Once upon a time………(now you know this is going to be a legal fairy tale, don’t you?) corporations could purchase an “umbrella” policy that was designed to cover those types of catastrophic, once-in-a-lifetime losses that could exceed even the most generous of primary policy coverage limits. Such policies were sold by the same carrier that issued the primary policy. Think earthquakes and electrical fires – those kinds of bad-luck losses that make you sigh when you read about then happening to other people.
But now, the demands of policyholders, along with the capitalization manner of the insurance market, has created an alternative type of excess policy. Such policies are now sold in “layers” with higher and higher limits. Corporations are increasingly looking to structure these layers in a strategic way to increase protection while also decreasing premium costs.
These policies are excess. They are triggered when primary coverage is exhausted and they typically do not cover defense costs in litigation. (There are drop-down defense coverage clauses, but that column is for another day.) Excess policies are equally designed to fill gaps created by primary policy coverage in addition to adding another layer of coverage for losses that exceed primary limits.
I don’t want to get too wonky on you with the variations of excess policy coverage. What I do want you to know is that litigation involving excess coverage is exploding into courtrooms and appellate dockets around the country. Such disputes usually concern one or more of what I call the “D” problems:
- D – efense. To what extent must excess insurers pay for defense costs that exceed the primarily coverage limits?
- D – rop down. To what extend is the excess policy’s drop down clause triggered to provide coverage when the primary insurer is either insolvent or its policy does not provide coverage?
- D – uty to settle. To what extent must must an excess insurer participate in negotiations and settlement of the underlying claim?
We will discuss these D problems in the next blogs. Stay tuned!!