In this video Miller Friel attorney Miles Karson discusses the five most important excess insurance policy issues that every corporate policyholder should consider. Excess insurance is not always given proper consideration, because, after all, most excess policies “follow form” to primary insurance. Conventional insurance wisdom says, if primary insurance language is great, then excess insurance policy language should also be great. That, however, is often not the case.
Miles Karson analyzes why excess insurance is different from primary insurance, pointing out the five most important things that corporate policyholders need to be aware of with respect to excess insurance:
- the excess policy exhaustion language issue;
- the Swiss cheese ADR provision issue;
- the “follow form” after inception issue;
- the “follow form” to what policy issue: and
- the ever present notice issue.
In today’s video Miles provides a deeper explanation of these topics and more. Please watch the video to learn more about how to spot the most common excess insurance problems faced by corporate policyholders.
We have included a transcript of the video below:
Five Things You Need To Know About Excess Insurance Policies
While policyholders and sometimes brokers overlook excess insurance policies because they simply follow form to the primary underlying policy, there are a number of things that policyholders need to be aware of both when they are placing insurance and when they are submitting claims. First and foremost is the trigger language or the exhaustion language in their excess policies. This is crucial because this language is what triggers insurance under the excess policies. This is an issue that has probably gotten more and more attention in recent years because of more and more litigation over this issue. An excess policy’s exhaustion language specifies how it can be triggered. For an excess policy to be triggered the underlying limits have to be exhausted.
But how can they be exhausted? They either can be exhausted by payments by the underlying insurer, by the insured, or even a third party. The best type of exhaustion language is the language that allows for exhaustion by any of those three categories the underlying insurer, the insured, or a third party. When placing their insurance policyholders have to ensure that their excess policies have that broad overarching exhaustion language. Otherwise, when it comes time to submit and even settle a claim it could be in a position where they do not have adequate access to their excess insurance.
Second, and as a general matter, policyholders want to make sure that their excess insurer matches up as squarely as possible with their primary insurance. That is, you want to avoid situations where excess insurance does not provide coverage as broadly as your primary insurance. Another example of making sure that your excess and primary coverage is harmonious is in the policy’s ADR provisions. We’ve seen a number of insurers come to us with what I would call Swiss cheese ADR provisions. Maybe the primary policy allows you to bring a lawsuit against your insurer when they deny a claim if there is a disagreement over whether a claim is covered. But your excess policies mandate alternative dispute resolution process, whether that being mediation, arbitration, or both. You’re in a position then where theoretically you could litigate against your primary insurer, but then you would have to go through an ADR process with your excess insurers. We’ve seen programs where, when I say Swiss cheese, some of the excess policies have ADR provisions and some don’t, which makes things even more difficult procedurally.
Another way in which you want to make sure your excess policies are in harmony with you primary is that they follow form to any changes made to the primary after the polices have incepted. We’ve seen excess policies out there that while they follow form to the primary at the time of inception, they don’t necessary follow form to changes made to the primary after the polices have incepted. In those cases the excess policies require the policy-holder to go to each excess insurer and make sure that each excess insurer expressly adopts whatever changes have been made to the primary. The reason you want all of your policies to be harmonious and changes to flow through each policy is so that your coverage is consistent so that there aren’t any gaps in coverage. If you have coverage under your primary policy you want that coverage to be consistent through each excess layer so you’re not left with coverage in your primary but no excess coverage in the event that your loss hits those policies.
If you’re not able to have all of your excess policies mirror the coverage provided by your primary policy, you want to make sure that the excess coverage from top to bottom only follows form to your primary policy. For example, let’s say a low level excess policy in your program incorporates an exclusion by way of endorsement that’s not included in the primary policy. The excess policies that sit above the excess policy that incorporates that, that different endorsement, you want to make sure that they only follow form to the primary policy so they don’t incorporate that stand-alone exclusion that could eliminate excess coverage from those policies as well. For example, let’s say you have a primary D&O policy that does not have a professional liability exclusion in it, but your first excess D&O policy does contain such an exclusion by way of endorsement. You want policies that sit above the first excess policy to only follow form to your primary policy so that they don’t incorporate the professional liability exclusion that’s in the first excess policy.
Finally, when submitting either notice of a claim or notice of facts and circumstances that could give rise to a claim under your primary policy, you also want to simultaneously provide the same notice to your excess insurers. This is as easy as copying those insurers on the same correspondence that you provide to your primary insurer. Time and again on our blog we have talked about the importance of notice and the potential complications that go along with providing notice. As the stakes get higher and higher in claims it’s important to have your excess insurers on notice of both claims and facts and circumstances that can give rise to claims.