The Duty to Notify an Excess Carrier: Considerations for Defense Counsel

The relationship between a primary and excess insurance carrier within the context of a catastrophic medical malpractice litigation is fraught with possible pitfalls. While the ultimate battles between primary and excess carriers are often resolved during negotiations between their officers and counsel, defense counsel retained by the primary insurance carrier should be mindful of the potential role that an excess carrier may assume leading up to the final disposition of a catastrophic claim. In this context, we address herein factors such as the duties that may exist between primary and excess insurers; the circumstances in which an excess carrier may be required to “drop down”; cases in which an excess insurer may defend or reimburse defense costs incurred by the insured or the primary insurer; and potential notice issues arising between primary and excess insurers.

An Illustration

For discussion purposes, we turn to the case of Birth Center v. The St. Paul Companies, Inc., 567 Pa. 386, 787 A.2nd 376 (PA. 2001). While this litigation did not directly involve an excess insurance carrier, the factual scenario is a near-textbook example of circumstances that would create a duty for either the insured or the primary insurance carrier to place an excess insurer on notice that its policy reserves might be implicated by the underlying litigation.

Birth Center

arose out of a lawsuit filed in November 1986 against The Birth Center and two physicians, as well as an attending midwife, alleging negligence during the birth of a child at the facility, causing the infant to suffer severe physical injury and permanent brain damage. After service of the complaint, The Birth Center turned to St. Paul, its professional liability insurance carrier, for its legal defense. St. Paul retained counsel, who then undertook defense of the action and an investigation of the claim. St. Paul insured The Birth Center under a professional liability policy with a $1 million policy limit.

Several years after the lawsuit was filed, the parents offered to settle the case within the limits of St. Paul's primary liability policy. The Birth Center, in turn, notified St. Paul and demanded that it settle the case within the primary coverage limits. St. Paul refused to settle and did not even extend a settlement offer.

On more than six separate occasions subsequent to these events, including communications with the trial judge during trial proceedings, demands were repeatedly made upon St. Paul to settle the claim within policy limits. At one point, a representative of the insurance company stated that St. Paul “tries all of these bad baby cases, and we're going to trial.” Thereafter, the jury returned a verdict in favor of the parents, with The Birth Center's ultimate liability calculated in the amount of $4.3 million, which St. Paul agreed to indemnify. In subsequent bad-faith litigation, the Birth Center secured a verdict of $700,000 in compensatory damages against St. Paul.

Although the reported decision in Birth Center v. St. Paul focuses on the contractual obligations between an insured and its primary insurance carrier, the factual setting ' including an extensive series of communications demanding settlement within the primary policy limits, at the risk of an excess verdict ' would clearly implicate the duty of a primary insurance carrier, such as St. Paul, to place an excess carrier on notice of the claim.

Notice Duties Owed to an Excess Insurance Carrier

Issues related to notice communications between insurance carriers, especially in catastrophic loss scenarios, are both fact-sensitive and largely dependent upon the provisions of individual state laws. Most often, the language of the insurance policies at issue defines the nature and scope of the notice requirement. The specific requirements of any individual policy are especially significant in jurisdictions that have not yet decided whether there is a duty extending directly from the primary to the excess carrier.

It is equally clear that lack of notice may affect multiple stages of a claim. For example, initial notification requirements in excess policies may establish the duty of an insured to an excess carrier as well as define the relationship between the primary and excess insurers. As litigation proceeds, and circumstances develop suggesting that the limits of a primary policy could be surpassed by a trial verdict, improper notice may result in settlements becoming unenforceable as to the excess carrier, even when the settlement amount exceeds the primary policy limit.

In considering insurance coverage above and beyond the primary insurance layer, it is important to distinguish between excess and “umbrella” policies. The latter differ from true excess insurance policies because, in addition to covering loss in excess of the underlying insurance limits, umbrella policies also provide “first dollar coverage” for specific risks not covered by primary insurance. “In the latter instance, the umbrella policy is said to drop down to provide primary coverage where the underlying policy provides no coverage at all.” See, e.g., Commercial Union Ins., Co. v. Walbrook Ins. Co., 41 F.3rd 764, 767, n.4 (1st Cir 1994).

