With directors and officers liability claims rising high into layered towers of insurance coverage, and excess insurers increasingly finding their interests at odds with primary carriers, is quota-share D&O insurance an idea whose time has come?
Joseph Monteleone, a partner with Tressler, Soderstrom, Maloney & Priess in New York, asked the question in a commentary for his firm's April newsletter, Specialty Lines Advisory.
"Maybe if you had true quota-share arrangements, with a lead insurer representing everybody and having claims control, you wouldn't have these situations," he told NU, referring to situations at the center of three recent court cases.
In these cases, excess carriers were unwilling to provide coverage on their layers, even though primary insurers had agreed to pay all or some of their limits. (See related article for more details.)
With quota-share structures, "you wouldn't have layers of insurance. You'd just have a single policy that's quota-shared by participating insurers," Mr. Monteleone said, describing an arrangement in which insurers take agreed percentages of risk in exchange for the same slices of premium.
Robbyn Reichman, senior vice president of legal claims for Aon Financial Services Group in New York, said she's "not a big fan" of the quota-share. "From a claims perspective, it just exponentially increases the number of parties with whom you have to communicate," she explained.
To make her point, Ms. Reichman used the example of a $50 million tower of coverage split up into $10 million layers that might be restructured into five shares of 10 percent under a quota-share approach.
With the usual tower approach, she said that for a claim contained in the first $10 million layer she only has to meet with her client, one claims analyst at the insurer and the insurer's monitoring counsel (which monitors defense counsel work). With the quota-share, however, "I have to go to five carriers with five sets of monitoring counsel to persuade everyone that a defense strategy [or] settlement amount…is appropriate."
While Mr. Monteleone proposes to solve that problem by having one quota-share insurer take the lead on claims control–an approach used in the London market–Ms. Reichman said "that is an uncomfortable concept to domestic insurers. They do not like to relinquish claims control."
Mr. Monteleone recognized that hurdle, but proposed that if a participant becomes unhappy with decisions made by the lead insurer during a policy period, then "the answer is literally you vote with your feet. You don't renew your participation."
"You get off the risk," he said.
Ms. Reichman said, "Anytime a carrier comes off a program, there's always a risk" that the replacement insurer won't "step in with full continuity" of coverage.
Mr. Monteleone also said a practical solution to problems arising with excess carriers is for policyholders and brokers to get excess players into claims negotiations sooner. "You shouldn't try to resolve issues piecemeal–making a deal with the primary, and then turning to the excess. You need to get everybody to the table at the same time to find out if everyone is on the same page."
Every other expert interviewed by NU, including excess carrier representative David Bell, put forth the same idea. As for quota-sharing, Mr. Bell agreed that "in certain scenarios, it eases pressures" that can explode into coverage battles. "The reason is when you're on a quota-share, all carriers have subscribed to the same language."
Mr. Bell's company, Allied World Assurance Company, is one of four Bermuda companies that agreed last year to adopt a single policy form, eliminating the possibility of inconsistencies in language between them, according to Jennifer Fahey, managing director and national D&O practice leader for Aon in New York.
In October, Aon Bermuda negotiated a $100 million quota-share placement with these insurers, she said, explaining that they agreed on a universal form, but maintain the right to claims control for their participation.
Still, solving the issue of differences in language is half the battle for policyholders, Ms. Fahey and Mr. Bell agree.
"We've told carriers we're fed up with the lack of follow-form" language, Ms. Fahey told NU, noting that even layered excess programs that are described as "follow-form" can contain inconsistencies in exclusion language, and in notice-of-claim, cancellation and exhaustion provisions.
During the D&O Symposium of the Professional Liability Underwriting Society in February, she said only about 25 percent of the D&O market is approaching true follow-form language. More recently, she told NU that Aon is grading excess insurers on the efforts to line up follow-form language, and that several would have gotten "D's" and "F's" but for some recent endorsements.
Kevin LaCroix, a partner for Oakbridge Insurance Services, a Beachwood, Ohio brokerage, said he's also keeping a mental scorecard. He gives failing grades to excess insurers that repeatedly take positions to deny coverage that aren't being taken by anyone else in a D&O tower.
Addressing another issue emerging with excess towers–the issue of excess carriers refusing to pay claims unless layers below are exhausted solely by underlying insurer payments–Ms. Fahey said they are now being addressed within contracts, through negotiated endorsements that allow underlying contributions by insureds.
Still, she said, "to a frustrating degree, endorsements from insurer to insurer vary widely." The most problematic wording makes the endorsement inapplicable to coverage disputes, she said, explaining that in many instances, when insureds agree to pay some losses on underlying layers, they are doing so in recognition of potential coverage disputes.
A common thread in the endorsements, she said, is "most favored nation" wording that says an excess insurer will receive at least as large a discount off its limit as any carrier underneath.
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