Please, SIR, I Want Some More: Protecting Carriers Against the Inherent Risks of Self-Insured Retentions

AS SEEN IN DRI's - FOR THE DEFENSE (MAY 2025) Issue

A Self-Insured Retention, or SIR, can be a viable, cost-effective insurance provision for growing startup businesses that are looking to save money on insurance premiums.  When a commercial insured does not have the financial muscle to maintain an SIR, however, insurance companies and their attorneys may find themselves in unfamiliar territory.  In this article, we discuss the inherent risks that are attendant to SIRs and protective measures that insurance carriers can and should take to manage those risks. 

Venture-Capital Based Startups and the Risk of Insolvency

The heart of this discussion is particularly prevalent in the world of venture-capital-backed startup companies.  These are often new businesses with relatively little loss experience or capital, which makes evaluating their ability to satisfy an SIR—and continue to satisfy it in the future—difficult to underwrite.  In 2023, more than 3,200 private venture-backed startups went out of business worldwide according to the New York Times and Pitchbook.  See Erin Griffith, From Unicorns to Zombies: Tech Start-Ups Run Out of Time and Money, The New York Times, Dec. 7, 2023.  Collectively, those companies had raised $27.2 billion in capital, but even that was not enough to keep them afloat.  Id.  According to the Times, many once-promising tech companies faced a “harsh reality: … [V]enture capital firms are deciding which young companies are worth saving and urging others to shut down or sell.”  Id.

Waitr Holdings, Inc. is one of the many companies in that number.  Waitr filed for protection from its creditors and liquidation of the company’s assets under Chapter 7 of the United States Bankruptcy Code on April 2, 2024.  At the time of the filing, the company and all its subsidiaries — including Dude Delivery, Waitr, ASAP, Bite Squad, Delivery Logistics, and Catering on Demand — ceased all operations, and immediately terminated the company’s executive leadership.  Joanna Fantozzi, ASAP Delivery Service Previously Known as Waitr Files for Bankruptcy, The Nation’s Restaurant News, April 3, 2024 (https://www.nrn.com/delivery-takeout-solutions/asap-delivery-service-previously-known-as-waitr-files-for-bankruptcy). According to published reports, the wheels for the Chapter 7 filing had been in motion since February 2024 when the companies began winding down operations. 

The parent company was founded in 2013 as a boutique delivery platform and was officially launched in 2015. In 2018, the company was acquired for $308 million.  Following that acquisition, however, the company faced a number of financial challenges as it struggled to compete in the increasingly crowded market brought on by what some have described as the golden era of restaurant delivery.  By 2019, Waitr received a delisting warning from Nasdaq as its stock had remained below $1 per share for 30 consecutive days.   Although the company scrambled to raise additional capital and stay solvent, those efforts mostly failed. Continuing financial and legal issues ultimately forced the company to shut down in the first quarter of 2024.

One lesser-known aspect of Waitr’s demise holds important lessons for insurers that provide coverage to tech-based startups.  Immediately prior to its bankruptcy filing, at least one key component of Waitr’s insurance coverage was subject to a significant SIR.  Among other things, the SIR required Waitr to pay a claims administrator to handle automobile liability claims against the company, and defense lawyers to respond to lawsuits arising out of those claims.  When Waitr declared bankruptcy, it abruptly stopped providing claims-administration services and fired its defense counsel.  See Fair American’s Proof of Claim (No. 41), In Re Waitr Holdings, Inc., No. 34-10676-MFW (Bankr. D. Del. 2024).  Waitr’s default forced its insurers to make significant decisions about how to administer and defend ongoing claims, while at the same time protecting their own interests in enforcing Waitr’s SIR obligations under the policies.

The SIR’s Unique Nature Makes it Both Attractive to the Insured and Risky for the Insurer

Before we can discuss managing the risks attendant to an SIR, we must acknowledge that there are several unique features of insurance policies that are subject to an SIR.  Those unique features make the provisions at once attractive to certain insureds—particularly startups and entrepreneurs—and risky for the insurers.

