Excess Follow Form Policies: Basics, Issues and Tips
Management liability insurance programs for larger companies (i.e., D&O, E&O, Fiduciary, and Employment Practices) are typically structured in a “tower” form comprising different vertically stacked layers of coverage. The first layer is a deductible or self-insured retention (SIR). The second layer is the “primary policy” that typically will have per claim and aggregate limits. The additional layers consist of one or more “excess follow form” policies, each with similar limits. The name, “excess follow form”, is descriptive: these policies provide “excess” coverage that, for the most part, adopts the terms and conditions (i.e., follows the form) of the primary policy.
While insured businesses typically focus their attention on the terms and conditions of the primary policy, excess policies also deserve attention. Excess policies are like fire extinguishers in that they are largely ignored, but when they matter, they really matter.
The best advice about excess policies that is easiest for businesses to follow is to minimize the differences between primary policy and the excess policies:
- When excess policies do not follow form to the primary policy, it is nearly always based on more restrictive (less favorable) excess policy language. In this case, eliminating the differences should result in more favorable terms.
- Sometimes, “most favored nation”-type provisions can make a more restrictive policy provision in any underlying excess policy apply to coverage under all other excess policies. This sort of feature is irrelevant if all of the excess policies are the same.
- Oftentimes, the differences in the excess policies concern the policyholder’s obligations concerning claim reporting, defense provisions, cooperation, and so forth. While the differences may be minor, an insurer will raise any noncompliance in the event of a dispute. But it also involves extra hassle and expense to identify and comply with multiple different versions of the same provision.
A particular recurring difference among excess policies is whether the policy honors exhaustion of the underlying limits amounts (i) only if actually paid by the underlying insurer(s), or (ii) if actually paid by the policyholder alone or in combination with the underlying insurer(s). The latter option, sometimes called “shaving limits”, is usually more beneficial to the policyholder. If there is a dispute between a policyholder and an insurer, so long as the policyholder is willing to make up the limit that the underlying insurer will not pay, then the excess insurers should not be able to avoid coverage merely because the underlying insurer won’t pay. All of the excess policies should have consistent language on this issue.