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Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policy holders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. Lisa: Good morning, and welcome back to Insured Success. My name is Lisa Szymanski, and I am joined by my colleagues Catherine Lewis and Liz Vieyra to talk about some topical issues relating to insurance towers and how policyholders can take steps to manage what can often be very complex towers of insurance. On this podcast, we are sharing our views across international offices. Great to have you both here with us. So the majority of Reed Smith's clients are international clients operating across jurisdictions and seeking insurance for a wide range of risks. Our clients very often have a need for high limits. For example, they may operate in particularly risky sectors, by way of example, the energy sector or the transportation sector, where a loss has the potential to be catastrophic and therefore pierce multiple layers of a tower. Capacity reasons may make it necessary to approach multiple insurers in multiple markets. There may be limited capacity in certain markets. For example, D&O has seen high claims volume of late, and some years have high numbers of natural disasters, which squeeze the property market. Accordingly, it is not uncommon to have a range of London market, Lloyd's Syndicates, Bermuda, and U.S.-based insurers on any given risk. There may be local law issues which require placement of a primary policy in a certain jurisdiction, which is then reinsured in one or multiple global reinsurance markets. We will split this podcast into a few sections. First, we will discuss issues relating to continuity of cover. Second, we will look at issues regarding continuity of approach in the event a dispute occurs. For example, issues of governing law and forum. And finally, we will summarize our top tips for policyholders. But before we get into the detail, Catherine, could you tell us what we mean when we talk about an insurance tower? 

Catherine: Right. So I'm going to assume that our listeners are all familiar with insurance generally. What we typically see is a primary policy or even a captive policy, which will respond to the first amount of loss over any deductible up to an agreed limit of liability. As you say, Lisa, the majority of our clients are major international companies with complex insurance arrangements. A single policy and a single limit of liability may be unlikely to provide them with the full cover that they need. And as you said, Lisa, there's a whole range of reasons why a policyholder may need more cover than a single insurer is able to provide. So these additional policy limits might be achieved by purchasing additional individual policies with different insurers which sit above the original policy. So for example, a primary policy might provide 50 million US dollars of cover, the next layer might be a further 25 million US dollars in excess of the original 50 million. And you might have a further layer providing an additional 50 million in excess of the 75 million dollars we've already talked about. So on that analysis, the tower would provide 150 million dollars of insurance cover in total. Ideally, the policies higher up the tower, but not always, which are written by different insurers are done so on identical terms as the primary policy. But I mean, we can discuss this in some more detail in a moment. There are some problems that can arise. 

Lisa: So as I mentioned earlier, the first topic we are going to discuss concerns continuity of coverage and issues that might arise where the scope of coverage is different in different layers and different policies. Liz, could you you tell us a little bit about your experience of these types of issues that can arise? 

Elizabeth: Sure. So if I had to kind of bracket it in two buckets, I think the two areas of discontinuity I've seen are regarding coverage terms, so the substantive coverage terms, and also regarding dispute resolution terms. So regarding coverage terms, I've seen towers in which certain layers of coverage above the primary incorporate unique requirements or limitations. Limitations so an example of a unique limitation might be an exclusion incorporated in one layer of coverage that's not in the primary another kind of unique requirement for example might be a requirement for attachment so it's not uncommon that a layer of coverage would include a requirement that underlying coverage have paid full limits of liability before it attaches but that kind of requirement might not necessarily be in an underlying layer an underlying layer might say something like, just that the policyholder have had to incur cover laws before attachment of limits. So this kind of continuity, a policyholder would have to be mindful of it when thinking about settling underlying layers. And as to dispute resolution, it may occur that policies in the same tower are subject to different laws and different jurisdictions. So as both you and Catherine discussed, insurers are often from different jurisdictions, and that insurer might might have a requirement that the policyholder agree to accept the law of its jurisdiction. But if the primary policy has a different law in a different jurisdiction, the policyholder might find themselves in a situation where they can't join all the insurers in a single action in a single forum because of the differing requirements. 