In the context of a liability policy, an SIR is generally defined as “[t]he amount of an otherwise-covered loss that is not covered by an insurance policy and that ... must be paid [by the insured] before the insurer will pay benefits.”  Self-Insured Retention, Black’s Law Dictionary (10th ed. 2014).  Claims that fall below the chosen SIR amount are “retained” (paid for) by the insured.  In addition to covering a set dollar amount, the insured is often responsible for handling claims and may be required to pay for the defense and other allocated expense costs until the SIR amount has been satisfied.

In this respect, SIRs are distinct from and should not be confused with large deductibles.  See e.g., Allan D. Windt, INSURANCE CLAIMS & DISPUTES § 11.31 (2009); State Farm v. Winney, 923 P.2d 517, 519 (Kan.Ct.App. 1996).  Although the two vehicles ultimately accomplish the goal of transferring risk back to the insured, there are significant distinctions between them that are important for this discussion.  First, a deductible is usually fronted by the insurer on the insured’s behalf and then collected or credited against the insured when the claim is paid.  See, e.g., Windt, INSURANCE CLAIMS & DISPUTES § 11.31 (2009).  Second, under many SIR provisions the insured is required to defend itself until the retention is exhausted, whereas with a deductible the insurance company’s defense obligation exists from the outset of a covered claim.  See U.S. Fire v. Scottsdale, 264 S.W.3d 160, 173 (Tex.App.—Dallas, 2008, reh’g overruled August 13, 2008).  The combined effect of those two features is that the insurance company’s obligation under the policy generally does not begin until the SIR is satisfied by the insured, whereas under policies with a deductible, the insurance company is often obliged to provide the insured with claims handling services and a defense to any suit from day one. 

For insureds, an SIR can offer significant cash flow benefits.  Instead of paying insurance premiums in advance to purchase coverage for future claims, an SIR allows an insured to pay for claims as they occur.  SIRs also result in lower premiums; because the insured takes on the initial risk of paying claims within the SIR amount, premiums are often much lower.  This usually allows new ventures to afford premiums for coverage that would otherwise be too expensive. 

In addition, SIRs allow a policyholder to have almost complete control over the claim adjustment process and the defense and settlement of a claim, at least up to a point.  In a related way, SIRs can positively impact an insured’s future loss history-- while a business’s loss history will likely be impacted with deductible-based coverage (where the insurers are often paying out multiple smaller claims), SIRs give the insured the power to control which claims they want to defend, which in turn, results in a cleaner loss history that may earn the insured better rates from future insurers. 

There is also typically no collateral required with an SIR.  Whereas deductible-based coverage almost always requires a letter of credit or some other form of collateral from the insured, this is not the case for SIRs.  See Melissa Huenefeldt, Large deductible programs: Demystifying collateral, (Oct. 21, 2021), https://www.milliman.com/en/insight/large-deductible-programs-demystifying-collateral. 

From the carrier’s perspective, an insured with an SIR has “skin in the game” which means, in theory, the insured takes responsibility for risk management and will actively work to keep their claims low because the initial portion of any claim is paid with the insured’s own money.  The thought is that where an insured does not carry an SIR, there is no incentive to prevent or minimize loss beyond the risk of future rate increases or lack of appetite from the market.

But what happens when an insured files for bankruptcy before paying the SIR?  The bankruptcy raises the question of whether there will be liability coverage even if the insured cannot pay the SIR.  It also presents the possibility that the insured’s inability to pay the SIR negates coverage.  Courts are split on this issue. See 21 J. Bankr. L. & Prac. 2 Art. 1 Norton Journal of Bankruptcy Law and Practice, April 2012, Intersections of Bankruptcy Law and Insurance Coverage Litigation (discussing the split in caselaw ).  Some courts have held that an insured’s failure to satisfy its SIR obligations does not excuse the insurer from performance under the policy, but others have required payment of the SIR as an enforceable condition precedent to coverage.  Compare In re Vanderveer Estates, 328 B.R. 18, 25 (Bankr. E.D.N.Y. 2005) with, In re Kismet, No. 04-25167, 2007 WL 6872750 (Bankr. N.D. Ohio Aug. 28, 2007) and, Pak-Mor v. Royal Surplus, No. 05-135, 2005 WL 3487723 (W.D. Tex. Nov. 3, 2005) and,  In re Apache Prods., 311 B.R. 288 (Bankr. M.D. Fla. 2004).

