In an excess casualty program, where several layers of coveragebuild upon each other, a follow form policy should mirror the termsand conditions of the policy beneath it.

Although many insurers stress that their policies are followform, often they are not. Language in these policies may includeadditional terms and exclusions, and some policies expresslyexclude coverage for specific risks even if they are covered byunderlying policies.

Such discrepancies could cause excess casualty insurers to denyclaims, leaving insureds responsible for covering sizable lossesthat they thought were insured

Provisions known to cause claim disputes

Three particular excess casualty policy provisions have been knownto cause claim disputes. It’s best to address each one using theexample of an insurance buyer with a $25 million lead umbrellapolicy and three excess policies each providing $25 million inlimits above the previous layer.

• Duty to defend. In most cases, an insurer isobligated to defend an insured if a loss could potentially becovered under a specific policy it underwrites, even if there is aquestion of whether the claim is valid. However, this is notstandard across all excess casualty policies. In this example, ifthe insured suffers a loss that exceeds the $25 million limit ofthe lead umbrella policy, but the second layer does not include aduty to defend clause, the insured could be left without defensecosts coverage beyond the lead umbrella layer. Instead of havingdefense costs covered for the entire tower, the insured will onlyhave these costs covered until the lead $25 million isexhausted.

• Restrictive as underlying provisions. Someexcess policies state that the provided coverage is as restrictiveas the layer below. For example, the second layer of coverage addsan exclusion for injuries related to silica dust; the third andfourth layers include the “restrictive as underlying” provision andtherefore also exclude silica dust-related injuries. This meansthat in the event of an injury related to silica dust, only thelead umbrella policy would respond — leaving the insured with only$25 million in coverage instead of $100 million.

• Negotiated partial settlements. Excesspolicies generally are not triggered until the layer below is fullyexhausted by actual payment of claims. Imagine you submit a $50million claim to your insurers. The lead umbrella insurer, however,does not believe that the claim is valued at its full $25 millionlimits for this loss; it is only willing to pay $23 million. Absenta “negotiated partial settlement” provision, which would allowunderlying limits to be exhausted through a combination of paymentsmade by the insurer and insured, the policyholder may not be ableto access coverage beyond the $23 million extended by the leadumbrella insurer.

Casualty losses continue to climb. Insurers’ total incurredlosses for all liability lines increased from $122.4 billion in2008 to $151.9 billion in 2015, according to data compiled by theInsurance InformationInstitute (I.I.I.). In large part, these increasing losses aredriven by rising litigation costs, including jury verdicts for autoliability, product liability and medical malpractice claims. Andthe defense costs and other expenses incurred by insurers to defendpolicyholders from this litigation also continue to increase: From2008 to 2013, defense costs increased from $16.8 billion to $19.4billion, according to the I.I.I.

Enhanced policy forms

To better address these rising claims costs, insurance buyers shouldconsider enhanced policy forms now available that aim to eliminategaps and conflicting terms and conditions in excess casualtyinsurance coverage. These enhancements allow for a single form tobe used throughout an excess casualty tower; instead of each excessinsurer underwriting coverage on its own policy form, the singleform explicitly follows the lead umbrella policy, altered only byeasily identified standalone endorsements.

Although this cannot guarantee coverage for any specific loss,the enhanced form’s uniformity of coverage helps ensure consistencyin how individual layers respond. It helps reduce the ability ofindividual insurers to deny claims: If the umbrella insurancepolicy provides coverage for a loss, the layers above also providecoverage, because they use the same terms and conditions. The sameis true for any subsequent excess casualty layers that use the samepolicy form.

This can provide greater contract certainty for insureds — andgreater confidence that their excess casualty programs will respondas expected in the event of a sizable loss.

Tony Tam is U.S. Casualty Placement Leader for New YorkCity-based Marsh, aglobal insurance broker and risk management firm. He canbe reached at [email protected].