Can a self-insured retention (“SIR”) or large deductible under one policy constitute “insurance” within the meaning of another insurer’s “other insurance” clause? This situation typically arises in cases where the mutual insured (1) is a named insured under a liability policy with an SIR or large deductible; and (2) qualifies as an additional insured under another liability policy which does not contain any SIR or deductible applicable to the insured. The determination of whether an SIR constitutes “insurance” is significant because “[m]any business liability policies contain self-insured retentions, which are, in effect, large deductibles.”  Allan D. Windt, Insurance Claims and Disputes,  §11.31 (4^th ed. 2003). I handled one of the leading Minnesota cases on the issue, U.S. Fidelity & Guarantee Ins. Co. v. Commercial Union Midwest Ins. Co., 430 F.3d 929 (8th Cir. 2005) (applying Minnesota law), which is discussed below. 

The determination of whether self-insurance can constitute “insurance” within the meaning of an “other insurance” clause generally depends on the particular circumstances presented.  See, e.g., Consolidated Edison Co. of New York, Inc. v. Liberty Mut., 193 Misc.2d 399, 749 N.Y.S.2d 402, 405 (Sup. Ct. N.Y. 2002) (noting that “at least under the circumstances presented here, Con Edison’s ‘self-insurance’ does not qualify as ‘co-insurance’”); Champlain Cas. Co. v. Agency Rent-A-Car, Inc., 716 A.2d at 813 (1998) (noting that the “parties tend to paint with a broad brush, suggesting that self-insurance is a form of insurance . . . or alternatively, the antithesis of insurance” and observing that such labels are “generally unhelpful” to resolving the issue of whether the self-insurance at issue can constitute insurance). “As a matter of common understanding, usage, and legal definition, an insurance contract denotes a policy issued by an authorized and licensed insurance company whose primary business is to assume specific risks of loss of members of the public at large in consideration of the payment of a premium.” St. John’s Reg. Health Ctr. v. American Cas. Co. of Reading, PA, 980 F.2d 1222 (8^th Cir. 1992), reh’g denied, (Feb. 2, 1993).  Insurance has been defined as a ‘contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specific subject by specified perils.”  Champlain Cas. Co. v. Agency Rent-A-Car, Inc., 168 Vt. 91, 716 A.2d 810 (1998) (quoting Black’s Law Dictionary 721 (5^th ed. 1979)).   Based on the plain meaning of “insurance,” several courts have recognized that an insured’s self-insured retention or deductible agreement with one insurer does not constitute “other insurance” within the meaning of another insurer’s liability policy See, e.g., Stratford School District, S.A.U. Dist. No. 58 v. Employers Reinsurance Corp., 162 F.3d 718, 721 (1^st Cir. 1998) (“under a self-insurance scheme, no written insurance policy is issued by another individual or entity nor is a premium paid because obviously a business which is self-insured does not need to pay itself to protect against its own risk of loss”) (quoting Wake County Hosp. Sys., Inc. v. National Cas. Co., 804 F.Supp.768, 775 (E.D. N.C. 1992), aff’d, 996 F.2d 1213 (4^th Cir. 1993)); Consolidated Edison Co. of N.Y., Inc. v. Liberty Mut., 193 Misc.2d 399, 749 N.Y.S.2d 402, 404 (N.Y. Sup. Ct. 2002) (noting that “a majority of jurisdictions across the nation subscribe to the view of self‑insurance as ‘not insurance’ in, inter alia, an ‘other insurance’ context”).

In American Nurses Ass’n v. Passaic Gen. Hosp., 192 N.J. Super. 486, 471 A.2d 66 (1984), aff’d in part, rev’d in part, 98 N.J. 83, 484 A.2d 670 (1984), a $100,000 “self-insured sum” identified in a liability policy issued to a hospital insuring a nurse did not constitute “other insurance” within the intent of a liability policy issued to  the nurse and, thus, the nurse’s policy, which was the only insurance available to cover the first $100,000 of a $375,000 malpractice settlement, was liable for the first $100,000 of the settlement, with the $275,000 balance of the settlement shared equally by the two insurers.  The New Jersey Supreme Court equated the SIR to a deductible and noted that “lay persons would consider ‘insurance’ to refer to another insurance policy comparable to the one issued to them” rather than an “obligation of an insured to pay a deductible.”  American Nurses Ass’n v. Passaic Gen. Hosp., 98 N.J. 83, 484 A.2d 670, 673 (1984).

