July 24, 2017 Practice Points

Avoiding Coverage Gaps in Your Excess Policies

A few recent trends suggest more attention should be given to retentions and deductibles to ensure a seamless transition from primary to excess layers up through a coverage tower

by Nicholas M. Insua

When placing or reviewing umbrella or excess policies, readers often focus on consistency between the coverage period, coverage grants, definitions, and exclusions. But a few recent trends suggest more attention should be given to retentions and deductibles, to ensure a seamless transition from primary to excess layers up through a coverage tower.

This can become an issue in an endorsement that allows a policyholder to reach an excess policy even if the policy below did not pay its full limits (think Zeig v. Massachusetts Bonding & Ins. Co. and its progeny), but only if the next layer consents to the policyholder filling the gap, and then that next layer will only pay the same percentage of limits as the insurer in the layer below paid. For example, for a $25 million loss, with a $10 million primary and a $15 million second-layer excess, if the primary insurer pays only $5 million of its $10-million limit, and the second-layer excess consents to the policyholder paying the remaining 50 percent of the underlying limit, the second-layer excess will still be triggered, but it would only have to pay 50 percent of its limit, or $7.5 million of $15 million. Thus, for that $25-million loss, the policyholder would only be able to access half of its $25 million in limits. While this endorsement is more advantageous to policyholders than policies that require complete exhaustion only through payments by the lower-layer insurer, policyholders should attempt to eliminate it where possible.

Another provision is an endorsement that allows an underlying amount obligation to be eroded by an underlying insurer’s payments, but excludes from that erosion payments for certain losses or types of losses. This is essentially an exclusion for certain specific losses placed in an endorsement about proper erosion. Again, policyholders and insurers should be mindful of such erosion requirements and whether they match the intention of the parties at the time of placement.

Nicholas M. Insua is a partner at McCarter & English in Newark, NJ


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