How Should Carriers Manage the Attendant Risks to SIRs in the Startup Space?

“If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business” -Gary Cohn, former Chief Operating Officer of Goldman Sachs and later Director of the National Economic Council

The benefits of an SIR do not come without consequence.  Waitr’s bankruptcy, while not unique, neatly illustrates three key risks that insurers face when they agree to provide startups with coverage subject to an SIR.  First, and most obvious, is the risk that the insured will become insolvent and unable to satisfy its SIR obligations.  Second is the risk that the insured will also default on its claims-handling and defense obligations, leaving the insurer exposed to a potentially catastrophic judgment without an adequate defense.  Third, because the SIR obligation may not be considered insurance, carriers can struggle with how to address coverage issues related to the insured’s default in the context of a bankruptcy proceeding.  See, e.g., Windt, INSURANCE CLAIMS & DISPUTES § 11.31 (2009) (discussing how certain courts and commentators have held that an SIR does not constitute “insurance.”).  The key for carriers is to find appropriate mechanisms to manage those risks.

Protecting the Carrier Against the Risk of the Insured’s Insolvency

The insured’s inability to satisfy its SIR obligations in the face of a litigation storm may well become one of the primary causes of its insolvency.  There are three primary mechanisms to protect carriers against the risk of an insured’s insolvency: (1) detailed underwriting and actuarial evaluation of the insured’s capacity to absorb the SIR risk; (2) careful selection of policy language and drafting of the SIR endorsement; and, potentially, (3) securing the SIR amount through a letter of credit or other commercial debt facility.

Good Underwriting is the Best Protection 

Solid underwriting is likely the best protection that an insurer can use against the risk of an insured’s insolvency and resulting default on its SIR obligations.  Tim O’Reilly, the founder/CEO of O’Reilly Media, Inc. provides a helpful analogy: “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.”  The fundamental question that must be asked while underwriting policies and monitoring claims that are subject to an SIR is whether the insured has enough “gas” to pay the SIR for the first policy period.  Assuming it does, the question changes to whether the insured has enough “gas” to continue to pay the SIR on a  long-term basis.

The answer to those two questions is especially important when the SIR is not subject to an aggregate limit or is subject to one that will likely involve payment of multiple claims from the insured’s own resources.  Measuring and determining a business’s financial risk-bearing capacity is obviously crucial in determining whether an insured is capable of maintaining an SIR and if so, to what extent.  Carriers and underwriters must do more than just look at whether the business has sufficient funding and capital. 

The other key to properly underwriting an account with an SIR is developing a thorough actuarial understanding of the company’s potential exposure based on its past loss history, its present operations and financial condition, and its future operations plans. Past loss information, including losses paid within the SIR, is critical.  This should include reviewing both paid and reserved claims going back at least five years and, where possible, an actuarial analysis of this history.  When a business’s losses are consistently represented over time, an underwriter is better able to accurately determine an acceptable SIR for both the insured and carrier and if necessary, place limitations on the risk that an insured may retain, relative to its financial capacity. 

When the business seeking insurance is a new startup, this becomes tricky.  Risk-bearing capacity is harder to predict as carriers and underwriters do not have the benefit of detailed loss runs or audited financial statements. 

Careful Selection of SIR Endorsement Language is the Next Best Option

The resolution of most SIR issues will turn on the precise language of the policy and the SIR-specific endorsement.  It is worth pausing here to note that SIRs are usually added to an insurance policy by way of endorsement.  While ISO and other insurance industry organizations have a variety of forms available for those endorsements, they are not standard.  Depending on the policy and the risk, SIR endorsements may be written in manuscript, and the material terms can vary greatly from carrier to carrier and even from policy to policy with the same carrier.  Thus, it is important for carriers to carefully consider the specific risk(s) the insured faces when adding an SIR endorsement to a policy.  Likewise, it is vital for lawyers to avoid extrapolating “general rules” or assuming that anything counts as “black letter law” regarding SIRs.

