In Clarendon America Insurance Company v. North American Capacity Insurance Company, E048176, 4th Dist. Ct. App. (Super. Ct. No. CIVRS701868), a new California Court of Appeal decision, the Fourth Appellate District has rejected an insurer’s attempt to apply multiple self-insured retentions to a single lawsuit.

Clarendon America Insurance Company (“Clarendon”) and North American Capacity Insurance Company (“NAC”) issued general liability insurance policies to a home builder (“Tanamera”) for two successive one-year policy periods.  Tanamera was sued by a group of individual homeowners for various alleged construction defects in one of its housing developments.  Of the 43 homes involved in the action, eight were completed during the NAC policy period (and therefore were covered by the NAC policy).

Clarendon agreed to defend the action, and ultimately settled it by paying a single lump sum to the homeowner group.  NAC, however, refused to defend or contribute to the settlement.  NAC’s policy imposed a self-insured retention (“SIR”) of $25,000 “per claim,” and NAC took the position that Tanamera had to pay a separate $25,000 SIR for each of the eight homes covered under its policy ($200,000 total).  Unless and until Tanamera did so, NAC argued, it had no duty to defend the litigation or contribute to settlement.  Clarendon sued NAC for equitable indemnity and contribution, and NAC moved for summary judgment on the basis of it SIR policy language.

The SIR provision stated, in pertinent part:

The Self-Insured Retention, shown above, applies to each and every claim made against any insured, to which this insurance applies, regardless of how many claims arise from a single ‘occurrence’ or are combined in a single ‘suit’.

The court acknowledged that on its face, this language appeared to draw a distinction between “claims” and “suits,” with a “suit” being capable of alleging multiple “claims.”  Based on this distinction, NAC argued that the term “claim” could only refer to each of the 43 homes involved in the construction defect litigation, while the term “suit” referred to the entire action.  Thus, NAC reasoned, Tanamera was required to satisfy a separate SIR for each of eight separate “claims” (the eight homes completed during the NAC policy period).

The Clarendon court, however, was not willing to take this leap.  The court observed that the term “claim” was undefined, and noted that in other places in the policy, the words “claim” and “suit” were used interchangeably.  Thus, the court could not accept the interpretation advanced by NAC as being the only reasonable interpretation of the SIR provision.  In the context of the policy as a whole and under the specific circumstances of this case, the term “claim” was subject to more than one reasonable interpretation, and therefore was ambiguous.  See E.M.M.I. Inc. v. Zurich Am. Ins. Co., 32 Cal. 4th 465, 470-71 (2004) (a case relied upon heavily by the Clarendon court).

The court went on to consider whether NAC had met its burden to show that the ambiguity should be resolved in NAC’s favor.  To do so, NAC had to establish that it would not have been objectively reasonable for Tanamera to expect that only one SIR would apply to a construction defect lawsuit involving multiple homes and multiple claimants.  See E.M.M.I. Inc., 32 Cal. 4th at 471.  The court concluded that NAC had presented no evidence below to support such a conclusion.  (Indeed, the court found support for the opposite conclusion by extrapolating NAC’s argument:  In a lawsuit involving all 450 homes covered under the policy, NAC’s interpretation would require Tanamera to pay $11.25 million in SIRs before it could access $2 million in liability limits.)

Although the Clarendon case involved a dispute among two insurers, the decision has positive implications for policyholders, who often confront this issue in coverage disputes with their insurers.  Insurers frequently attempt to leverage their policies’ SIR provisions in order to defer or entirely avoid their coverage obligations, attempting to apply multiple SIRs to a single lawsuit.  Clarendon makes clear that California courts will not permit this result unless the policy language clearly and unambiguously dictates it.