The Layering Debacle in D&O Policies
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!
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.