Accessing Your Excess Insurance

Over the last several years, excess level insurance companies have increasingly disputed and denied insurance coverage to their policyholders when the policyholder settles for less than full policy limits with one of its underlying insurance companies, including the primary level insurance company. While this tactic often fails to work a forfeiture of excess insurance coverage, it does present yet another insurance coverage headache that risk managers must confront.

What had been a settled legal point for many decades and a consistent way of doing insurance business (i.e., that insurance claim settlements were desirable and would not lead to a forfeiture of excess coverage) has been turned on its head in recent years. A potent reminder of this came several weeks ago when a federal appeals court held that a bank could not access some of its excess level insurance coverage after it settled with two underlying layers of insurance coverage for less than the full policy limits.

As such, before agreeing to accept less than full policy limits from an underlying insurance company in order to settle a claim, the policyholder must consider what the language of the excess policy (or policies) says about exhaustion and trigger, as well as the law governing the construction of the insurance policies. Keep in mind that this will not always be clear to policyholders given the convoluted language in some excess insurance policies and uncertainty over what law will apply.