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 beenknown to cause claim disputes. It's best to address each one usingthe example 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. Excess policiesgenerally 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 Information Institute (I.I.I.). In large part, theseincreasing losses are driven by rising litigation costs, includingjury verdicts for auto liability, product liability and medicalmalpractice claims. And the defense costs and other expensesincurred by insurers to defend policyholders from this litigationalso continue to increase: From 2008 to 2013, defense costsincreased from $16.8 billion to $19.4 billion, according to theI.I.I.

Enhanced policy forms

To better address these rising claims costs, insurance buyersshould consider enhanced policy forms now available that aim toeliminate gaps and conflicting terms and conditions in excesscasualty insurance coverage. These enhancements allow for a singleform to be used throughout an excess casualty tower; instead ofeach excess insurer underwriting coverage on its own policy form,the single form explicitly follows the lead umbrella policy,altered only by easily 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 ([email protected].) is U.S. casualty placement leaderfor New York City-based Marsh, a global insurance broker and riskmanagement firm.