In many cases, companies’ D&O insurance programs are structured in several layers, with one or more policies of excess of insurance written over top of a primary layer. The excess insurance is often said to be written on a “follow form” basis, meaning that the primary policy’s terms govern the operation of the excess policies. However, even in programs that are intended to be “follow form,” the excess policies will sometimes have terms that cause them to operate differently, sometimes in unexpected and even undesirable ways. In addition, there are a number of other considerations to keep in mind when selecting the insurers to include in the excess layers.
In an interesting April 2014 article (here), Tom Bentz of the Holland & Knight law firm takes a look at the issues that can arise with excess D&O insurance. As Bentz correctly notes, “few excess D&O policies truly follow the terms and conditions of the primary D&O insurance policy.” Instead, the excess policies include various additional terms and conditions that “have the potential to significantly affect the overall protection” of the D&O insurance program.
In order to illustrate his point, Bentz identifies several of the kinds of excess insurance policy features that can be critical in the event of a claim.
First, Bentz refers to the excess D&O insurance policy provision that specifies when the excess insurance will “attach” – that is, what is required in order for the excess insurance to be triggered. In many instances, excess D&O insurance policies were written with a provision stating that that the excess insurer’s liability for any loss will attach only after the insurers of the underlying policies have exhausted their limits in payment of loss. The problem with this language is that if, for example, the policyholder is in a dispute with one of the underlying carriers and reaches a compromise to accept less than the full amount of the underlying insurance, there is an uninsured gap.
As I have discussed in prior posts (for example, here), a number of courts have now held that even if the policyholder funds the gap, the underlying insurance was not exhausted by the insurers’ payment of loss, and accordingly the excess insurer’s obligations have not been triggered.
As Bentz notes in his article “to avoid this unfair result, insureds need to negotiate excess insurance policies so that they recognize payments made by the underlying insurers, the insureds, or other source.” Indeed, this kind of provision has now become fairly standard. But as noted below, these kinds of provisions will not address all of the kinds of gaps that can arise and create questions as to whether the excess insurers’ policies have been triggered.
Another excess D&O insurance policy term that Bentz discusses in his article is the provision found in some policies requiring disputes between the insured and the insurer to be resolved by arbitration. This can be a problem if the separate excess policies in the different layers of insurance have separate arbitration provisions. It is possible that different policies could require that the arbitration take place in different geographic locations, using different arbitration processes and applying different jurisdiction’s laws. As Bentz notes, “the type of inconsistency could force an insured to fight multiple battles on multiple fronts with potentially inconsistent results.” Bentz suggests first attempting to have all of the arbitration provisions removed. If that is not possible he suggests that “an insured should seek to have all of the insurers agree to one arbitration method with only on choice of law provisions and one required venue to resolve any potential coverage disputes.”
In addition to the items that Bentz identified in his article, there are several additional considerations that should be kept in mind with respect to excess D&O insurance.
The first is the excess carrier’s financial strength. All too often, excess D&O insurance is viewed as generic and fungible. However, the ability of any given excess D&O insurer to pay claims when the time comes should not be overlooked. It doesn’t happen often, but carriers do become insolvent, and when that happens, it makes a big mess. There are still cases working their way through the system because of the insolvency in the early 2000s of Reliance National and The Home. When a carrier in insurance program is insolvent and unable to pay a claim, it not only creates an uninsured liability exposure, but it also creates the kind of “gap” that avoids coverage for any carriers that were above the insolvent insurer in the insurance tower.
For example, as discussed here, in June 2013, the Second Circuit held in the Commodore International case that excess D&O insurance is not triggered even if losses exceed the amount of the underlying insurance, where the underlying amounts have not been paid due to the insolvency of underlying insurers. (Commodore had both Reliance and The Home in its insurance tower.)
It is important to think about the problems that can arise from this type of insolvency gap. This is not an issue that can be “fixed” with the type of wording cited above, which provides that the excess D&O insurance will be triggered if the underlying amount is paid by the underlying insurer, the insured, or any other source. When the underlying insurer is insolvent, there is just an underlying uninsured gap. The excess carriers will take the position that they have to obligation to “drop down” to take the place of or attach at the underlying carrier’s attachment point. For that reason, the financial stability of all of the carriers in the insurance program should be an important consideration. In particular, excess D&O insurance should not be viewed as generic and fungible. The excess carrier’s financial ability to honor its payment obligations is an important and potentially differentiating consideration.
It is also important to keep in mind that in the event of a significant D&O claim, the excess D&O insurer(s) may be directly involved in the claims resolution. The excess carriers’ responsiveness and claims handling capabilities could well affect whether or not a claim is resolved expeditiously. The claims handling capabilities of the primary D&O carriers are often considered and discussed, as they should be, because the primary carrier will take the lead in handling any claims that will arise. However, because of the role that excess insurers can play in the resolution of claims, the excess insurers’ claims handling experience and reputation should be kept in mind as well.
There is one final thing that should be considered with respect to the excess insurers. It is often a good idea to try to include in the line up of carriers on a D&O insurance program excess insurers who might be willing to move the primary position in subsequent years, if the primary carrier were to change its appetite for the risk or seek to get off the account. It is just a good idea to have an excess insurer as a reserve to take the primary position if the need should arise.
Another set of issues to keep in mind with respect to excess D&O insurance are the considerations involved in deciding how the excess insurance should be layered and structured, as I discussed in an earlier post, here.