UK: Tension Between The Layers

Last Updated: 11 July 2007
Article by Simon Konsta and Roderic McLauchlan

The involvement of excess insurers can give rise to a multitude of claims handling issues and disputes, vis-ŕ-vis the insured and/or the primary insurer. While market practice is instructive, there is surprisingly little English legal authority on these topics.

Notification

Notification can be problematic, especially if there has been a delay between notice to the primary insurer and to the excess insurer. Attention must be paid to the specific policy wording as opposed to any general principle. On the one hand, in Sirius International v Friends Provident (2005), the Court of Appeal held that notification to the primary insurer was deemed to be notification to the excess insurers as a result of the incorporation into the excess policy of the notification provision of the primary policy. As a result, the excess policy was triggered even though the excess insurer was not actually aware of the loss. In contrast, in Tioxide v CGU (2005), the Court of Appeal ruled that although a notification to the primary insurer could, in the right circumstances, trigger cover under the excess, on the facts the purported notification failed to meet the specific requirements of the provisions in the excess policy and cover was rightly declined.

What happens if the same insurer participates on both the primary and the excess layer? In that situation, it may be difficult for an excess insurer to contend that it was not aware of the claim if in fact it had received information in its capacity as primary insurer which indicated the potential involvement of the excess layer. An insured is not generally obligated to do something that is unnecessary (Barratt Bros. (Taxis) v Davies et al (1966)). That said, it is expected that the court would consider the nature of the knowledge, in what capacity it was provided, whether it would reasonably indicate that the excess layer was implicated, and the specific policy language.

This can lead to a divergence of interests between insurers on the same layer, as some may be attributed with knowledge that the others are not. As noted in Tioxide, one insurer on the layer cannot be considered to be the agent of the other insurers for the purpose of notice, in the absence of specific policy language. Each insurer on a layer is considered as having a separate contract.

This leads to another important aspect of the attribution of knowledge to different layers. Conceivably, knowledge attributed to an excess insurer by virtue of being a primary insurer may be considered in determining whether the excess insurer has waived any policy or extra-contractual defences. This will depend on numerous factors, including whether or not the excess insurer has been notified of the claim. Nevertheless, it is an issue that claims handlers should bear in mind.

Sharing information

Disputes can also occur about whether or not primary and excess insurers should share information. No duty is owed by the primary insurer to provide information. Moreover, it is unlikely that there is a common law duty on an insured to provide the same information to the excess insurers as provided to the primary. The excess contract may expressly oblige the insured to provide information or it might be argued that such a term is implied into the contract. Alternatively, the excess insurer may seek to rely on a term incorporated from the primary policy. However, in the latter case, even an apparently minor detail in the excess wording may have significant consequences. There may also be data protection issues triggered by the sharing between the primary and excess layer insurers of any information without the insured's consent.

The sharing of legal advice can be problematic. An excess insurer may be able to request advice on liability on the basis of the right to information from the insured. However, there is no duty on the primary insurer to share advice, although in practice, such agreements may be entered into between insurers. However, the insurers should consider to what extent "common interest" privilege can be maintained between different layers.

Costs sharing

Many excess policies are silent with respect to any obligation concerning costs sharing. When drafting excess wording, considering the specific underlying terms and conditions and agreeing with the insured in what contexts the excess policies will contribute towards costs can avoid substantial disputes later on. And, in those cases when the excess layer and the primary are potentially at odds on this topic, it is important to address the issue early on and memorialise clearly any agreement between the insurers.

Claims handling and settlement

Finally, what about claims between the layers? In the US, a primary insurer can face claims from the excess insurers if it declines a settlement offer within primary policy limits and the ensuing liability exceeds the primary layer. Under English law, no direct duties are owed by the primary insurer to the excess insurers unless there has been some form of voluntary assumption of responsibility. However, this remains an untested area of law and it cannot be ruled out that such claim may be attempted.

An important aspect of disputes between the layers arises in the settlement context. On several occasions our firm has been involved in cases where such disagreements prevented settlement. In one case, one layer was prepared to pay a significant contribution, but owing to the diverging views of the different layers, the matter ended up going to trial - where the insurers won! However, for each case like that there will be numerous situations where the failure of primary and excess layers to agree will drag out proceedings and increase the insurers' claims handling costs.

Surprisingly, we are not aware of any concerted efforts to minimise such disputes in advance, other than ad hoc claims committees that are sometimes formed on a case-by-case basis. The logical occasion for trying to address these points is when an insurance programme is being arranged and negotiated. In principle, there should be no obstacle to including terms in the relevant contracts that provide for an independent tribunal or nominated arbitrator to resolve disputes between the layers in a quick and efficient manner.

Conclusion

These issues remain largely undeveloped in English law and most disputes of these kinds will be resolved on a commercial basis. What can be extracted as a general conclusion is that, in each case, the specific terms and conditions of the excess policies should be carefully considered, not only on their own but in conjunction with the terms of any policies which they purport to incorporate by reference. On close examination, the legal position may not always be consistent with what practice might lead you to expect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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