Fo­cus

The Lay­er­ing De­ba­cle in D&O Poli­cies

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The Lay­er­ing De­ba­cle in D&O Poli­cies: Tiers & Tears!

It is a se­ri­ous ex­er­cise for any bro­ker or rein­sur­ance bro­ker to ne­go­ti­ate at each layer. It is bet­ter to have fewer but larger lay­ers in the pro­gramme. How­ever, very of­ten it is not pos­si­ble or fea­si­ble to ob­tain larger lay­ers. Hence, in most cases mul­ti­ple in­sur­ers will be re­quired in or­der to com­plete one D&O pro­gramme. The ex­cess lay­ers of cov­er­age are of­ten said to be writ­ten on a ‘fol­low form’ / ‘fall down’ ba­sis, mean­ing the ex­cess layer poli­cies should be gov­erned by the pri­mary pol­icy’s terms and con­di­tions. How­ever, this is not the case when a claim oc­curs and in­volves a few lay­ers. Dis­putes have been the norm th­ese days at al­most each layer of cov­er­age when in­sur­ers have dis­puted cov­er­age. There has been no known case law in the pub­lic do­main in Asia re­lat­ing to dis­putes on in­sur­ance pol­icy lay­ers. Also there has been some re­liance on mar­ket prac­tices though they are not re­ally bind­ing. It is im­por­tant to note that there is no con­trac­tual re­la­tion­ship be­tween the un­der­ly­ing Pri­mary In­surer and each of the Ex­cess Layer In­surer. The con­tract is be­tween in­sured and in­surer, and not be­tween co-in­sur­ers even though the cov­er­age is the same risk and same in­sured. There is no duty of care owed by the Pri­mary In­surer to the Ex­cess Layer In­sur­ers and there is no duty to be con­sid­er­ate or to pro­tect Ex­cess Layer In­sur­ers’ in­ter­ests! The dis­putes re­cently have thrown up the fol­low­ing is­sues: 1. The lay­ers have in­con­sis­tent word­ing or in­com­plete ‘slip’ lan­guage es­pe­cially this typ­i­cal clause found in most pro­grammes: “Ex­cept as stated to the con­trary, this pol­icy shall be sub­ject to the same terms, ex­clu­sions, con­di­tions and def­i­ni­tions as the pri­mary pol­icy.” 2. The Ex­cess Layer In­surer can act dif­fer­ently from Pri­mary In­surer by tak­ing a dif­fer­ent claims strat­egy or may just want to pay and close the case. 3. As there is no duty owed by Pri­mary In­surer to no­tify the Ex­cess Layer In­sur­ers, there are prob­lems as to no­ti­fi­ca­tion up­wards. It is the Bro­ker or the In­sured who has to no­tify for each layer. Some­times the same in­surer could be on two lay­ers, for ex­am­ple the pri­mary pol­icy and on an­other higher up layer. There have been cases where the court had held that there was suf­fi­cient no­tice even though the in­sured failed to no­tify at each layer. 4. There is no duty by the Pri­mary In­surer to pro­vide or share in­for­ma­tion they have or to share le­gal opin­ions with the Ex­cess Layer In­sur­ers. In a num­ber of cases in the USA and the UK, Ex­cess Layer In­sur­ers have won their stand not to pay their share of the claim based on the in­ter­pre­ta­tion of their ex­cess layer word­ings es­pe­cially on the use of the term ‘ex­hausted’. The courts have said that “ex­haus­tion means ex­haus­tion!” and they will ap­ply the lit­eral read­ing of ‘ex­hausted’. This was clearly stated in the case of Qual­comm Inc in 2008: “The Court be­lieves that the ex­cess pol­icy in this case like­wise re­quires that the pri­mary in­sur­ance be ex­hausted or de­pleted by the ac­tual pay­ment of losses by the un­der­ly­ing in­surer. Pay­ments by the in­sured to fill the gap, set­tle­ments that ex­tin­guish li­a­bil­ity up to the pri­mary in­surer’s lim­its, and agree­ments to give the ex­cess in­surer “credit” against a judge­ment or set­tle­ment up to the pri­mary in­surer’s li­a­bil­ity limit are not the same as ac­tual pay­ment. The In­sur­ers’ pol­icy re­quires “ac­tual pay­ment of losses” by the un­der­ly­ing in­surer….”.

There is no duty of care owed by the Pri­mary In­surer to the Ex­cess Layer In­sur­ers and there is no duty to be con­sid­er­ate or to pro­tect Ex­cess Layer In­sur­ers’ in­ter­ests!

Text Aruno Ra­jarat­nam | Char­tered In­sur­ance Prac­ti­tioner, Tech­ni­cal Ad­vi­sor | Hunt­ing­ton Part­ners LLP, Sin­ga­pore

TH­ESE DAYS, D&O IN­SUR­ANCE PRO­GRAMMES WITH LARGE LIM­ITS ARE AR­RANGED IN SEV­ERAL LAY­ERS. IN SIM­PLE LAN­GUAGE, THE PRO­GRAMME PRO­VIDES AD­DI­TIONAL LAY­ERS OF COV­ER­AGE (THE EX­CESS LAY­ERS) WHICH ARE SUP­POSED TO FOL­LOW THE TERMS AND CON­DI­TIONS OF THE UN­DER­LY­ING POL­ICY(IES), ES­PE­CIALLY THE PRI­MARY POL­ICY.

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