In Wake County Hosp. Sys., Inc. v. National Cas. Co., 804 F.Supp.768, 775 (E.D. N.C. 1992), aff’d, 996 F.2d 1213 (4^th Cir. 1993), St. Paul Fire & Marine Insurance Company (“St. Paul”) issued a liability policy issued to Wake County Hospital System, Inc. (“Wake”), which extended liability coverage to Sarvey, a nurse.  The St. Paul policy contained a $750,000 “self-insured retention.”  National Casualty Company (“National”) issued a liability policy issued to Sarvey, which had no self-insured retention or deductible.  A malpractice action was commenced against Sarvey and was settled for an undisclosed amount that was less than $750,000.  National, the insurer with no self-insured retention or deductible, contended that Wake had a contractual obligation to indemnify Sarvey under the St. Paul policy, for claims up to $750,000, and this contractual obligation constituted “other insurance” within the meaning of National’s policy.  The “other insurance” clause of the National policy provided that “[i]f the insured has other insurance against a loss covered by this policy, this policy shall be excess and secondary over such valid and collectible insurance.”  804 F.Supp. at 776.  Because the settlement was less than Wake’s $750,000 SIR with St. Paul, National contended that Wake was responsible for the entire amount of the settlement.  The court disagreed: “ [t]he court recognizes that whatever contractual obligation Wake had to Sarvey, such obligation does not fall within the plain and ordinary definition of insurance as the term is used in National’s policy. Wake did not issue an insurance policy to Sarvey, nor did Sarvey pay a premium to Wake for any benefit or protection against loss. Because Wake had a self-insured retention of $750,000, it was essentially uninsured for that amount.” 804 F.Supp. at 776-77.

In U.S. Fidelity & Guarantee Ins. Co. v. Commercial Union Midwest Ins. Co., 430 F.3d 929 (8th Cir. 2005), a case I handled for USF&G, the Eighth Circuit Court of Appeals held that a $200,000 “self-insured sum” identified in a liability policy issued by USF&G to its named insured, Payless, did not constitute “insurance” within the meaning of a liability policy issued by Commercial Union (“CU”), which insured Payless as an additional insured.  In that case, a wrongful death case against Payless was settled for $950,000.  CU declined to defend Payless or participate in the settlement.  Following the settlement, Payless and USF&G sued CU.  Payless sought recovery of its $200,000 SIR and USF&G sought to recover $750,000, or some portion thereof. 

The federal district court concluded that Payless was self‑insured for $200,000, and that the self‑insurance was “insurance” within the meaning of CU’s “other insurance” clause, such that Payless could not recover anything. The district court further determined that USF&G’s policy was “closer to the risk” than the CU policy, such that USF&G could not recover. The Eighth Circuit Court of Appeals disagreed and reversed.  The Eighth Circuit Court of Appeals held that Payless’s self‑insured retention under the USF&G policy did not constitute “insurance” within the meaning of CU’s “other insurance” clause.  The court noted that “the term “insurance” generally does not include a SIR under an insurance policy,” and “a majority of jurisdictions across the nation subscribe to the view of self‑insurance as ‘not insurance’ in, inter alia, an ‘other insurance’ context.” Id. at 935 (quoting Consolidated Edison Co. of N.Y., Inc. v. Liberty Mut., 193 Misc.2d 399, 749 N.Y.S.2d 402, 404 (N.Y.Sup.Ct.2002) (collecting cases)). Because CU’s policy was the only policy insuring Payless’s liability for the first $200,000 of any loss, CU was obligated to pay the first $200,000 of the $950,000 settlement.

The Eight Circuit went on to conclude that the USF&G and CU policies “equally contemplated the risk” and were thus obligated to pro-rate the balance of the settlement.  Id.  (citing Cargill, Inc. v. Commercial Union Ins. Co., 889 F.2d 174, 179‑80 (8th Cir. 1989) (applying Minnesota law and apportioning liability based on the proportion that each insurer’s policy limit bears to the total available insurance limits)). The liability limits of the CU and USF&G policies were $2 million and $1 million, respectively.  As a result, CU’s pro-rata share of the $750,000 settlement balance was $500,000 and USF&G’s share was $250,000.