Recent decisions throughout the country serve as a reminder to insurance companies that policy provisions requiring satisfaction of SIRs will not be enforced unless they include incredibly specific language that identifies the SIR as a “condition precedent” to coverage.  See Cont'l Cas. Co. v. N. Am. Capacity Ins. Co., 683 F.3d 79 (5th Cir.2012). When the policy at issue is ambiguous as to the form of payment required, courts have permitted the insured to satisfy the SIR in various manners, including by a non-dischargeable note or credit.  See Qualcomm, Inc. v. Lloyds,161 Cal. App. 4th 184 (2008); Pak-Mor, 2005 WL 3487723, at *6-7; In re Keck, 241 B.R. at 596.  Caselaw also suggests, however, that carriers may not be able to rely on even the most carefully-crafted provisions to protect themselves from the risk of their insured filing for bankruptcy.  See Daniel J. Bussel, The Mass Tort Claimants' Bargain, 97 Am. Bankr. L.J. 684, 751 (2023) (for a discussion of cases).

When the required language is incorporated into the SIR endorsement, however, courts have shown some willingness to enforce the policy as written.  See, e.g., McFee v. Freds, 3:20-CV-00968, 2021 WL 2457190 (W.D. La. June 16, 2021).  Courts have also enforced policies that clearly and expressly require payment of the SIR in a particular form literally, effectively requiring satisfaction in cash where the insurance policy expressly required it. See Kismet Prods., 2007 WL 6872750, at *9. 

Given the uncertainty in the reported caselaw, carriers should give careful forethought to policy language in the drafting process.  Counsel representing the carrier should also consider how the endorsement will be interpreted in their jurisdiction.  It may help to ask the following questions:

-       Does the governing state law require policies to contain a provision stating that the insolvency/bankruptcy of the insured shall not release the insurer from the payment of policy proceeds otherwise due under the policy?  If so, how does policy language affect the outcome?

-       Is policy language ambiguous on the SIR question?

-       Does the policy define “satisfaction” of the SIR?

-       Can someone other than the named insured satisfy the SIR?

-       Can satisfaction of the SIR be accomplished by means other than the actual payment of money?

Monetary Security for SIR and Aggregate SIR May Prevent Some Risks

A third potential way to protect against the risk of the insured’s insolvency is to require monetary or near-monetary security for the amount of the SIR.  That security can take a variety of different forms.

The specific policy language may offer an insurer the opportunity to obtain monetary security for the insured’s SIR obligation as a contract matter, at least when the value of the claim is reasonably anticipated to exceed the SIR.  For example, one SIR endorsement that we have worked with repeatedly provides:

When your liability is reasonably anticipated to exceed the remaining [SIR], we shall have, at our option, the right to ask you to tender the remaining [SIR] and have the right to negotiate the settlement of any claim.  We shall obtain your consent prior to entering into any settlement of any claim which is equal to or less than the [SIR].

If, however, you refuse to consent to any settlement recommended by us within the [SIR] and elect to contest the claim or continue with any legal proceedings in connection with such claim, our liability for that claim shall not exceed the amount determined by subtracting the [SIR] from the amount for which the claim could have been settled on the date you refused to consent.  We shall have no liability with respect to such claim if this difference is zero or a negative number.

We shall have no responsibility for “defense costs” incurred after the date you refuse to consent.

Arguably, that provision allows the carrier to demand that the insured tender the SIR to the carrier for use in settling a case that will clearly exceed the limits of the SIR.  When a financially troubled insured is confronted with multiple claims that may exceed an aggregate SIR, the carrier can rely on this provision to demand that the insured tender the aggregate amount in cash for use in settling the cases.  Of course, such a demand comes with the risk that if the insured tenders the aggregate SIR, their cash-flow position will get worse, not better.  Despite that possibility, when it becomes apparent that an insured is on the brink of insolvency, the carrier should consider invoking this sort of provision.

