Understanding how excess insurance responds once underlying insurance policies have been settled is one of the most important and least understood areas of insurance coverage law today.  The primary-excess settlement issue is present in most any claim that triggers more than one policy layer.  When faced with considerable liability, primary insurance carriers often want out.  But, they still wants some “credit” – however small – for the coverage defenses they have raised.  That “credit” may come in the form of settling for an amount less than policy limits.  In the meantime, the excess insurers sit back and argue that they have no reason to engage, because their policy limits have yet to be reached.  In reality, excess insurers are hoping that the policyholder makes a mistake in settlement that will arm them with an additional coverage defense.  This is a common trap that arises in most large insurance claims, and unless handled properly, can be a setup for disaster. 

Today’s video is the first in a three part series designed to help policyholders recognize and navigate some of the complex issues that arise when considering partial insurance settlements.  In this three part video series, we discuss the under-appreciated topic of excess insurance policy language, with a particular focus on exhaustion provisions.  Excess policy exhaustion language falls into one of three general categories: (i) the good, (ii) the decent, and (iii) the ugly.  As we discuss in today’s video, the “good” exhaustion language unambiguously allows a policyholder to settle with its primary or other lower-level insurers for less than policy limits and still access its excess insurance policies.  Indeed, excess insurers rarely, if ever, challenge this language.  By negotiating this kind of language into their excess policies, policyholders can sidestep some of the potential problems that can occur later.  Additional information on the subject can be found in our prior blog post entitled,  Settling With Underlying Insurers For Less Than Policy Limits: the Good, the Decent, and the Ugly. 

Here is today’s transcript:

Excess Insurance Policy: The Good

One of the biggest issues we’ve seen with some of our clients is actually in the realm of excess insurance. Excess insurance, excess policies often times get short shrift. They’re not thought about very seriously because other than maybe their costs and the limits of liability that come along with them, they’re not given serious consideration because they generally follow form to their underlying insurance.

So their terms and conditions aren’t focused on until really it’s too late. But really the terms and conditions of an excess policy particularly their exhaustion language can have a huge significant role when it comes time to settle a significant claim that implicates multiple layers of insurance.

What I mean by that is, let’s say you have a large claim that implicates 3 levels of insurance, primary, 1^st excess and 2^ndexcess. Well often times when you go to the settlement table, you’re only going to the table with the primary insurer first.

The 1^st and the 2^nd excess can sit on the sidelines and watch and so then the question arises, well what happens if the primary insurer doesn’t want to settle for full policy limits which is very common? The primary insurer has thrown out however many coverage defenses they’ve thrown out and no matter what arguments you have and what stage of any dispute resolution process you’re in, they want some credit for, however small, for those coverage defenses.

When you’re at the settlement table with your primary insurer, can you settle for less than policy limits but still access your upper level excess insurance? An excess insurer typically takes a position that they have no responsibility for a claim until their policy is triggered and their policy is not triggered until all of the underlying limits are exhausted.

Depending on the policy language in that, in the excess insurance policies they may argue that their limits, that the underlying limits are only exhausted if the underlying insurer pays their full limits, that those limits cannot be paid by anyone else.

So that’s where you run into the issue of whether or not you can settle with your insurer for less than policy limits than what’s referred to as fill the gap. You as the policy holder, you fill the gap and make up the difference between what you settle with, what the primary insurer pays, and its policy limits and then access your excess insurance.

So the answer as to whether or not you can do that, maybe not surprisingly, comes in the excess policy itself, what’s referred to as the exhaustion language in the excess insurance policies. That exhaustion language generally falls into one of 3 categories, the good, the decent, and the ugly, kind of similar to the Clint Eastwood movie.

So with the good language, the good language it’s a home run. It unambiguously states that underlying limits can be exhausted through payments by the insurer, through the insured or someone else on behalf of the insured.

We’ve never seen an example of an excess insurer challenging the validity of that language, the ability of a policy holder to settle for less than policy limits and fill the gap to access its excess insurance.

Now with respect to the good language we’ve seen examples of that in standard form excess policies. But many standard form excess policies don’t have that language and that’s where it’s very helpful to engage coverage counsel to negotiate that language. Not all brokers are in tune with this issue, they’re not familiar with the breadth of case law on this issue, interpreting policy language.

They are just not always aggressive in negotiating that language into the excess policies. It’s something that we’ve had success negotiating into excess policies by way of endorsement on behalf of a number of clients. That’s real value that Miller Friel can add in the negotiating process when you’re placing or renewing your insurance policies.