  Following a discussion of Georgia’s rules of policy interpretation, the federal appeals court concluded that Ausborn’s was “strained and unavailing” and a “review of the entire policy shows that Ausborn’s interpretation is not a reasonable one and attempts to create an ambiguity where none exists.”

[For more on the various policy provisions, see the District Court’s opinion which goes further in depth.]

The court held as follows: “We conclude that the policy is not ambiguous and clearly states that Illinois Union has no duty to defend nor a duty to indemnify in this situation. The only duty to defend is on the insured, the City of East Point. The City did not provide a defense to the officers in the underlying wrongful death claim, and because it did not fulfill its duty, Illinois Union has no duty to indemnify damages and claim expenses within or equal to the retained limit. These duties are clearly stated in the policy as ‘Policy Conditions.’ Thus, based on the record, we conclude that the district court did not err in granting the City’s motion to dismiss.”
 
One could look at this opinion and conclude that, on one level, it’s mundane and hardly significant.  The policy contained a condition.  The court concluded the condition was unambiguous.  The court applied said condition.  Nothing to see here folks, move along.

However, I see it differently.  The defense obligation under the SIR was minimal relative to the amount of coverage being sought.  In addition, the claim may have been one where it was foreseeable that the exposure was likely to exceed the SIR.  But these factors – which would likely be ones argued by policyholders in this situation – did not divert the court from its conclusion that the policy language was unambiguous.   

Another significant aspect of the opinion is that the District Court also discussed, and rejected, this “no prejudice”-sounding argument [likely one that policyholders would make] that “there was no breach [of the policy condition], or at least not a material one, given . . . [the insurer] had the same notice of the claim and the same opportunity to defend . . . as to any amounts above the SIR as to which [insurer] was necessarily obligated to defend . . . .”

If you have this issue, I really do recommend that you read the District Court’s opinion.  It goes much deeper into the policy language and various arguments made in support of coverage, including a lengthy discussion of whether there is a so-called implied duty to defend if it was foreseeable that the exposure was likely to exceed the SIR.