Several courts have recognized that an insurer may limit its obligations to additional insureds to the amount necessary to satisfy a claim against an additional insured which exceeds any SIR (or large deductible) “by including language in the policy that its coverage would be excess to “any self- insured retention”.  Wake County Hosp. Sys., Inc. v. National Cas. Co., 804 F.Supp.768, 777 (E.D. N.C. 1992), aff’d, 996 F.2d 1213 (4^th Cir. 1993) (citing Nabisco, Inc. v. Transport Indem. Co., 143 Cal.App.3d 831, 192 Cal.Rptr. 207, 208-09 (Cal. App. 4^th Dist. 1983) (“other insurance” clause in policy provided that coverage was excess over any “other insurance or self-insurance”)).  See, also, Redeemer Covenant Church of Brooklyn Park, 567 N.W.2d at 79 (construing policy that stated that its coverage was “excess over and above any other valid and collectible insurance (including any deductible portion ) or agreement of indemnity, available to the insured” ); Nabisco, Inc. v. Transp. Indem. Co., 143 Cal.App.3d 831, 192 Cal.Rptr. 207, 208‑09 (1983) (finding self‑insurance to be “other insurance” where policy explicitly stated that its coverage was excess if there was “other insurance or self‑insurance ”); Shaver v. Continental Cas. Co., 210 Kan. 189, 190, 499 P.2d 513, 514 (1972) (“[h]ad Continental wished to define ‘net loss’ as the amount required to satisfy the claim against the insured less payments by other insurers less the deductible, it could have done so”); Rudish v. Jennings, unpublished opinion, 2003 WL 1193818 (Ohio App. 5^th Dist. 2003) (umbrella policy defined “underlying insurance” to include “any type of self-insurance or alternative method by which the insured arranges for funding of legal liabilities that affords coverage that this policy covers”). 

In the auto arena, a self-insured retention (SIR) may constitute “insurance” in the context of a policy issued to a statutorily qualified self-insured motor vehicle owner. Minnesota, as well as several other jurisdictions, have recognized that qualified self-insurance, as it may be termed for convenience in reference, requires the self-insurer to provide the public sought to be protected by the compulsory insurance with the same “coverage” and incidents of “coverage” as he would have had to have purchased but for the certificate of self-insurance.  See, e.g., Hertz Corp. v. State Farm Mut. Ins. Co., 573 N.W.2d 686, 689 (Minn. 1998) (a certificate of self-insurance obtained pursuant to Minn. Stat.  §65B.48, subd. 3, of the Minnesota No-Fault Automobile Insurance Act,“is the functional equivalent of an insurance policy” and “such a policy, if purchased [by the self-insured owner], would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds” and constitutes “other insurance” within meaning of renter’s personal policy); McClain v. Begley, 465 N.W.2d 680 (Minn. 1991) (same);  White v. Howard, 240 N.J. Super. 427, 573 A.2d 513 (N.J. Super. A.D. 1990), cert. denied, 122 N.J. 339, 585 A.2d 354 (N.J. July 17, 1990) (“qualified self-insurance” obtained by car rental agency was the equivalent of “other collectible insurance” within the meaning of renter’s personal automobile policy); Boatright v. Spiewak, 214 Wis.2d 507, 570 N.W.2d 897 (1997) (statute requires self-insured car rental agency to “pay the same amounts that an insurer would have been obligated to pay under a motor vehicle liability policy if it had been issued” and, thus, protection extended to renter constituted “other insurance” within meaning of renter’s personal auto policy); Southern Home Ins. Co. v. Burdette’s Leasing Service, Inc., 268 S.C. 472, 234 S.E.2d 870, 872 (1977) (self-insurer is required to provide same protection to one operating self-insurer’s vehicle with consent as a statutorily required automobile liability policy must provide and, thus, protection extended to lessee constitutes “insurance” within meaning of lessee’s policy). 

However, in jurisdictions which do not require a self-insured vehicle owner to extend omnibus liability protection to permissive users, a self-insured certificate will generally not be considered insurance. See, e.g., Home Indem. Co. v. Humble Oil & Refining Co., 314 S.W.2d 861 (Tex. Ct. App.1958), writ of error and reh’g denied, 159 Tex. 224, 317 S.W.2d 515 (1958) (self-insurance does not operate for benefit of negligent driver); Farmers Ins. Co. of Oregon v. Snappy Car Rental, Inc., 128 Or. App. 516, 876 P.2d 833 (Ore. Ct. App. 1994) (same);  American Fam. Mut. Ins. Co., v. Missouri Power & Light Co., 517 S.W.2d 110 (Mo. 1974) (same). This is so because the self-insured vehicle owner, if it paid the injured party for damages caused by the negligent permissive user, would be entitled to recover its payment from the permissive user, a proposition directly contrary to the purpose of liability insurance.  See Champlain Cas. Co. v. Agency Rent-A-Car, Inc., 168, Vt. 91, 716 A.2d 810, 813 (1998) (explaining basis for distinction in case law decisions and noting that “there is far less disagreement in the cases than a superficial perusal would suggest”). 

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