Defense Expenses Exhaust SIR

The Southern District of Florida, applying Florida law, held that class action defense expenses incurred by a Florida agricultural business eroded the applicable $1 million self-insured retention (“SIR”) despite the fact that the policy contained another contradictory SIR endorsement.  

The coverage dispute arose when US Sugar Corporation (“US Sugar”) successfully defended itself against a class-action lawsuit alleging its sugarcane burning practices blew toxic smoke into neighboring communities. US Sugar’s general commercial liability insurer, Commerce and Industry Insurance Company (“C&I”), denied defense of the class-action lawsuit by arguing that the costs incurred by US Sugar should not count against the policy’s SIR. C&I argued that the defense costs did not erode the SIR, and therefore, it had no obligation to US Sugar under the policy. Conversely, US Sugar argued that it exhausted the $1 million SIR by incurring excess of that amount in defense costs and that C&I was required to reimburse it for the costs excess of the SIR. 

Endorsement 23 of C&I policy states that the self-insured retention “will not be reduced by defense expenses.” However, the policy includes another SIR endorsement, Endorsement 26, that provides that it controls over other conflicting provisions. It includes a schedule of retained limits and states that the $1 million SIR limit is “inclusive of defense expenses.” Endorsement 26 also states that it applies “notwithstanding anything to the contrary in the other terms.” 

The Court determined that because Endorsement 26 contained a provision stating that its terms control over other conflicting provisions, and given this plain meaning, the Court must disregard the terms of any provision that conflicted with Endorsement 26. Therefore, since the second endorsement conflicted with the first and explicitly stated that the SIR for general liability included defense expenses, US Sugar’s defense expenses incurred in defending the class action lawsuit eroded the SIR. The Court also noted that even if it found the policy’s terms ambiguous, Florida law would still require C&I to provide coverage since ambiguities in insurance contracts are interpreted against the insurer. Thus, the Court granted US Sugar’s motion for judgment on the pleadings and found that the defense expenses eroded the policy’s self-insured retention limit for general liability. U.S. Sugar Corp. v. Com. and Indus. Ins. Co., 22-21737-CIV, 2022 WL 17403613 (S.D. Fla. Dec. 2, 2022).