1. An excess insurer has the same fiduciary responsibility toward the policyholder as does the primary insurer. Along with this duty comes a responsibility to act in the best interests of the policyholder. Excess insurers are not usually the defendant in a bad faith claim, as the primary insurer undertakes the general responsibility to investigate the claim and determine initial coverage. However the excess insurer is not immune to an action holding it accountable for refusing to settle a viable claim that would have been covered by the higher policy limits. See, e.g. Perera v. U.S.F. & G. Co., 35 So.2d 893, 898 (Fla. 2010) (an excess insurer has an obligation to settle where a reasonably prudent person, when faced with the prospect of paying the total recovery, would do so).
2. A primary insurer owes a derivative duty of good faith and fair dealing to the excess insurer on the claim. Thus, if a primary insurer refuses to accept a reasonable settlement within its policy limits and thereby exposes the excess insurer to judgment on its policy, the excess insurer can sue the primary for bad faith. This claim is derivative. The excess insurer steps into the shoes of the policyholder and can bring a bad faith claim for equitable subrogation. This is the majority rule. Nat’l Sur. Corp. v. Hartford Cas. Ins. Co., 493 F.3d 752, 756 (6th Cir. 2007). Few states allow an independent duty of care between primary and excess insurers. W. Am. Ins. Co. v. RLI Ins. Co., 698 F.3d 1069, 1075 (8th Cir. 2012).
3. The excess insurer has no duty to settle unless and until the limits of the underlying policy are exhausted. The word “exhaustion” is a term of art in the industry and it defined in the policy. It does not necessarily mean that the primary insurer has paid out the total limit on the policy. Exhaustion is usually defined on a policy by policy and case by case basis. See, e.g. Service Corp. International v. Great American Ins. Co. of New York, 264 Fed. Appx. 43` (5th Cir. 2008) (court found that primary policy was not “exhausted” as that term was used in the excess policy, even though primary insurer paid out underlying limits).