Had an excess insurance policy been in play during the Birth Center litigation, it is certainly arguable that the duty to place the excess insurance carrier on notice existed no later than the time after suit was commenced and the medical records initially reviewed by the defendant's counsel. See, e.g., Trustees of the University of Pennsylvania v. The Lexington Insurance Company, 815 2nd 890, 895 (3rd Cir 1987) (“The policy does not postpone the duty to notify until the insured has information from which it may believe itself liable but only until the insured has information that a claim may involve the [excess] policy if the insured is liable.”)

Generally, the insured will bear the burden of proving that an insurer has received complete notice that the insured was either tendering a defense to the excess insurer or placing the excess insurer on notice of a claim potentially implicating its reserves. Appropriate notice should contain information including a broad description of the claim and course of proceedings; an unequivocal and certain demand to undertake the defense, if appropriate; and an offer to surrender control of the litigation, if the matter is advanced to that degree. See, e.g., Purvis v. Hartford Accident and Indem. Co., 877 P.2nd 827, 830 (Ariz. Ct. App. 1994). In many jurisdictions, an insured's failure to provide timely notice does not relieve the insurer of its contractual liability, unless the excess insurer is able to prove that it has been prejudiced. If, however, the insured can establish that “the excess insurers suffered no material prejudice from the delay, the nonoccurrence of the condition of timely notice may be excused because it is not ' a material part of the agreed exchange.” Aetna Cas. and Sur. Co. v. Murphy, 206 Conn. 409, 418 (1988).

As a practical matter for defense counsel, the duty to notify an excess carrier may be resolved during the early stages of discovery. Depending upon jurisdictional requirements, insurance interrogatories often request disclosure of at least one layer of excess insurance above the primary level. While information sufficiently responsive to such discovery may well be available from the primary carrier, many defense litigators will recommend that initial notice of the claim be given to the excess insurer at this time.

That said, as a general rule, the notice requirements of typical excess insurance policies do not mandate immediate notice of an occurrence in a manner comparable to the corresponding provisions in primary policies. Excess insurers are not interested in every accident or occurrence, but only those which may be serious enough to implicate their coverage. See, e.g., American States v. National Cycle, 260 Ill. App. 3rd 299, 311 (1994). Since excess coverage is contingent upon the exhaustion of primary or underlying policies, such primary policies generally do not require the insured to provide notice of an occurrence unless and until a claim is reasonably likely to impact the excess layer. See, e.g., Trustees of the University of Pennsylvania, supra. It follows that notice provisions in many excess policies generally provide the insured with a certain degree of discretion in evaluation of the case, assessment of potential value, and the timeliness of notice to the excess carrier. See, e.g., Employers Liab. Assurance Corp. v. Hoechst Celanece Corp., 43 Mass. App. Ct. 465 (1997).

When Must an Umbrella/Excess Insurer 'Drop Down'?

“Drop down” coverage, in general, refers to the obligation of an excess insurer to indemnify its insured for losses that would otherwise be covered by a primary insurer but for the primary insurer's insolvency. See, e.g., Hartford Accident and Indem. Co. v. Chicago Housing Auth., 12 F.3rd 92, 95 (7th Cir. 1993). In Illinois, for example, excess insurers are not required to “drop down” to assume the primary insurer's coverage obligations. Accordingly, where the language of the excess insurer's policy defines its coverage as in excess of the insured's retained limit (or the limits of the underlying insurance), the risk of a primary insurer's insolvency rests exclusively with the insured, absent clear contract language requiring “drop down” coverage. Id. Illinois law recognizes exceptions to this general rule, as in cases where policy language requires the excess insurer to provide coverage for liability in excess of the “amounts recoverable” from the insured's primary insurance. See, e.g., Donald B. MacNeal, Inc. v. Interstate Fire and Cas. Co., 132 Ill. App. 3rd 564, 567-68 (1985).

Foreseeing Assumption of the Defense by an Excess Insurer

Many excess insurance policies provide that the excess insurer's duty to defend is not triggered until the primary policy limits have been exhausted, as by payment of settlement or judgment. In Arizona, for instance, until the primary carrier offers its policy limit, the excess insurer does not have a duty to evaluate a settlement offer, to participate in the defense, or even to act at all. See, e.g., Twin City Fire Ins. Co. v. Burke, 63 P.3rd 282, 286 (Ariz. 2003). Pennsylvania law, however, recognizes that the duty to provide notice arises when the claim is likely to involve the excess policy, and does not measure the primary carrier's responsibilities in the context of “policy limits,” as Arizona law does. See, e.g. Trustees of the University of Pennsyvania, supra, 815 F.2nd 896.