Another way a carrier can protect itself, although atypical, would be to require the insured to post collateral for the express purpose of securing the insured’s SIR obligations.  Collateral, in this sense, can come in many forms.  See Melissa Huenefeldt, Large deductible programs: Demystifying collateral (https://www.milliman.com/en/insight/large-deductible-programs-demystifying-collateral).  Some forms, such as letters of credit, securities held in trust, or surety bonds are considered “static” because the entire amount of collateral remains available to pay claims, regardless of the insured’s financial situation.  Other forms, such as cash deposits, may be “depleting” in nature.  With depleting collateral, the carrier generally requires collateral at the inception or renewal of the policy in the amount of the perceived loss expectancy.  Losses are then paid out of the cash in the fund and subsequently reevaluated based on the insured’s actual loss history.  The amount of collateral required in either form is calculated based on two components: credit and actuarial.  The credit component involves a determination of the insured’s financial condition and ability to pay claims.  The actuarial component requires an estimate of ultimate losses for all covered years and lines of business and may be subject to more uncertainty.

This raises several questions.  Would a bankruptcy court have to honor that accounting and  maintain it as a separate fund only to be used to satisfy the SIR?  Would the collateral be treated as a general asset of the insured’s bankruptcy estate? Could it be used to pay other creditors in the event of bankruptcy? 

The danger, of course, is that the collateral posted to support the SIR could become part of the insured’s general bankruptcy estate such that the debtor or the trustee could use it to satisfy claims of other creditors as opposed to paying the SIR.  In jurisdictions such as Ohio and Illinois, where bankruptcy courts have required an insurer to pay claims even though the insured failed to satisfy the SIR, this could mean that the collateral provides no security at all.  See In re Energy Future Holdings Corp., 548 B.R. 79, 62 Bankr. Ct. Dec. (CRR) 125 (Bankr. D. Del. 2016), aff'd, 2017 WL 1170830 (D. Del. 2017).  There is, however, at least some case law suggesting that letters of credit can be successfully insulated from an insured’s bankruptcy estate in the event of insolvency. See U.S. Bank v. Bankplus, 2010 WL 1416505 (S.D. Ala. 2010) (letters of credit separate from bankruptcy estate under independence principle); Accord ACE American v. Bank of the Ozarks, 84 U.C.C. Rep. Serv. 2d 834 (S.D. N.Y. 2014).  This may be another reason to consider a letter of credit as a preferred form of collateral to support an SIR. 

The way courts have handled unpaid deductibles perhaps offers some additional insight into these questions.  With a deductible, the insurer pays every cent of the loss (up to the policy limit) and is then reimbursed by the deductible.  Insurers who seek deductible reimbursements from a bankrupt policyholder are usually entitled only to general unsecured claim status. See In re Broaddus Hosp. Ass'n, 159 B.R. 763, 768 (Bankr. N.D.W. Va. 1993) (deductible reimbursements accorded same priority as pre-petition tort claims); In re HNRC Dissolution Co., 343 B.R. 839 (Bankr. E.D. Ky. 2006), aff'd, 371 B.R. 210 (E.D. Ky. 2007), aff'd, 536 F.3d 683 (6th Cir. 2008) (denying administrative expense priority to insurer's deductible claims). 

Requiring certain types of collateral to support an SIR can be an effective tool to protect the insurer against at least part of the indemnity obligation when the insured’s insolvency causes it to default on its SIR obligation.  It is unclear, however, whether a bankruptcy court will honor the restrictions on the use of that collateral if the insured declares bankruptcy.  And, given the differences in how bankruptcy courts handle insurance coverage where the insured has defaulted on an SIR, the sudden absence of the collateral is not a definitive defense to paying claims that exceed the SIR.

Maintaining an Effective Defense in the Face of an Insured’s Default on Claims Handling and Defense Obligations

Once an insured files for bankruptcy and defaults on its SIR obligation, a second problem arises.  Most SIR endorsements require the insured to pay counsel to defend the insured’s interests in court until the SIR is exhausted.  The provision may require, for example, that “[f]or each incident, you are responsible for all ‘defense costs’ incurred until the exhaustion of the Per Incident SIR.”  In certain cases, the policy may also require the insured to “pay all fees, charges and costs of the claim service provider in addition to ‘self-insured retention’ and applicable ‘defense costs’ incurred before exhausting the ‘self-insured retention,’ without any reimbursement from us.”  Depending on the policy language, the payment of those costs may or may not count toward or erode the SIR.

