On the Defensive: Excess Insurers and the Duty to Defend

When one thinks of excess insurance (and who doesn’t) the duty to defend is probably not the first thing that crosses the mind.  The duty to defend is typically associated with primary insurance, not excess insurance that provides coverage above underlying layers of primary or other excess insurance.  Not all excess insurance is the same, however, and certain excess insurance policies, especially excess umbrella insurance policies, expressly impose a duty to defend on the excess insurer.

Umbrella insurance policies have been referred to as “hybrid” policies because an umbrella policy “combines the characteristics of both a primary and a following form excess policy.”   An umbrella insurance policy typically promises to defend occurrences covered by the terms of the umbrella policy, but not the underlying primary policy.  That duty to defend is set forth in the Defense Settlement provision of certain umbrella policies.

Beyond defense coverage for occurrences not covered by underlying insurance, some umbrella insurance policies also promise to defend the policyholder upon the exhaustion of underlying insurance.  Courts have focused on three policy provisions in determining that umbrella excess insurers have such a duty to defend:  (1) Underlying Insurance; (2) Retained Limit-Limit of Liability; and (3) Assistance and Cooperation.

Starting with the last provision first, an Assistance and Cooperation provision in an excess insurance policy with no duty to defend will typically provide that the insurer “shall not be called upon to assume charge of the settlement or defense of any claim, suit or proceeding….”  Assistance and Cooperation clauses in umbrella policies that include a duty to defend provide differently, as follows:

Except as provided in Insuring Agreement II (Defense, Settlement) or in Insurance Agreement VI (Retained Limit-Limit of Liability) with respect to the exhaustion of the aggregate limits of underlying policies listed in Schedule A, or in Condition J [Underlying Insurance] the company shall not be called upon to assume charge of the settlement or defense of any claim made or proceeding instituted against the insured; but the company shall have the right and opportunity to associate with the insured in the defense and control of any claim or proceeding reasonably likely to involve the company.  In such event the insured and the company shall cooperate fully.

Thus, pursuant to this form of the Assistance and Cooperation clause, the insurer is obliged to defend pursuant to the three provisions identified in the clause.  As discussed above, the Defense Settlement provision requires the umbrella insurer to defend claims covered by the umbrella policy, but not the underlying insurance policy.  Pursuant to the remaining two provisions, the umbrella insurer is obliged to defend upon the exhaustion of underlying insurance.

As for the effect of the Underlying Insurance provision, one court concluded that the plain terms of the provision imposed defense obligations:
“All three policies contain a clause imposing an obligation to assume charge of and pay for [the policyholder’s] defense under certain circumstances.  Specifically, [the Underlying Insurance provision of] the policies provide:

If underlying insurance is exhausted by any occurrence, [the Excess Insurer] shall be obligated to assume charge of the settlement or defense of any claim or proceedings against the insured resulting from the same occurrence, but only where this policy applies immediately in excess of such underlying insurance without the intervention of excess insurance of another carrier.

Accordingly, by its plain terms, the policies impose defense obligations upon the insurers where the immediately underlying insurance has been exhausted by a single occurrence.”
The Eighth Circuit Court of Appeals also relied on the Underlying Insurance provision in concluding that the insurance policy expressly imposed defense obligations on the insurer.

The Retained Limit-Limit of Liability provision provides, in pertinent part, that the excess policy “shall continue in force as underlying insurance,” in the event of “exhaustion” of the aggregate limits of liability of the underlying policies.  In accordance with this language, an excess insurer must function as a primary insurer upon exhaustion of the underlying primary policy.   Of course, functioning as a primary insurer includes the assumption of the duty to defend that was previously shouldered by the primary insurance before the exhaustion of the primary policy.

Accordingly, it would be a mistake to blindly assume that an excess insurance policy contains only a duty to indemnify, and no duty to defend.  As always, the policy language controls, and policyholders should not hesitate to take advantage of all of the benefits the duty to defend offers.

Questions? Contact Lee Epstein at Weisbrod Matteis & Copley PLLC.

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