Excess--Vertical v. Horizontal Exhaustion (12/20/12)

    In the last BLOG we discussed "following form" situations with Excess Policies and how this gets more into "coverage issues" and not necessarily into "condition issues". We also discussed that it is not necessary to add someone as an A-I to an Excess policy (99% of the time anyhow) as it is automatically done. No better/no worse coverage wise; real "following form". However, how does the coverage stack? 

     There may be a few exceptions but virtually all of the time if you have coverage on someone else's policy as an A-I you will also have coverage for that loss under your own CGL. So, which one is primary for the A-I? Everyone is aware that most demanding parties insist that the A-I endorsement be primary over their CGL. Many carriers have been willing to put this language in their A-I endorsements. Another popular way to get this done is to make it clear that your CGL is EXCESS if you have coverage for the loss on another policy as an A-I. While carriers started using language like this quite a while ago ISO incorporated into the CGL with the 12/04 edition and, of course, kept the language with the 12/07 CGL. In fact, here it is---(Stuff like this is always found in Conditions.)


     However, notice the key words "primary" and "endorsement". While this is true on the other party's CGL it is not true on their EXCESS policy. The A-I coverage is available on the EXCESS policy but it is not provided by endorsement and, of course, an EXCESS policy is not primary. So, while your CGL is excess over an A-I endorsement on someone else's CGL it is not excess over that party's Excess policy. So, how will things stack?

    *The CGL policy for which you have been added as an A-I will be primary for       both of you.

   *Your CGL policy will be second for you NOT their Excess even though you have the coverage on their Excess policy.

  *Your Excess policy and their Excess policy will be 3rd for you.

   This is called horizontal exhaustion. What most people "think" and/or want is what is called "vertical exhaustion". (Here is a  Link  on this subject written by a law firm in CT. I have also referenced this article and this firm in other parts of this website). With Vertical the coverage goes straight up. If the underlying CGL provides coverage to the A-I then the Excess will also. If the underlying is primary the Excess would go 2nd before my own insurance. HOWEVER, it really does not read like that. 

   This issue has really always been true but it is getting more attention and demanding parties now have new demands. The A-I endorsement must be 1st but the Excess Insurance must be 2nd. In other words, they are insisting on Vertical Exhaustion not Horizontal. This, in many ways, is more logical and isn't that what "following form" means? Not really. What we have been discussing here is a 'conditions issue' not a 'coverage issue'. Can we make the process Vertical. Yes---we will discuss that next time for our last BLOG on this subject.