In our three-part series, The Good, The Decent and The Ugly, we discuss best practices for settling with primary and excess insurance carriers.  This series focuses on how excess insurance policy language impacts potential settlements with excess carriers when underlying carriers pay less than their full policy limits to settle a claim.

In today’s final installment of this three-part series, we discuss what business should do if one or more excess insurance policies contains exhaustion language falling into the “ugly” category – that is, exhaustion language that requires exhaustion of underlying limits through payment by the underlying insurers.  This kind of language is the most problematic, because the majority of courts hold that this kind of language does not permit a policyholder to contribute to settlement with an underlying insurance carrier, and still recover from an excess insurer.  The first step is recognizing that excess policies contain this language so that policyholders do not unwittingly enter into a settlement that could compromise coverage. The second step is to recognize that, if a business still wants to settle, there are ways to accomplish this, but that settling must be done correctly, or coverage may be forfeited.

More broadly, we discuss  lessons to be learned regarding the impacts of settling on excess insurance coverage by examining the full spectrum of potential coverage issues.  The main takeaway for any corporate policyholder is that they need to proceed carefully at every step in the process.  Watch the video to learn more about how policyholders can proceed to give themselves the best chance of recovery, even If their policy language is “ugly.”

Here’s a transcript of the video:

Excess Insurance Coverage: The Ugly

So we talked about the good and the decent and the contrast to those is the ugly. When we talk about the ugly, we talk about exhaustion language that requires exhaustion of underlying limits through payments by the underlying insurance.

While policy holders have challenged this language, some courts have ruled in the insurer’s favor. While some policies holders have challenged this language, some courts have ruled that it requires the underlying insurance to be exhausted through payments by insurers only.

Policy holders should still challenge this language if they have in fact settled for less than policy limits and want to gain access to its excess insurance. Just because certain courts have ruled in the insurer’s favor does not foreclose the possibility that a policy holder can obtain access to their excess insurance despite this language in their policies.
Be proactive, exercise caution, and don’t give your excess insurer a get out of jail free card.

I think there are few takeaways here. One, you have to be proactive. The easiest way to address this is issue is when you buy insurance or you go through the renewal process and being aware that this is an issue, and it’s important to engage coverage counsel in the process in order to ensure that you have the best language possible, because language varies from excess policy to excess policy.
Second, if faced with decent or ugly exhaustion language in your excess policies and a desire to settle, caution must be exercised. You have to be aware of the problem and it’s best to engage coverage counsel if coverage counsel hasn’t been engaged already, and 2 it’s also important to approach your excess insurers and let them know that you are aware of the issue.

If they don’t, so that they can’t hang back and think that they are, come to get, they’ll get a get out of jail free card so to speak. They don’t get a free pass on this. They are not going to build another coverage defense for themselves and to engage them directly in the settlement discussions.

Fourth, if you’ve already reached a settlement and your insurers are giving you run around on coverage give us a call. If you haven’t engaged coverage counsel already it’s critical that at that point you engage coverage counsel and that’s exactly where Miller Friel can add value.