Excess Insurance

Excess insurance is insurance that responds only after primary coverage is exhausted, providing additional limits above the primary policy. Excess coverage is critical for managing liability exposure beyond primary policy limits, a single severe claim can easily exceed $1M-$2M primary CGL limits, leaving the insured personally exposed without excess. The two principal types of excess coverage, following-form excess and umbrella, operate differently. Sophisticated commercial programs typically include multiple excess layers stacked on primary policies for managed liability tail risk.

Following-form excess

Following-form excess coverage adopts the terms of the underlying primary policy with limited modifications. The excess policy typically references the primary policy and provides "follow form" coverage subject to (1) the excess limits, (2) the attachment point, and (3) any specific endorsements or exclusions in the excess policy. Following-form excess is the most common excess structure for CGL, the excess insurer provides additional limits above primary CGL, with the same coverage terms and exclusions. Most M&A and large-project liability stacks use following-form excess for predictable, layered coverage.

Umbrella coverage

Umbrella coverage is broader than following-form excess. Umbrella policies typically: (1) provide excess limits above multiple primary policies (CGL, auto, employer's liability); (2) include "drop-down" coverage where the umbrella responds to losses not covered by primary (filling gaps); (3) have their own coverage terms that may differ from primary; (4) include broader coverage in some areas (e.g., broader personal injury). True umbrella coverage is increasingly rare; most "umbrella" policies are now following-form excess with limited drop-down. Read the policy carefully, the "umbrella" label is sometimes marketing rather than substance.

Attachment point structure

Excess coverage has an attachment point, the threshold above which the excess responds. Common structures: (1) primary $1M, excess $5M xs $1M, primary covers the first $1M; excess covers $5M above $1M (total $6M); (2) primary $1M, $5M xs $1M, $5M xs $6M, three-layer stack with $11M total; (3) quota share excess, multiple excess insurers share the same layer (e.g., 50/50). Higher attachment points typically have lower premium per dollar of limit. Sophisticated programs stack multiple layers from different carriers to diversify counterparty risk and obtain cost-efficient capacity.

The "horizontal" vs. "vertical" exhaustion debate

When losses implicate multiple primary policies (e.g., losses spanning multiple policy years), a key question is whether excess attaches after horizontal exhaustion (all primary policies in all years exhausted) or vertical exhaustion (primary in the year of loss exhausted). Texas law generally follows the policy language; most modern excess policies require horizontal exhaustion of primary coverage in the same policy period. Long-tail losses (environmental, construction defect, mass tort) raise complex attachment issues that have been heavily litigated.

Following the primary's defense

Most excess policies adopt the primary's defense obligations through following-form provisions or specific reference. Some excess policies provide independent defense once primary is exhausted; others "tail in" to existing defense arrangements. Best practice: review excess defense provisions carefully. The "exhaustion" point, when excess defense begins, has substantial cost implications. Sophisticated programs include "drop-down" provisions that allow excess insurers to fund defense before primary exhaustion in appropriate cases.

Stowers-type claims in excess

Excess insurers can pursue the same Stowers-type claims against primary insurers as the insured. American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992), held that excess insurers have a direct right of action against primary insurers for negligent failure to settle within primary limits, shifting the excess judgment loss to the primary insurer that failed to settle. This creates significant pressure on primary insurers to settle within their limits when reasonable demand is made. Excess insurers actively monitor primary settlement decisions in significant cases.

Common provisions and pitfalls

Important excess provisions: (1) concurrent coverage requirements, excess often requires specific primary policies in place; failure to maintain primary can void excess; (2) exhaustion language, when primary is "exhausted" can be ambiguous (paid? agreed to pay? settled by judgment?); (3) insolvency of primary, most excess policies do not "drop down" if primary becomes insolvent; (4) defense within or outside limits, affects total available coverage; (5) specific exclusions, excess may exclude items covered by primary. Sophisticated insureds review excess policies for consistency with primary; gaps and inconsistencies create coverage disputes.