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Risk Insider: Daven Lowhurst
Will Your Excess Insurer Protect You When You Use Up Your Primary Insurance?
Daven Lowhurst is a partner in Jones Day's San Francisco office and a member of the firm's Insurance Recovery Practice. The views and opinions set forth herein are the personal views or opinions of the author; they do not necessarily reflect views or opinions of the law firm with which he is associated. He can be reached at [email protected].
A fundamental notion of liability insurance is that when your primary liability insurance is used up, your excess insurer will step in and protect you. But some excess insurers are not so quick to agree.
Excess insurers have argued with increasing frequency, and some success, that they are not obligated to cover a particular claim (or sometimes future claims) because innocuous-looking language in their policies requires that the primary insurer, and no one else, pay 100 percent of the primary policy limit in order to trigger the excess policy.
This scenario illustrates the point: Your company is sued. You tender the claim to your primary insurer whose policy has a $1 million limit. You settle the claim for $1 million, but due to coverage disputes with the primary insurer, you agree that the primary insurer will pay $900,000 and be released from further liability on the policy, and you will pay the $100,000 balance.
You may think this position is unfair, against public policy, and in bad faith. But some courts, confronted with such restrictive attachment language, have ruled that excess policies do not attach until the full underlying limit is paid solely by the underlying insurer.
When the next lawsuit is filed against you, you turn to your excess policy, which states that it attaches only after the underlying limit is paid in full by the underlying insurer (here, the primary insurer).
The excess insurer denies coverage, asserting that its policy is not triggered because the primary policy’s $1 million limit has not been exhausted. The excess insurer contends that the $1 million limit must be paid solely by the primary insurer, and since your $100,000 contribution does not count, the primary policy has not been exhausted.
Consequently, the excess policy is not triggered. Further, since you released the primary policy for any future claims, the excess insurer may argue that its policy can never be triggered, since the primary policy will never pay the remaining $100,000.
You may think this position is unfair, against public policy, and in bad faith. But some courts, confronted with such restrictive attachment language, have ruled that excess policies do not attach until the full underlying limit is paid solely by the underlying insurer.
This result can be problematic to policyholders not only on a given claim, but on future claims as well if the excess insurer, and potentially all higher excess insurers, balk because some portion of the primary limit was not paid by the primary insurer.
But policyholders can employ several strategies to minimize these risks:
- Review the attachment language in your excess policies, now and at renewal. If needed, negotiate language clearly providing that payment of the underlying limit by any source counts towards exhaustion.
- Structure settlements, even those not requiring contribution from your excess policies, with your excess policies in mind.
- Engage the excess insurer in the settlement process, including, if appropriate, confirming that it will not seek to avoid coverage based on who pays the underlying policy limit.
- If an exhaustion dispute arises with excess insurers, consider steering the dispute toward a forum with favorable law, or at least with no adverse law, on the exhaustion issue.
