I’m not sure what to make of this case, other than to say that it is wrongly decided.

Homeowners in a residential development secured a $4 million judgment against the developer for construction defects.  The developer was insured under a Steadfast policy subject to a self-insured retention of $1,000,000 per occurrence.  The homeowners, as judgment creditors and assignees of the developer, filed an action against Steadfast seeking coverage for the judgment.       

Steadfast maintained that it never had a duty to defend or indemnify the developer because it never paid the self-insured retention, being a condition precedent to coverage.  The trial court agreed.  But the appeals court, in Stryker v. Steadfast Ins. Co., No. C089374 (Cal. Ct. App. Mar. 7, 2022) reversed.

The applicable self-insured retention language provided as follows:

1. Our obligations under SECTION I — COVERAGES to pay damages . . . applies only to the amounts of damage . . . in excess of any “self insured retention” amounts . . . . 2. If you do not pay the applicable “self insured retention” amount . . . the insurance provided by this policy will not replace the “self insured retention."

Self-insured retention was defined as “a. All amounts which you become legally obligated to pay as damages . . . as defined in this policy; and b. The legal expenses, expert and other witness expenses, court costs, bond premiums and such other usual and incidental expenses attendant to claim and litigation costs.”

On one hand, the court noted that “case law indicates that, as a general matter in insurance, satisfaction of a self-insured retention is a condition precedent to a duty to defend or indemnify.”  However, “here, the language of the policy does not expressly and clearly say that.”  Further, “[t]he label ‘self-insured retention’ does not control our interpretation of the policy; the actual language in the self-insured retention does.”
As the court saw it, the flaw in the policy language was as follows:

“The policy language defining the self-insured retention as being comprised of ‘usual and incidental’ litigation expenses did not expressly and clearly indicate to Cambridge [the insured-developer] that satisfaction of the self-insured retention was a condition precedent to Steadfast’s obligations under the policy. . . . Further, the policy’s definition of a self-insured retention as ‘the amount you or any insured must pay for . . .’ has no temporal language. Had the definition said a self-insured retention was ‘the amount you or any insured must first pay for . . .’ such a definition would be somewhat closer to the general understanding of typical self-insured retentions that Steadfast invokes. But even if such temporal language were in the definition, there might still be an ambiguity if the definition did not also expressly preclude any duty to defend or indemnify until satisfaction of the self-insured retention.”  (emphasis in original)

Indeed, the court went so far as to conclude that the self-insured retention language did not preclude Steadfast from an obligation to reimburse the insured for damages or defense costs less than the self-insured retention amount.