Catherine: That's incredibly interesting, Liz. Thank you. I mean, just from a kind of English law perspective. We see very much similar things and some examples that come to my mind that it's not uncommon for certain jurisdictions for a policyholder to be required to have a local policy in place within its global insurance program. So for example, in Japan. But from our perspective, it's always ways important that where possible, the cover afforded under any local policy is replicated in any sort of further insurance tower or within the global program to ensure the point that Liz was making about having continuity of cover. The other issue I see arising, which goes to the second point, as a matter of English law, policyholders and insurers have various obligations under the Insurance Act. The Insurance Act is a broad topic for another podcast, but in essence, there are various obligations on policyholders to make a fair presentation of the risk that's to be underwritten, which on its face may be more burdensome than in other jurisdictions. However, there are also limitations on the remedies available to insurers and specifically limitations on the circumstances in which an insurer can avoid the policy. So clearly, to have different remedies available under different layers of an insurance tower, depending on the governing law of that policy or indeed different obligations owed to the various insurers when you're placing the policy can cause a policyholder quite a headache. 

Lisa: That certainly seems to be the case. So I think the takeaway here from what I'm hearing you both say is that it seems very important for policyholders to work closely with their brokers when their insurance is placed to ensure that the broker fully understands the nature of the policyholder's business and to ensure that the policyholder fully understands the nature of the protection that they have purchased. One point that I can raise in my experience is that you should make sure that you receive the policies promptly after the inception of the policy period. So, for example, I've seen situations where the policyholder thought all of its disputes would be litigated in court based on what binders of the various layers of coverage said. But once the actual policy was issued, and it was issued much later after the loss had occurred, in fact. One of the layers said something different and required an arbitration. Thus, the policyholder was very surprised to learn that it needed to arbitrate in a foreign forum. I've also seen situations, which I think Liz touched on, where a key exclusion appeared in one layer but not in others, and that had quite a big impact on the total recovery throughout the layers. Once a loss happens or once a dispute around coverage for that loss occurs. Policyholders may be in for a surprise if they don't have a solid understanding of how the layers in their insurance tower fit together. So try to be mindful of that on the front end. And the second topic for today's discussion is looking at issues surrounding the continuity of approach in the event of dispute. And Catherine, I think you have some recent experience in this field. Could you tell us what your English law view is? 

Catherine: Certainly. In complex insurance tower situations, it might not have been possible, or perhaps, as you say, Lisa, the policyholder might be unaware, well, that there are not the same governing law and jurisdiction clauses in each policy layer. For example, and we've touched on this briefly, the first few layers might have a clear governing law and jurisdiction clause in favour of local courts, but perhaps for capacity reasons, additional cover was obtained in London or Bermuda or other US insurance markets, and insurers in those markets might have insisted on their own law and jurisdiction clauses. In addition, insurers might seek to include either arbitration clauses or insist on the jurisdiction of the English clause, or it might be a Bermuda form policy, which is broadly a New York law governed policy, but the procedural aspects of the arbitration is governed by Bermudian or English laws. Causing that, even if there are consistent arbitration clauses across policies, due to the confidentiality attaching to each arbitration, even if you have what looks like aligned dispute resolution clauses across your programme, a policyholder might find it difficult to read agreement with the insurers to have all of those coverage issues determined together due to the confidential nature of each individual arbitration. In our experience, there is usually very little incentive for an insurer to save the policyholder money if there is a coverage dispute. 

Elizabeth: Right. There may also be differences in the procedural requirements across different jurisdictions. So speaking about the costs and the burden on the policyholder, discovery in U.S. courts is typically more extensive as compared to disclosure and arbitration. For example, under some arbitration rules, parties don't conduct depositions at all. rather they just prepare written witness statements. So a policyholder undertaking proceedings regarding the same tower of coverage but concerning different layers of insurance and in different forums may have to duplicate efforts particularly in the area of discovery because of these different procedural requirements. 

Catherine: Exactly Liz, as we all know the last thing one of our clients needs when it has suffered a serious loss and where coverage is being challenged is to have to resolve the issue of the governing law or the court in which the dispute should be heard. 