It is not at all unusual for an excess carrier to become actively involved in the final stages of catastrophic medical malpractice litigation. Once the excess carrier's policy limits are implicated, most insurers prefer to take a more active role in order to properly evaluate the litigation and assist with its resolution, as well as to maximize their opportunity to preserve some or all of the excess policy reserves.

Many times the increased involvement of the excess carrier will impose a corresponding burden upon defense counsel, who will be asked for additional information as the excess carrier formulates its litigation decisions. The excess carrier's decision whether to retain independent counsel will often depend upon the reputation and experience of trial counsel for the primary carrier. In perhaps the majority of cases, excess carriers will defer initially to trial counsel retained by the primary insurer; thereafter, independent counsel may be retained but will either remain “behind the scenes” observing proceedings strictly on a reporting basis, or will become more active by filing an entry of appearance and participating on a formal basis until the case is resolved.

Conclusion

Perhaps the majority of catastrophic medical malpractice claims, regardless of jurisdiction, will potentially implicate excess insurance coverage. Many primary carriers have both the sophistication and experience to address all of the issues raised above, and many others, without imposing additional burdens upon trial counsel. That said, it is important that defense counsel litigating such cases be aware of the limits of the primary insurance policy and continue to analyze the potential value of the case as discovery moves forward. Few, if any, excess carriers will complain that notice of litigation potentially implicating their reserves was provided too early in any given case. Providing adequate and appropriate information as early as possible to both the primary and excess insurers facilitates greater cooperation between the insurers and should ultimately ease the burdens on defense counsel as trial proceedings draw near.

Michael D. Brophy, a member of this newsletter's Board of Editors, is a partner in Goldberg Segalla, LLP, practicing out of the firm's Philadelphia office. Mr. Brophy wishes to recognize the contributions and assistance of his colleague, Patrick B. Omilian, Esq., who serves as Co-Editor-in-Chief of “Excess and Umbrella Insurance, State-by-State Compendium” (Defense Research Institute 2012).

The relationship between a primary and excess insurance carrier within the context of a catastrophic medical malpractice litigation is fraught with possible pitfalls. While the ultimate battles between primary and excess carriers are often resolved during negotiations between their officers and counsel, defense counsel retained by the primary insurance carrier should be mindful of the potential role that an excess carrier may assume leading up to the final disposition of a catastrophic claim. In this context, we address herein factors such as the duties that may exist between primary and excess insurers; the circumstances in which an excess carrier may be required to “drop down”; cases in which an excess insurer may defend or reimburse defense costs incurred by the insured or the primary insurer; and potential notice issues arising between primary and excess insurers.

An Illustration

For discussion purposes, we turn to the case of Birth Center v. The St. Paul Companies, Inc. , 567 Pa. 386, 787 A.2nd 376 (PA. 2001). While this litigation did not directly involve an excess insurance carrier, the factual scenario is a near-textbook example of circumstances that would create a duty for either the insured or the primary insurance carrier to place an excess insurer on notice that its policy reserves might be implicated by the underlying litigation.

Birth Center

arose out of a lawsuit filed in November 1986 against The Birth Center and two physicians, as well as an attending midwife, alleging negligence during the birth of a child at the facility, causing the infant to suffer severe physical injury and permanent brain damage. After service of the complaint, The Birth Center turned to St. Paul, its professional liability insurance carrier, for its legal defense. St. Paul retained counsel, who then undertook defense of the action and an investigation of the claim. St. Paul insured The Birth Center under a professional liability policy with a $1 million policy limit.

Several years after the lawsuit was filed, the parents offered to settle the case within the limits of St. Paul's primary liability policy. The Birth Center, in turn, notified St. Paul and demanded that it settle the case within the primary coverage limits. St. Paul refused to settle and did not even extend a settlement offer.

On more than six separate occasions subsequent to these events, including communications with the trial judge during trial proceedings, demands were repeatedly made upon St. Paul to settle the claim within policy limits. At one point, a representative of the insurance company stated that St. Paul “tries all of these bad baby cases, and we're going to trial.” Thereafter, the jury returned a verdict in favor of the parents, with The Birth Center's ultimate liability calculated in the amount of $4.3 million, which St. Paul agreed to indemnify. In subsequent bad-faith litigation, the Birth Center secured a verdict of $700,000 in compensatory damages against St. Paul.

