D&O insurance programs for businesses are frequently built in layers, with one or more excess insurance policies established on top of a primary layer.
Excess insurance is often write “follow form,” meaning the primary policy’s conditions determine how it works. Even in “form-following” programmes, excess policies can function in unexpected and even undesired ways. There are several aspects to consider while picking excess insurers.
Jason of the legal firm Malaysia examines the problems that can occur with excess D&O insurance in an intriguing article from April 2014. Few excess D&O policies actually adhere to the terms and conditions of the basic D&O insurance policy, as Jason accurately notes. Instead, the excess policies contain a number of extra clauses that “may materially affect the overall protection” of the D&O insurance programme.
Jason cites a few of the excess insurance policy elements. It can be crucial in the case of a claim to illustrate his point.
Jason first makes reference to the clause in the excess D&O insurance contract that describes when the excess insurance will “attach,” or what is necessary for the excess insurance to be triggered. A common clause in excess D&O insurance policies states that the excess insurer’s responsibility for any loss attaches only after the insurers of the underlying policies have used all of their available limits to pay the loss. The issue with this phrase is that it leaves an uninsured gap if. The policyholder settles a dispute with one of the underlying carriers by accepting less insurance.
Several courts have rules that the underlying insurance isn’t exhaust even if the policyholder covers the gap. Also, the excess insurer’s responsibilities haven’t been activate.
To avoid this unfair result, insureds must negotiate excess insurance contracts. This is to accept payments from underlying insurers, insureds, or another source, Jason writes. In fact, this kind of clause is now fairly common. These clauses won’t address all conceivable gaps that could create issues about whether excess insurers’ policies have been trigger.
The clause in some plans that mandates that disagreements between the insured and the insurer be settled through arbitration is another excess D&O insurance policy word that Jason examines in his essay. If the distinct excess policies in the various layers of insurance have different arbitration clauses, this could be a problem. Various policies may require arbitration in certain regions, utilising certain procedures, and enforcing certain laws. Jason says this consistency “may require an insured to fight many battles with uneven outcomes.” Jason advises making an effort to have all arbitration clauses eliminated initially. “An insured should try to get all insurers to agree on one arbitration technique. It’s all about one choice of law, and one venue to address coverage issues,” he says.
There are several other factors that should be taken into account with regard to excess D&O insurance in addition to those that Jason mentioned in his article.
The surplus carrier’s financial stability comes first. Excess D&O insurance is far too frequently thought of as fungible and generic. However, it’s important to keep in mind that any excess D&O insurer’s capacity to pay claims when the time comes. Although it doesn’t happen frequently, when carriers do become bankrupt, a major mess results. Due to Reliance National and The Home’s bankruptcy in the early 2000s, there are still claims pending in the system. When an insurance carrier is insolvent and unable to pay a claim, it generates an uninsured liability exposure. And a “gap” that limits coverage for carriers above the insolvent insurer in the insurance tower.
For instance, as previously mentioned, the Second Circuit ruled in the Commodore International case in June 2013 that excess D&O insurance is not activated even if losses exceed the amount of the underlying insurance when the underlying amounts have not been paid because the underlying insurers are insolvent.
Financial Heath
It is crucial to consider the issues that can result from this kind of bankruptcy gap. The aforementioned wording, which states that the excess D&O insurance will be activated whether the underlying amount is paid by the insurer, the insured, cannot “solve” this problem. There is only an underlying uninsured gap when the underlying insurer is bankrupt. The surplus carriers will argue that it is their duty to “drop down”. It replace the underlying carrier or to attach at the attachment point. The financial health of each carrier participating in the insurance scheme should therefore be carefully take into account. Particularly, excess D&O insurance shouldn’t be considered fungible and generic. A crucial and possibly determining factor is the surplus carrier’s financial capacity to fulfil its payment obligations.
Additionally, bear in mind that the excess D&O insurer(s) might participate directly in the claims resolution in the event of a sizable D&O claim. The timeliness and claim-handling skills of the excess carriers may have an impact on how quickly a claim is settle. The principal D&O carrier will be in charge of processing any arising claims, so it is important to think about and discuss the primary carrier’s claims handling capabilities. Given their potential role in resolving claims, excess insurers’ reputation and claim-handling skills should also be consider.
Surplus insurers
Regarding the excess insurers, there is one more item to take into account. On a D&O insurance programme, it is frequently a good idea to try to include surplus insurers who might be willing to take over the primary position in later years, should the primary carrier change its appetite for the risk or decide to leave the account. Having an excess insurer on hand as a backup who can assume the primary role if necessary is just a good idea.
The factors involved in choosing how the extra insurance should be layered and structured, as I covered in an earlier piece here, are another set of concerns with regard to excess D&O insurance to bear in mind.
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