This piece is by Jan Kraayvanger, Signature Litigation
The concept of an insurance tower is straightforward: it involves integrating multiple insurance policies into a single structure that helps companies obtain high coverage limits. It should be noted that this is not a unified body. An insurance tower is comprised of a primary policy and multiple excess of loss insurance policies, which means that it is a collection of different insurers. Each insurer enters into a separate insurance policy with the policyholder. When disputes arise, this often results in complexity, with policyholders facing numerous challenges in arbitration against an insurance tower.
The primary policy outlines the insurance protection provided by the primary insurer. This includes details such as which guarantees are insured, the retention and limit, as well as exclusions. It is standard practice for the W&I primary policy to include an arbitration clause.
Much shorter in length, excess policies include the attachment point, the limit, and language to the effect that the excess policy will only be triggered after the lower layers are exhausted. Furthermore, the excess policies include a following form clause confirming that the insurance protection granted is subject to the same terms and conditions as the primary policy. It is worth noting that each excess policy will include its own arbitration clause.
In general, no contractual agreement exists between and among the different insurers. There is also no corporate or joint-venture agreement in place. Consequently, no insurer is obliged to adhere to the decision of another insurer. Similarly, an arbitral award rendered against one insurer does not have binding effect on the others.
Disputes involving an insurance tower present all the typical issues associated with a multi-party, multi-contract arbitration.
However, there are specific challenges, including the policyholder’s ability to sue multiple or all insurers in a single arbitration. The outcome will be largely contingent upon the specific arbitration clauses included in the various policies and the precise stipulations outlined in the rules of the chosen arbitration institutions. It should be noted, however, that not all institutions have rules for multi-party, multi-contract arbitration. Furthermore, those that do have such rules typically stipulate that it is permissible if all participants have consented and the arbitration clauses are compatible with each other.
It could be argued that any insurer participating in such a tower has agreed to multi-party arbitration, at least implicitly. This could be viewed as a matter of good faith. However, circumstances vary, and it may be the case that the lower layers are unaware of the higher layers, or that the primary insurer is not aware that the policyholder has purchased additional insurance protection through excess insurance. In such circumstances, the primary insurer might well be able to reject the participation of other insurers it had been unaware of, when it entered into the primary policy.
As a minimum, joint arbitration requires that the arbitration clauses are compatible with each other. But if, for example, the arbitration clauses do not even provide for the same arbitration institutions, multiple arbitrations might be needed.
It is possible to avoid these difficulties by ensuring that the arbitration clauses are drafted with care when the tower is structured. One potential solution is for all insurers and the policyholder to sign a joint arbitration agreement. As an alternative, the arbitration clauses could provide wording which allows the policyholder to include other insurers, which participate in the tower, in the arbitration process.
Another common challenge is the issue of exhaustion. It is important to note that the wording of every excess policy states that it will only be triggered if the lower layer is fully exhausted. In practice, this means that once the primary insurer has accepted coverage and paid out the full limit, the primary layer is considered exhausted, and the excess insurer(s) is/are then responsible for the remaining amount.
But what if the primary insurer declines to pay, can the policyholder still request compensation from the excess insurer(s) if the damage exceeds the primary insurer’s limit? Additionally, can the policyholder sue all the layers simultaneously?
Even if the arbitration clauses allow for joint arbitration, the higher layers may still contend that the policyholder cannot file a claim against them successfully as long as they have not obtained an award against the lower layers. If this interpretation is correct, the policyholder would be required to file separate arbitrations on a layer-by-layer basis. This would entail initiating proceedings first with the primary insurer, then with the first layer, etc.
Another problem which is linked to the interpretation of term “exhaustion” is as follows: In the event that the policyholder initiates legal action against the primary insurer and is unsuccessful, can they pursue a subsequent arbitration against the first layer for the amount starting at the attachment point of this layer?
A policyholder-friendly interpretation suggests that exhaustion simply means that the policyholder can claim only the portion of their damage from the attachment point to the limit. As a result of this interpretation, the excess policy of the first layer would effectively become like a primary policy with a high retention.
Whereas the insurer-friendly interpretation would suggest that each lower layer has to accept liability in full before the next layer is triggered. This is due to the “follow the fortunes” nature of excess insurance, which is a more cost-effective option than primary insurance. Excess insurers can afford to be passive, allowing the primary insurer to take the lead. The primary insurer is required to conduct a thorough and costly investigation. In the event that the primary insurer determines that a payout is necessary, or if a tribunal rules against the primary, there is a high probability that the excess insurers will follow the primary insurer’s lead and refrain from conducting another investigation. Instead, they can take advantage of the findings of the primary insurer’s investigation.
There are judgments and arbitral awards that support both positions. The interpretation an arbitral tribunal will adopt will, at the very least depend on the wording of the exhaustion clause. There is no uniform wording in use in the market, and in many cases, the language regarding exhaustion is not entirely clear. Once more, meticulous drafting can prevent disputes and potential headaches.
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