SNR Denton on Seventh Circuit Holds That Where Policy Language Was Not Clear, Insurer Had Duty to Defend Even Though Self-Insured Retention (SIR) Was Not Exhausted; Denial of Defense Was Vexatious

William Barker   By William T. Barker, Partner, SNR Denton

Ordinarily, when a liability policy has a self-insured retention ("SIR"), the insurer's duty to defend does not attach until the SIR is exhausted.  But, in American Safety Casualty Insurance Co. v. City of Waukegan, 2012 U.S. App. LEXIS 5496 (7th Cir. Mar. 16, 2012), the Seventh Circuit, interpreting Illinois law, held that, absent clear policy language deferring the duty to defend, the duty attached immediately.  Moreover, in the absence of a declaratory judgment action or other effort to resolve trigger disputes among the insurers, the failure to defend was deemed vexatious and subjected the insurer to an award of attorneys' fees for the coverage litigation.

The commentary advises that insurers whose primary policies have SIRs should review them to make sure the language on accrual of the duty to defend is clear.  And the case emphasizes the already strong reasons for filing declaratory judgment actions in Illinois cases where a defense is not provided.  Insurers should also recognize the need to prepare for arguments that even better drafted SIR language should be construed to apply only to the duty to indemnify.  Finally, insurers must consider the implications of the Seventh Circuit's expectations regarding insurer cooperation in dispute resolution.

The author warns, "[W]here there is a dispute among insurers, leaving the insured 'in the lurch,' is likely to be viewed negatively by the courts, potentially subjecting whichever insurer[s] are found to have coverage to expanded liability." The commentary concludes with steps insurers can take to avoid this outcome. 

William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office.  He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of THE NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION and with Charles Silver of the forthcoming PROFESSIONAL RESPONSIBILITIES OF INSURANCE DEFENSE COUNSEL; he has written over 100 published articles on insurance and litigation subjects.  He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure.  Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995).  He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance.  He is a member of the EDITORIAL BOARD OF THE NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION and THE NEW APPLEMAN INSURANCE LAW PRACTICE GUIDE.  He is Editorial Board Director and Senior Contributing Editor of INSURANCE LITIGATION REPORTER and a member of the Board of Editors of DEFENSE COUNSEL JOURNAL.

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