Disputes still regularly crop up over whether excess layer insurers are entitled to avoid liability for late notice of claims and circumstances. We have noticed an increase in this area over the last 12 to 18 months. When such disputes do arise brokers invariably find themselves in the firing line. Incorrect assumptions about notice requirements in excess layer wordings are often to blame.
Mind the gap
It is not unusual for there to be a considerable gap between the notification of a claim or circumstance to a primary layer and notification to the excess layer. The period between the two can sometimes be several years. Often in such cases what triggers the notification to excess layers is a dramatic increase in the likely loss. Unsurprisingly, in such situations close scrutiny tends to be given by excess layer insurers to their rights under the policy.
Establishing the notification requirements under an excess layer wording is not always straightforward. Primary policy wordings will have their own notification conditions. Where the excess layer policy purports to incorporate the primary policy wording, the effect can be that notice to the primary layer insurer is treated by the courts as sufficient to satisfy the notice requirement to the excess layer. In such cases excess layers will find themselves prevented from declining cover.
Where the excess layer wording does not clearly carve out separate notification obligations the conflict between competing notification clauses in the two wordings can be difficult to resolve. Poorly defined terms often contribute to this challenge. For example, where the excess layer notification condition requires notice to “Insurers” this might be construed to refer to the insurers of the primary policy, instead of the intended insurers of the excess layers, leading to the conclusion that notice to the primary insurers suffices.
It is, of course, perfectly possible for excess layer insurers to include their own specific notification provisions in their policy which impose on the insured an obligation to give notice to them as well as to the primary insurer. Such provisions may, if properly drafted, prove fatal to any insured who fails to comply. Excess layer policies will, therefore, generally stipulate that any terms which are incorporated from the primary policy apply unless they are inconsistent with the excess layer wording. Separate notification obligations will generally then be set out as conditions precedent, breach of which by the insured entitles the excess layer to decline indemnity.
Excess layer notification conditions generally fall into two categories.
The first is those conditions which require notice to excess layers upon a particular threshold being reached. Often this will be when the value of the claim reaches or exceeds 50 per cent of the underlying limit of indemnity. Such wording can give rise to its own issues. For example, is the value of the claim determined by reference to its value as presented by the claimant? Or is it by reference to the likely level of any indemnity under the underlying policy and if so, on whose assessment: the primary insurer’s? the appointed lawyers? What is the position if the insured or its broker is not aware of how the underlying insurer is quantifying the loss or even how the claim is developing? An insured can be at risk of breaching a threshold based notification condition in an excess layer policy without even being aware that it is doing so.
The second category of notification condition is one which requires immediate notice of claims or circumstances to excess layer insurers regardless of their value. In other words, generally this means that when the primary insurer is notified so too must the excess layer be. Theoretically this provides absolute clarity and it is perhaps, therefore, surprising that it is not uncommon for insurance brokers to notify the primary insurer but to fail to notify excess layer insurers of the claim or circumstance. The reason for this invariably seems to be based on the mistaken assumption that the notification condition falls into the first category and that no obligation arises until some assumed threshold is reached.
Excess layer insurers and brokers alike should pay close attention to the terms of excess layer notification conditions. From the insurer’s perspective getting the wording right to ensure that the obligation to notify is clear and corresponds with its timing requirements is critical. The incorporation of underlying terms if not undertaken correctly can have unintended consequences. From the broker’s point of view knowing what the notification requirements are under excess layer policies is equally important to avoid falling foul of them. Whilst excess layer notification issues are not an everyday occurrence, when they do arise they are often not straightforward and can involve significant sums.