In the context of liability insurance, it is common, indeed advisable, for insured parties to have more than one insurance policy covering the same claim. Layered coverage, as this is called, is an excellent way to manage large risk for lower cost, but it carries its own risk for insurers and the insured. Where the insurance scheme involves a primary and an excess policy, there exists a tripartite relationship of good faith between the two insurers and the insured.
All these parties should ensure they understand and fulfill their duties to avoid compromising the defence of a claim, voiding coverage, increasing litigation costs, or even risking an independent claim. Below we outline the two steps that insureds and insurers should take when managing claims in the context of layered coverage.
1: Determining Priority of Coverage
The first step in determining to whom a duty is owed—and what that duty is—is to clearly understand the insurance scheme and how the relevant policies relate to each other. When a policy triggers the obligation to defend or indemnify an insured and precludes calling on other insurance until the limits are exhausted, that policy provides the primary layer of coverage. The excess layer is a policy that requires any other collectible insurance to be exhausted before it is triggered. Where there are two or more primary policies, the duties contained in the policy can be concurrent; an insured can call upon all these policies for its defence and indemnification concurrently and the respective insurers will share the costs according to their respective obligations.
When there are disputes between insurers, courts determine priority of coverage by examining the policy wording. As a practical matter, insurers should resolve, or at least explore, which of them has priority early in the claim process. Litigating after the fact can be expensive and also lead to conflicts between insurers over how a claim was defended and settled in the first instance. Sometimes an insurer is precluded from pursuing other insurers after an underlying claim is settled. Therefore, insured parties and responding insurers should notify all potential insurers of a claim as soon as possible. Insureds should inform insurers about all other policies that may relate to a claim.
Insurers should ask their insureds if they have other insurance that may be collectible on a claim, particularly if the claim may exceed primary limits. Waiting until the involvement of an excess insurer becomes necessary can lead to conflicts between insurers, delay settlement or, worst of all, preclude coverage.
2: Managing the Tripartite Relationship
The tripartite relationship of good faith has been recognized by Canadian courts, is well-established law in the United States, and has wide-reaching implications for all parties during and after the defence of a claim.
Primary insurers should keep in mind that, because of the duty of good faith (and because the excess insurer has a joint interest with the insured and the primary insurer in the outcome of the defence of a claim) primary insurers likely cannot claim privilege against the excess insurer over the files of counsel retained to defend a claim. All legal advice from defence counsel is probably not privileged vis-à-vis the excess insurer.
Primary insurers should also be aware that an excess insurer can make claims against a primary insurer directly, in its own name or in the name of its insured, to recover damages for breaches of the primary insurer’s twin duties of defence and good faith. Excess insurers, who are by nature prepared for litigation and familiar with the process of defending claims, may become more proactive in recouping the costs of indemnifying their insureds from both the primary insurer and defence counsel when the defence of a claim is conducted negligently or in bad faith.
Insured parties must take care to fulfill their reporting and cooperation responsibilities to both the primary and excess insurers to avoid compromising the defence of a claim or, worse, risk losing coverage. For example, most excess policies contain the insurer’s right to drop down and associate in the defence of a claim. To exercise this right, the excess insurer must be kept aware of the status of the claim by the insured. A failure on the part of the insured could void coverage.
For their part, excess insurers should be mindful that there are situations where exercising the right to associate in the defence of a claim is key to protecting their interests. For example, if a primary policy has eroding limits (where defence costs are included in the overall policy limits), mismanagement of the defence of a claim may mean that the excess layer is reached sooner than expected. In such a case, early intervention in the litigation by an excess insurer can protect the interests of both the excess insurer and the insured. However, excess insurers must be careful to avoid complicating litigation or delaying settlement. Doing so could run the risk of a claim against them by the primary insurer or the insured.
3: Check lists for primary insurers, excess insurers, and insureds
For Primary Insurers
- Always ask insureds about other policies that may provide coverage.
- Carefully review and consider the obligations and rights of all insurers in an insurance scheme when dealing with a claim involving multiple insurers.
- Carefully seek legal advice, and remember that that defence counsel should not advise an insurer with respect to issues of priority as between itself and another insurer.
- Be aware that the obligation to diligently investigate and defend a claim and to make a good faith effort to settle within limits is also owed to the excess insurer.
- Be aware that excess insurers may make claims against primary insurers who fail to discharge these duties.
For Excess Insurers
- Encourage and require insureds to report early and often.
- Seek advice early about any potential priority issues between insurers. Consider seeking a declaration as to your excess status.
- Keep abreast of the defence of a claim, especially where the underlying claim exceeds or might exceed primary limits, particularly where the primary policy has eroding limits.
- Be prepared to associate early in the defence of a claim should the need arise.
- Keep your insureds advised of your strategic decisions and concerns with respect to the defence and settlement of the underlying claim.
For the Insured
- Report to all insurers early and be careful to abide by all reporting requirements.
- Be prepared for your excess insurer to involve itself in your claim.
- Make sure your excess insurer is kept fully informed of all developments in the defence and settlement of the claim.
- Abide by your obligations to cooperate in the defence and settlement of the underlying claim. If necessary, seek legal advice on your obligations, especially where you suspect the interests of your insurers may conflict.