PUBLISHED ON: August 1, 2011
When calamity strikes, there may be a silver lining: the policyholder may benefit by having both insurance coverage and a right of indemnification from a third party to deal with the loss (or liability). This silver lining, however, may feel more like tin when the insurance company argues that its coverage obligations are actually “secondary” and that the indemnification must pay first before the primary coverage is triggered.
In effect, the insurer has converted its primary insurance coverage policy to an excess insurance policy. While this strategy may not always work, it can be devastating to the policyholder if it does, particularly if the indemnification is promised from a corporate affiliate rather than an unrelated third party.
Many policyholders have learned the hard way that some insurers will take the position that, if there is an inter-affiliate indemnification obligation between the policyholder and one of its corporate relatives, the indemnification becomes “primary” and the insurer’s coverage obligations are supposedly rendered “secondary” or “excess.” Such a position is troubling on a number of levels.