Recently, I attended the 2023 American Bar Association Insurance Coverage Litigation Committee Seminar in “sunny” Tucson, Arizona. Even with an unexpected snowstorm in the desert, it was, as always, an engaging, informative, and enjoyable experience for my colleagues who attended and me. All five of us had speaking roles this year; I led a roundtable discussion along with Bradley Dlatt of Perkins Coie, Chicago, on insurance company business transfers in the U.S.

One of the most interesting panels I attended was a breakout session titled “Challenges with Excess Insurance: Bearing the Risk for Excess Judgments and Avoiding Uncovered Losses”. The panelists focused on the rights and responsibilities of primary carriers and excess carriers to each other and to insureds, including with respect to notice, exhaustion, and attachment provisions.

Of note, the panelists engaged in an extensive back and forth with each other (and the audience) on attachment and “Qualcomm” clauses. These conditions require actual payment by the underlying insurance to exhaust policies and trigger the next layer. Put differently, the insured cannot settle for less than the primary policy’s limits and make up the difference. This puts insureds in a bind because legitimate coverage disputes may often lead to a below-limits settlement with primary insurers. Such settlements often lead to further disputes with excess insurers over if and when primary insurance is exhausted.

We have written about such clauses before. You might ask why a policyholder would ever accept such restrictions. If you purchase a policy attaching excess of $20M, why does who paid that $20M matter to the issuing insurance company? There are several reasons why a policyholder might accept this restriction. First, these clauses are written into the standard policy forms for many policies. Second, obtaining a policy that does not require actual payment by underlying insurance may require a special endorsement. Third, this change likely requires an additional premium. The analysis only gets more complicated when you consider whether other years and other towers of coverage must also be exhausted by actual payment by the underlying insurance.

Also discussed were duties to cooperate, duties to prove exhaustion, and the ambiguity of the word “exhaustion” itself. In all, it was a great panel that focused on some of the practical issues that we face daily when considering the value of excess insurance.