Although the reported decision in Birth Center v. St. Paul focuses on the contractual obligations between an insured and its primary insurance carrier, the factual setting ' including an extensive series of communications demanding settlement within the primary policy limits, at the risk of an excess verdict ' would clearly implicate the duty of a primary insurance carrier, such as St. Paul, to place an excess carrier on notice of the claim.

Notice Duties Owed to an Excess Insurance Carrier

Issues related to notice communications between insurance carriers, especially in catastrophic loss scenarios, are both fact-sensitive and largely dependent upon the provisions of individual state laws. Most often, the language of the insurance policies at issue defines the nature and scope of the notice requirement. The specific requirements of any individual policy are especially significant in jurisdictions that have not yet decided whether there is a duty extending directly from the primary to the excess carrier.

It is equally clear that lack of notice may affect multiple stages of a claim. For example, initial notification requirements in excess policies may establish the duty of an insured to an excess carrier as well as define the relationship between the primary and excess insurers. As litigation proceeds, and circumstances develop suggesting that the limits of a primary policy could be surpassed by a trial verdict, improper notice may result in settlements becoming unenforceable as to the excess carrier, even when the settlement amount exceeds the primary policy limit.

In considering insurance coverage above and beyond the primary insurance layer, it is important to distinguish between excess and “umbrella” policies. The latter differ from true excess insurance policies because, in addition to covering loss in excess of the underlying insurance limits, umbrella policies also provide “first dollar coverage” for specific risks not covered by primary insurance. “In the latter instance, the umbrella policy is said to drop down to provide primary coverage where the underlying policy provides no coverage at all.” See, e.g., Commercial Union Ins., Co. v. Walbrook Ins. Co., 41 F.3rd 764, 767, n.4 (1st Cir 1994).

Had an excess insurance policy been in play during the Birth Center litigation, it is certainly arguable that the duty to place the excess insurance carrier on notice existed no later than the time after suit was commenced and the medical records initially reviewed by the defendant's counsel. See, e.g., Trustees of the University of Pennsylvania v. The Lexington Insurance Company, 815 2nd 890, 895 (3rd Cir 1987) (“The policy does not postpone the duty to notify until the insured has information from which it may believe itself liable but only until the insured has information that a claim may involve the [excess] policy if the insured is liable.”)

Generally, the insured will bear the burden of proving that an insurer has received complete notice that the insured was either tendering a defense to the excess insurer or placing the excess insurer on notice of a claim potentially implicating its reserves. Appropriate notice should contain information including a broad description of the claim and course of proceedings; an unequivocal and certain demand to undertake the defense, if appropriate; and an offer to surrender control of the litigation, if the matter is advanced to that degree. See, e.g., Purvis v. Hartford Accident and Indem. Co. , 877 P.2nd 827, 830 (Ariz. Ct. App. 1994). In many jurisdictions, an insured's failure to provide timely notice does not relieve the insurer of its contractual liability, unless the excess insurer is able to prove that it has been prejudiced. If, however, the insured can establish that “the excess insurers suffered no material prejudice from the delay, the nonoccurrence of the condition of timely notice may be excused because it is not ' a material part of the agreed exchange.” Aetna Cas. and Sur. Co. v. Murphy , 206 Conn. 409, 418 (1988).

As a practical matter for defense counsel, the duty to notify an excess carrier may be resolved during the early stages of discovery. Depending upon jurisdictional requirements, insurance interrogatories often request disclosure of at least one layer of excess insurance above the primary level. While information sufficiently responsive to such discovery may well be available from the primary carrier, many defense litigators will recommend that initial notice of the claim be given to the excess insurer at this time.

