Nothing Succeeds Like Excess (Coverage) ….

Occasionally I am called to serve as an expert witness on insurance coverage disputes. A disproportionate number of them have involved matters of reporting to excess and umbrella carriers.

Well, maybe I should say matters of NOT reporting or late reporting to excess and umbrella carriers.

In one case, the policyholder did not report a general liability loss to an upper level excess carrier until a freaky trial result delivered a multi-million dollar plaintiff award. In truth, the first defense attorney had evaluated the case as having modest “legs” on liability, but the damages were significant. There was much dispute later over the wording of the excess policy CONDITIONS, as to whether it required reporting if the insured had reason to believe that the claim would never penetrate the excess.

In another case, a primary insurer failed to notify an umbrella carrier of a personal lines auto claim which – you guessed it – blew north of the primary limits. The primary’s adjuster made some quick phone inquires to the agent and broker, was told that they couldn’t locate an excess policy, and the adjuster then assumed there was no such coverage; this despite the policyholder’s insistence that he did in fact pay for coverage with a specific named umbrella carrier. Rather than report it on to the umbrella (“throw it up against the wall and see what sticks …”), the adjuster assumed that absence of evidence (“We can’t locate the policy…”) equals evidence of absence (“There is no umbrella coverage …).

In both matters, literally hundreds of thousands of dollars in legal and related fees could have been saved had the risk manager (in case #1) or the adjuster (in case #2), invested just five or ten minutes to draft a letter to the excess/umbrella carrier. Five to ten minutes!

A sound risk management – and loss reporting -- adage is, “When in doubt, report it out.” There may be many reasons why insureds and primary carriers don’t do so. They may be too busy. They may have an oversight. They may be guilty of wishful thinking. They may have legit grounds to think it is a bogus claim. They may not want to come across as an alarmist. They may be worried that reporting a loss will cause the excess/umbrella to jack up the renewal premium. They may think the policy does not require them to. They may fear that the plaintiff’s demand will ratchet up once he learns of the added insurance limits. They may chafe at the prospect of some new upper layer insurer galloping in, nosing around and telling them to settle the case.

I understand all the reasons. Not all of them are flawed. Still, investing five to ten minutes to draft and send a letter to avert the huge risk of a coverage problem seems like a sound bargain to me. There is a huge upside (preserving coverage) versus a small downside (five to ten minutes of time).

Sounds like a good investment to me!

When they don’t invest the time, they are certainly providing full employment opportunities for coverage lawyers.