Lisa: I totally agree with that, Catherine. I have had multiple proceedings for a client arising out of a single loss over the course of years because the insurers were not willing to proceed in a single arbitration. This is not only costly, but it takes more time for the client to receive payment as the policyholder has to wait until all the arbitration from their force to be paid in full. We should also be mindful of the risk of inconsistent coverage decisions in different jurisdictions. While the decisions of an arbitration panel are confidential, court decisions are not. The additional impact of inconsistent decisions mean that there is a risk of gaps in cover, with some of the loss being suffered effectively being self-insured or uncovered. So, on to some practical tips. This all sounds incredibly daunting for many insurers, but it is possible to navigate some of the challenges. Liz, could you tell us what some of your top tips are? 

Elizabeth: Right. So I probably have three big tips that I would give to a risk manager or someone purchasing a tower of insurance. The first one would be to have clear contractual policy documentations in place with all the operative terms in a single agreement. And if that can't be done in a single place. So, of course, it's very common for excess layers to incorporate terms from the primary policy. That's called follow form and is standard and, in fact, probably ideal. Deal and for policy documents to reference schedules or other external documents. So this is a perfectly standard practice, but it's just important for the policyholder to make sure to maintain final copies of all of the operative documents so that there is not a confusion about what terms are incorporated. The second tip is to liaise closely with brokers and make sure the brokers understand the risk and your business. This is just an important step for any kind of coverage, but particularly with purchasing a tower of insurance, the broker has to understand the policyholder's business to align the coverage with what the risks of the business are. And the third tip I give is to align governing law and jurisdiction throughout the tower as far as possible to avoid the fights and the kind of duplicative costs that we described earlier. This might not always be possible. Many insurers require that a policyholder agree to litigate disputes in the insurance company's forum. But to the extent it's possible, it's ideal. And where it's not possible, the policyholder should just be aware. 

Catherine: I completely agree with these, Liz. And as you say, I'd add that it's not always practical to avoid approaching insurers in different markets. Sometimes it's absolutely necessary in order to get the best capacity at the best price. When it comes to renewal, the priority is often achieving the lowest premium for the maximum cover and depending on the risk in question a policyholder might have limited options in terms of capacity. As you say it's always key to be aware of what it is that is being purchased and the terms of that. Another tip of mine is to try and maintain some consistency with the insurers on the tower so far as possible year on year. Where I'm coming at in terms of the advantage of this is that it ensures that insurers keep some skin in the game. So if there is a big loss in one year, an insurer will be more motivated to reach an agreement or a settlement on that loss if they are still on risk in other years. Even if it's not possible to keep the same insurers at the same level, so it's not impossible to keep your primary insurer or your first or second excess at that level for numerous years, keeping them in the tower even at a higher access layer might mean that they can be brought to the table to discuss losses on other years. 

Lisa: Thanks very much, Catherine and Liz. I think the two ways from this morning's discussion are, first, policyholders should ensure that they work closely with their brokers. They should make sure their broker understands their company's business, as well as its objectives and preferences. Second, at the time of placement or renewal, policyholders should be sure to be engaged in the process. ask questions to ensure that you are making an informed decision about what you are purchasing. And I think this goes to the point that Catherine just raised. For example, we understand that premium considerations are sometimes driving the deal in terms of saving a little bit of premium versus being an insurer who's been on the risk for many years in the tower. You want to make sure you fully understand the costs and benefits of saving some money versus keeping an insurer in the tower who's been there for a long time. And finally, third, in the event of a loss and a subsequent dispute about that loss, neither of which we hope occurs, hers. Policyholders should consult with an insurance coverage team like that at RedMet that has expertise across the globe so that we can, you know, present a unified front and assist you with, you know, a law that may have happened, for example, in Canada, but that implicates policies in the U.S. and London. So thanks, everyone, for listening to today's podcast, and we hope that you enjoyed this episode. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean and reedsmith.com. To learn more about Reed Smith's Insurance Recovery Group, please contact insuredsuccess@reedsmith.com. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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