When the insured is insolvent, however, it will almost certainly cease paying for those expenses.  In most cases, that is of no concern to the carrier because once the insured declares bankruptcy, the automatic stay under the Bankruptcy Code will prevent underlying state and federal actions from continuing against the insured while the bankruptcy is pending.  There are, however, two situations which can lead to significant concerns.

First, Bankruptcy Courts have discretion under Section 362(d)(1) of the Bankruptcy Code to modify or “lift” the automatic stay to permit a tort claimant to pursue their claims against the debtor either by continuing to press the tort claimant’s suit against the debtor in state court and recovering proceeds from the applicable insurance policies.  In that case, the carrier will have to decide whether to provide the insured with a defense after the bankruptcy court lifts the automatic stay.  That decision is, necessarily, dependent in part on whether the relevant jurisdiction will allow the carrier to enforce the SIR provision as written or will require the carrier to provide a defense and settle the case despite the insured’s failure to meet its SIR obligation.  The fact that coverage issues like that one are often not decided until after the underlying case against the insured proceeds to trial, makes a decision not to defend the insured risky even in jurisdictions where the SIR provision is likely to be enforced in the carrier’s favor.

Second, in some states tort claimants may be able to pursue a carrier even without an order from the bankruptcy court that modifies the automatic stay.  In states like Louisiana and Wisconsin, where third-party plaintiffs are given a direct action against the insurer, the automatic stay potentially applies only to claims against the debtor.  See Louisiana Revised Statute 22:1269 and Wisconsin Statute 632.24.  Co-defendant insurance carriers are arguably not subject to the stay and the case may, theoretically, proceed to trial against them while the bankruptcy proceedings are ongoing.  See Reliant v. Enron, 349 F.3d 816, 825 (5thCir. 2003); Sosebee v. Steadfast Ins. Co., 701 F.3d 1012, 1025 (5thCir. 2012).

Either of those situations requires a careful response from the insurance company.  As a practical reality, the courts may well allow the tort suit against the insured to proceed and result in a judgment against the insured, even if that judgment is only collectible against the insurance company.  The carrier must therefore decide whether it will appoint defense counsel to represent the insured’s interests in the underlying trial even though, contractually, the responsibility to hire defense counsel lies with the insured until the SIR is satisfied.  Absent a decision by the carrier to provide a defense, in that situation there is a possibility that the tort case could proceed to trial without a lawyer there to represent the insured.  That situation is likely to lead to what is, for all intents and purposes, a default judgment against the insured.

On the other hand, the carrier could appoint defense counsel to protect its own interests by defending the liability and damages claims against the insured. That situation is equally troubling because it requires the insurer to take on an obligation that it never bargained for when it placed the policy, and an added cost to the program that was not included in the policy premium.

Litigating Coverage Defenses in Bankruptcy

If all other risk management mechanisms fail, the insurer’s last resort may be to try and remove an underlying case to the bankruptcy court and litigate its coverage defenses there.  See 28 U.S.C. § 1452(a) and 28 U.S.C. § 1334 (which provide for removal based on “related to” jurisdiction).  The insurer’s ability to remove based on “related to” jurisdiction depends entirely on where the underlying litigation is pending.  Insurers with cases pending in jurisdictions where liability policy proceeds are automatically considered “property of the bankruptcy estate,” have the best chance of a successful removal.  See Alexander v. Travelers, 625 F. Supp. 512, 517 (E.D. La. 2022) (discussing “related to jurisdiction” and ruling that removal to bankruptcy was proper).

