D&O - EVOLUTION OF THE PRIMARY/EXCESS MARKET RELATIONSHIPS
This month, Advisen published the inaugural issue of its Management Liability Journal. Among the excellent pieces in this new and insightful publication was an interview by Advisen’s David Bradford of my long-time D&O industry colleague, Michael Mitrovic, now at IronShore in an executive position.* The Journal requires a paid subscription and can be accessed at http://corner.advisen.com/journals.html.
Mike makes many thoughtful and well-taken observations on the changing nature of primary and excess relationships and insurer and insured relationships over the past several years. In particular, I would like to address three of the topics covered in the interview and add some further observations of my own.
1. Follow the form, but not the actions of the primary insurer
Mike makes excellent observations about the increasing frequency of excess insurers taking positions contrary to those of the primary insurer, as to whose policy they “follow form.”Of course, as Mike indicates, it is wrong to take a contrary and more restrictive position solely because the excess insurer does not want to pay. There are, however, some instances where the excess may have a legitimately different view of the primary language, which after all is its contractual language too by virtue of the policy’s “follow form” provision. Those rights of the excess insurer were affirmed in a landmark Massachusetts high court decision in 2007 in Allmerica Financial Corp. v. Certain Underwriters at Lloyd's, London, 449 Mass. 621 (Mass. 2007).
Allmerica addressed the very abuses that Mike observes. The excess insurers must still interpret the primary contract correctly, but they are not bound to follow the primary’s position, particularly where, for business reasons not necessarily shared by the excess insurer, it relinquishes valid coverage defenses under the policy.
2. The Qualcomm Issue
Mike also makes note of the difficulty in achieving settlement of coverage disputes separately with primary and excess insurers because of decisions such as Qualcomm, Inc. v. Certain Underwriters at Lloyd’s, London, 161 Cal. App .4th 184 (2008). A number of other decisions, both prior and subsequent to Qualcomm have reached the same result on the same reasoning.
What these decisions do is essentially strictly enforce the “exhaustion provision” in many excess contracts, which provides that the excess insurer shall have no payment obligation until such time that the underlying insurance is exhausted by payment from the underlying insurers. Payments from other sources, including the insured, cannot be used to fill any gaps.
The results in Qualcomm and similar decisions were grounded in the excess policy exhaustion language at issue. As discussed below, the marketplace has already reacted and addressed the problem by changing the exhaustion provisions in most instances. An increasing number of newer excess policy forms, as well as older ones by way of amendatory endorsements, now provide that exhaustion of the underlying limits can take place by any combination of (i) payments by the underlying insurers, (ii) payments by the insured, and (iii) payments from any other source of indemnification or insurance. The latter component is not quite universal and can get a bit tricky in its application, but that is another story for another blog post on another day.
Perhaps the optimal solution here is now, and always has been, to negotiate resolution of coverage disputes contemporaneously with all insurers in a tower. Nothing infuriates an excess insurer so much as when it perceives it is not being offered as fair a deal as others below it in the tower.
3. Additional Protections for Excess Insurers
Where excess insurers are often hamstrung is in decisions by primary insurers to pay their full policy limits without properly vetting submitted defense expenses before exhausting. In many respects, this problem is related to the two discussed above and occurs where the primary quickly realizes that its limits “are toast” and does not want to expend time, effort and, most of all, expense in scrutinizing legal invoices and other submitted items before simply paying them in full.
In such cases, the real parties in interest are one or more excess insurers that will in reality become the working layers of insurance in getting the claim resolved. Yet, it has been difficult, if not practically impossible, for the excess insurers to insert themselves in the defense expense processing.
In a little known opinion, a Minnesota court addressed this issue in Royal Indemnity Company V. C. H. Robinson Worldwide, Inc., A08-0996, Court of Appeals of Minnesota (Decided July 21, 2009). Here, the Court recognized the excess insurers’ dilemma and allowed them to effectively reconsider defense payments already made by the primary insurer. It is uncertain as to what happened in the case after this decision, as the Court stopped short of explicitly stating that some portion of the primary limits had to be restored. Nonetheless, it should be an encouragement to excess insurers to become more involved in the defense expense vetting process when they are the real party in interest and it is apparent that the primary insurer is not vigorously carrying out its rights and duties in this regard.
*By way of full disclosure, I am grateful for Advisen’s invitation and publication of my article in this issue on the ramifications of the MBIA decision earlier this year, a case that I have also commented upon in this blog and elsewhere.