Layers Of Liability

Verdict amounts across the country are on the rise, due in part to the phenomenon of social inflation and the success of reptile theory-style arguments. An insurer’s potential extra-contractual liability for these verdicts and related damages continues to substantially increase a carrier’s exposure in litigation.

However, the potential for extra-contractual liability does not lie solely in the insured/claimant versus carrier context. In some circumstances, a primary liability insurer may owe duties to an excess or umbrella carrier giving rise to potential extra-contractual claims between carriers.

Let’s explore the interplay between carriers issuing layers of insurance covering the same liability or loss, as well as the manner in which their duties to one another may lead to extra-contractual liability for bad faith.

Primary insurance refers to the first layer of coverage that applies when a covered liability or loss takes place. More than one primary insurance policy may apply to a covered liability or loss.

The priority of coverage between multiple policies applying on the same layer is typically determined by an analysis of the ‘Other Insurance’ provision in each policy. Confusion often arises because a primary policy may dictate that it applies to a loss on a primary, excess, or super excess basis in relation to other primary insurance covering the same liability or loss.