Here again, however, there is no clear rule that allows removal based on “related to” jurisdiction in all cases.  One group of bankruptcy scholars put it best when they noted that: “Like the rule for buttoning a three-button suit, caselaw in this area ranges from sometimes, always, never. Unlike the three-button suit rule, however, policy/proceeds jurisprudence is anything but straightforward.”  George W. Kuney & Donna C. Looper, When Liability Insurance Policy Proceeds are Property of the Estate —Sometimes, Always, Never—and a Proposal for a Consistent Rule, 2019 Ann. Surv. of Bankr.Law 1 (2019). 

Bankruptcy courts considering whether to take on coverage litigation based on “related to” jurisdiction are likely to ask two practical questions: (1) what are the potential effects the debtor’s estate?; and (2) what are the potential effects on the creditors as a whole?  In general, bankruptcy courts are more likely to accept the argument that insurance policies should be treated as an asset of the estate when the value of all outstanding claims is substantially likely to exceed the total amount of available insurance. See, e.g., In re OGA Charters, L.L.C., 901 F.3d 599 (5th Cir.2018).  There is a good reason for that.  When there is not enough insurance to cover the claims remaining against the insured, the damages for those claims, if possible, will have to be paid directly from the debtor’s assets, i.e., the bankruptcy estate.  When there is plenty of insurance available to cover the claims, bankruptcy courts are likely to avoid addressing coverage issues because those issues are unlikely to change the outcome of the bankruptcy court’s effort to compensate unsecured creditors.

Where bankruptcy courts decline jurisdiction over related coverage issues, carriers are likely to find themselves litigating those issues in a mix of state and federal courts.  Those courts are, in our experience, more likely to order the carrier to pay covered claims even though the insured has defaulted on its SIR obligations.  There are, however, at least a few courts which have held that insurers are absolved of their obligation to cover claims by virtue of the insured’s default on an SIR.  See, e.g., Mt. Hawley. v. Van Hampton, CV H-23-360, 2023 WL 6725735 (S.D. Tex. Oct. 12, 2023).

Conclusion

There are obvious benefits to an SIR for both insurers and insureds.  In the right situation, they can facilitate an insurance coverage program that is affordable for the insured and beneficial for the carrier.  Providing coverage subject to an SIR, however, can present unforeseen risks for the carrier.  Most importantly, it is unclear whether an insurer can litigate coverage issues related to a default on the SIR obligation in bankruptcy court.  State and federal court decisions outside the context of bankruptcy are mixed when it comes to whether the insurer continues to have an obligation to cover claims in excess of the SIR after a default.

Appropriate management of those risks is key to avoiding exposure beyond what the carrier anticipated in the event of the insured’s insolvency or bankruptcy.  That management begins with more detailed underwriting to evaluate the insured’s capacity to initially satisfy the proposed SIR and continue to satisfy it in response to future claims.  It also includes careful selection or drafting of the SIR endorsement language to give the carrier the best chance of maintaining a coverage defense if the insured defaults on its obligations.  In some extreme cases, particularly those involving new start-ups with little financial or loss history, carriers may want to consider reducing the amount of the SIR or even demanding collateral to secure its satisfaction.

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ABOUT THE AUTHORS:

Christopher R. Teske is a member at the law firm of Pipes Miles Beckman, LLC in New Orleans.  Mr. Teske is also an Associate Professor of Trial Advocacy and Co-Director of the Civil Litigation Intersession at Tulane University Law School.  His practice focuses on complex disputes involving insurance coverage including the pre-suit investigation of first-party property insurance claims, the trial of catastrophic loss first-party and bad faith claims, and third-party disputes related to construction defects, exposures to and damage from environmental contaminants, and related disputes.  Mr. Teske also represents insureds at trial in a variety of serious personal injury and property damage cases.

Sarah M. Day is an associate at the law firm of Pipes Miles Beckman, LLC in New Orleans.  Ms. Day was admitted to practice in 2020.  Her practice also focuses on insurance coverage disputes and litigation in the areas of third-party liability and first-party insurance coverage, including construction defect, automobile, and professional liability claims.  She also provides coverage advice on issues involving additional insureds and contractual indemnity claims between insurers.  Ms. Day is an active member of the Louisiana Association of Defense Counsel, currently serving as the young lawyer’s liaison for the insurance coverage practice group.