That said, as a general rule, the notice requirements of typical excess insurance policies do not mandate immediate notice of an occurrence in a manner comparable to the corresponding provisions in primary policies. Excess insurers are not interested in every accident or occurrence, but only those which may be serious enough to implicate their coverage. See, e.g., American States v. National Cycle , 260 Ill. App. 3rd 299, 311 (1994). Since excess coverage is contingent upon the exhaustion of primary or underlying policies, such primary policies generally do not require the insured to provide notice of an occurrence unless and until a claim is reasonably likely to impact the excess layer. See, e.g., Trustees of the University of Pennsylvania, supra. It follows that notice provisions in many excess policies generally provide the insured with a certain degree of discretion in evaluation of the case, assessment of potential value, and the timeliness of notice to the excess carrier. See, e.g., Employers Liab. Assurance Corp. v. Hoechst Celanece Corp. , 43 Mass. App. Ct. 465 (1997).

When Must an Umbrella/Excess Insurer 'Drop Down'?

“Drop down” coverage, in general, refers to the obligation of an excess insurer to indemnify its insured for losses that would otherwise be covered by a primary insurer but for the primary insurer's insolvency. See, e.g., Hartford Accident and Indem. Co. v. Chicago Housing Auth. , 12 F.3rd 92, 95 (7th Cir. 1993). In Illinois, for example, excess insurers are not required to “drop down” to assume the primary insurer's coverage obligations. Accordingly, where the language of the excess insurer's policy defines its coverage as in excess of the insured's retained limit (or the limits of the underlying insurance), the risk of a primary insurer's insolvency rests exclusively with the insured, absent clear contract language requiring “drop down” coverage. Id. Illinois law recognizes exceptions to this general rule, as in cases where policy language requires the excess insurer to provide coverage for liability in excess of the “amounts recoverable” from the insured's primary insurance. See, e.g., Donald B. MacNeal, Inc. v. Interstate Fire and Cas. Co. , 132 Ill. App. 3rd 564, 567-68 (1985).

Foreseeing Assumption of the Defense by an Excess Insurer

Many excess insurance policies provide that the excess insurer's duty to defend is not triggered until the primary policy limits have been exhausted, as by payment of settlement or judgment. In Arizona, for instance, until the primary carrier offers its policy limit, the excess insurer does not have a duty to evaluate a settlement offer, to participate in the defense, or even to act at all. See, e.g., Twin City Fire Ins. Co. v. Burke , 63 P.3rd 282, 286 (Ariz. 2003). Pennsylvania law, however, recognizes that the duty to provide notice arises when the claim is likely to involve the excess policy, and does not measure the primary carrier's responsibilities in the context of “policy limits,” as Arizona law does. See, e.g. Trustees of the University of Pennsyvania, supra, 815 F.2nd 896.

It is not at all unusual for an excess carrier to become actively involved in the final stages of catastrophic medical malpractice litigation. Once the excess carrier's policy limits are implicated, most insurers prefer to take a more active role in order to properly evaluate the litigation and assist with its resolution, as well as to maximize their opportunity to preserve some or all of the excess policy reserves.

Many times the increased involvement of the excess carrier will impose a corresponding burden upon defense counsel, who will be asked for additional information as the excess carrier formulates its litigation decisions. The excess carrier's decision whether to retain independent counsel will often depend upon the reputation and experience of trial counsel for the primary carrier. In perhaps the majority of cases, excess carriers will defer initially to trial counsel retained by the primary insurer; thereafter, independent counsel may be retained but will either remain “behind the scenes” observing proceedings strictly on a reporting basis, or will become more active by filing an entry of appearance and participating on a formal basis until the case is resolved.

Conclusion

Perhaps the majority of catastrophic medical malpractice claims, regardless of jurisdiction, will potentially implicate excess insurance coverage. Many primary carriers have both the sophistication and experience to address all of the issues raised above, and many others, without imposing additional burdens upon trial counsel. That said, it is important that defense counsel litigating such cases be aware of the limits of the primary insurance policy and continue to analyze the potential value of the case as discovery moves forward. Few, if any, excess carriers will complain that notice of litigation potentially implicating their reserves was provided too early in any given case. Providing adequate and appropriate information as early as possible to both the primary and excess insurers facilitates greater cooperation between the insurers and should ultimately ease the burdens on defense counsel as trial proceedings draw near.

Michael D. Brophy, a member of this newsletter's Board of Editors, is a partner in Goldberg Segalla, LLP, practicing out of the firm's Philadelphia office. Mr. Brophy wishes to recognize the contributions and assistance of his colleague, Patrick B. Omilian, Esq., who serves as Co-Editor-in-Chief of “Excess and Umbrella Insurance, State-by-State Compendium” (Defense Research Institute 2012).