How Insurance Companies Admit
and Deny Coverage at the Same Time:
The Multiple SIR Problem
By David E. Wood and John L. Corbett
M
any cost-conscious businesses purchase errors and
omission insurance policies with high self-insured
retentions, or SIRs, as a way of keeping premiums
down. Unlike a first-dollar policy, in which the insurance company has a duty to defend from dollar one
even if the policyholder is financially responsible for
an initial indemnity layer, a policy with an all-loss SIR
often imposes no duty to defend or indemnify on the
insurance company until that SIR has been exhausted
by the policyholder’s payment of defense costs, judgments or settlements. Given a large enough SIR, the
insurance company may end up with no defense or
indemnity obligations over the life of the policy. Generally, the higher the SIR, the lower the premium.
The reason why businesses purchase high SIR policies is to plan for that catastrophic liability that might
imperil the continued existence of the company. Although the policyholder may have to pay a significant
amount to exhaust the SIR and trigger coverage, the
insurance company’s limits often exceed the SIR many
times over. In the big picture, this higher-SIR-lowerpremium approach is a win-win proposition for the
policyholder . . . so long as when that major litigation
comes around, the insurance company agrees that the
SIR has in fact been satisfied.
In many instances, exhaustion of the SIR is not a complicated issue. For example, where a service company
is sued by a client, the policyholder may spend enough
money defending the case to exhaust the SIR, thereby
triggering coverage under the E&O policy. In some
cases, the policyholder may enter into a partial settlement with one plaintiff out of a number who have
made a series of related claims against the policyholder,
where the partial settlement is sufficient to exhaust the
SIR. In such circumstances, the insurance company’s
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Enforce: The Insurance Policy Enforcement Journal
ability to wriggle out of any obligation to defend or
indemnify the policyholder may be limited to other
coverage defenses, but not breach of the condition that
the SIR be exhausted before coverage attaches.
The more difficult scenario is the series of claims alleging injuries to numerous plaintiffs. Although none
of the claims is, by itself, sufficient to break the bank,
collectively they pose a grave threat to the business.
When this happens, insurance companies sometimes
rely on an additional avenue for avoiding liability: the
assertion that each claim requires the exhaustion of
a separate SIR to trigger coverage. Such a coverage
posture often places any practical possibility of coverage out of reach, regardless of whether the claims are
otherwise covered under the policy.
An insurance company’s decision to assert that multiple
SIRs must be exhausted involves several considerations.
One is the contextual architecture of the policy: the
relationship among 1) the SIR, 2) the aggregate limit
of liability, 3) the per-claim limit of liability, and 4) the
potential liability exposure from the various claims. If
some of the claims are reasonably likely to result in a
judgment substantially in excess of the SIR, the insurance company may elect not to assert multiple SIRs
where the per-claim limit of liability is substantially
lower than the aggregate limits of the policy. This is
because an assertion of multiple SIRs can result in the
applicability of multiple individual limits of liability.
In other situations, the SIR is sufficiently high that none
of the claims on its own is likely to exceed one SIR.
The existence of multiple claims therefore may present
little additional exposure to the insurance company.
Although an insurance company asserting a multiple
SIR requirement theoretically places multiple per-claim