When faced with a large loss, all eyes turn toward a party’s excess carrier if that party had the foresight to obtain excess coverage. A large body of case law focuses on when a primary layer of coverage is considered “exhausted,” and whether a primary carrier’s insolvency will trigger excess coverage. (See, e.g., Alabama Ins. Guar. Ass’n v. Magic City Trucking Serv., Inc., 547 So. 2d 849, 855 (Ala. 1989) (collecting case law). Equally important, however, is the scope of an excess carrier’s obligations to its insured, which may depend upon whether the primary policy’s limits have been reduced or exhausted entirely. For example, what happens when an excess policy provides that when “underlying insurance” limits are reduced or exhausted, the policy will: 1) in the event of reduction, pay the excess of the reduced underlying limit; and 2) in the event of exhaustion, continue in force as underlying insurance?
It is this author’s opinion that these provisions are intended to apply to two different scenarios: the first applying when a single loss has eclipsed a policy’s each occurrence limit, and the second applying to a subsequent loss after the overall aggregate limit of the policy has been exhausted. Such a reading allows each provision to carry its own weight and meaning. See, e.g., Mendota Ins. Co. v. At Home Auto Glass, LLC, 348 So. 3d 641, 644 (Fla. 5th DCA 2022) (“Courts must examine the entire agreement and seek to harmonize and give effect to all provisions so that none would be meaningless.”); Taurus Holdings, Inc. v. U.S. Fidelity and Guaranty Co., 913 So. 2d 528, 532 (Fla. 2005) (“[C]ourts may not ‘rewrite contracts, add meaning that is not present, or otherwise reach results contrary to the intentions of the parties.’”). Under this reading, the difference between the provisions is most apparent when a single loss uses up a policy’s each-occurrence limit, but the general aggregate limit remains intact. In such a scenario, the excess insurer would pay the loss above and beyond the primary carrier’s each occurrence limit for that loss. It would not, however, pay dollar one in a subsequent loss, because the each occurrence limit would be restored for that subsequent loss. If and when a single loss exhausts a policy’s aggregate limit, however, the excess insurer will pay the loss above and beyond that aggregate limit, and for any subsequent loss, will pay dollar one.
Some courts have taken the approach that policy language requiring the excess carrier to “continue in force as underlying” goes a step further than this- requiring the excess carrier to “drop down” and provide umbrella coverage, regardless of whether the excess policy contains provisions which may otherwise not have afforded coverage. See Sarka v. Love, 2005-Ohio-6362, ¶ 14, 2005 WL 3215138, *3 (Ohio Ct. App. 2005) (reasoning that the “continue in force” language provided a form of umbrella coverage requiring the excess carrier to “drop down” and provide umbrella coverage); LGS Techs., LP v. United States Fire Ins. Co., No. 2:07-CV-399, 2015 WL 5934689, at *10 (E.D. Tex. Aug. 14, 2015), report and recommendation adopted sub nom. LSG Techs., Inc. v. United States Fire Ins. Co., No. CV 2:07-CV-00399, 2015 WL 5934690 (E.D. Tex. Oct. 12, 2015) (imposing defense obligation upon exhaustion of primary policy, despite lack of policy language expressly requiring insurer to defend).
In very general terms, excess coverage typically provides an insured with coverage above a certain dollar amount (thus offering a vertical extension of coverage), and umbrella coverage may provide coverage both above a certain dollar amount and beyond what is provided at the primary level (thus offering both vertical and horizontal extensions of coverage). Am. Special Risk Ins. Co. v. A-Best Products, Inc., 975 F. Supp. 1019, 1022 (N.D. Ohio 1997), aff’d, 166 F.3d 1213 (6th Cir. 1998) (“In providing excess coverage, an insurance company may offer “umbrella policies” which differ from standard excess insurance policies in that they are designed to fill gaps in coverage both vertically (by providing excess coverage) and horizontally (by providing primary coverage)); Garmany v. Mission Ins. Co., 785 F.2d 941, 948 (11th Cir. 1986) (describing that the function of an umbrella policy is to provide a higher limit of liability and to provide coverage for losses typically not covered by liability insurance). Acknowledging the clear difference between the two, it is this author’s opinion that interpreting the “continue in force” language to broadly convert an excess policy into an umbrella policy is inappropriate. Language strictly providing excess coverage, and not umbrella coverage, should be honored despite exhaustion of any or all available underlying insurance coverage.
In sum, the excess carrier’s duty to its insured may vary depending upon whether a policy’s each occurrence limit has been used up or its policy has been exhausted entirely. The specific language within the policy is critically important in determining the interplay between a primary and excess carrier’s obligations. While the law in your jurisdiction will of course be relevant, the language of the policies themselves should always control.