"Shaved-Limits" Endorsements

 The Feb. 1 issue of the Business Insurance publication contains an article on the "shaved-limits" endorsement. It contains, in my opinion, a rewriting of history, attributing an increase in early settlements of D&O coverage disputes to recent use of a "shaved-limits" endorsement in excess policies, thereby requiring excess insurers to recognize that payments by the insured to settle a claim help satisfy the exhaustion of the underlying policy.

In fact, for the past 50 years, the common law rule, as set forth in the well-known Zeig case, has been (and continues to be, absent contrary policy language) that when an insured compromises a claim and pays a portion itself, such payment counts towards exhaustion of the underlying limit. Insurers attempted to circumvent this rule by using contrary language that says exhaustion occurs only through actual payments by the underlying insurers. So, this shaving of limits endorsement is akin to insurers selling ice to the eskimos. They create the problem, then "solve" the problem by selling a shaved-limits endorsement that is far worse than the original common law rule. Crediting such "new" language with helping policyholders to settle cases rewrites the actual history of the past ten years, in which excess insurers held up settlements negotiated through blood, sweat and tears of their insureds by citing their exhaustion language as insulating them from liability.

I believe the best approach is to do away with the exhaustion wording altogether, and go back to the common law rule which favors policyholders.

Peter M. Gillon

Pillsbury Winthrop Shaw Pittman

Washington, D.C.

Peter.Gillon@pillsburylaw.com

Comments

mxmt
  • 02-10-2011

Payment by the Insured towards a claim should not go towards exhausting the Underlying Limits of Liability. Accepting the exhaustion of primary limits or underlying limits by payments made by the Insured places Excess Insurers at a disadvantage. Excess Insurers are placed in a situation exposing them to risk they did not rate for or underwrite to. Excess Insurers should not be prejudiced by unwise settlement negotiations conducted by Insured.