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U.K. Ruling: Dropdown Clauses Don't Cover Excess Claim
Insurance Law Update
High Court of Justice, Queen’s Bench Division, Commercial Court
The U.K.’s High Court of Justice, Queen’s Bench Division, Commercial Court, held that a dropdown clause does not cover the excess claim of a local policy where the master policy did not provide coverage.
In Flexsys America L.P. v XL Insurance Company Ltd., [2009] EWHC 1115 (Comm), the defendant insurers issued a master policy for public and product liability, subject to the laws of England and Wales, to the claimant’s group of companies. Local policies that derived from the master policy were issued for various regulatory reasons in jurisdictions worldwide. When Flexsys had exhausted the limits of the relevant local policy, it sought to use the “dropdown clause” in the master policy to recover the balance of the disputed claim.
Flexsys contended that the master policy dropped down in place of the local policy to provide the master policy’s higher level of indemnity, even though the claim was not covered under master policy’s terms and conditions.
The court found that the master policy did not include a provision to deal with the scenario where the terms of the master policy are narrower than the local policy. The court concluded, however, that the master policy would not respond unless the claim fell within the master policy’s coverage provisions. Accordingly, the dropdown clause alone would not require the master policy to respond to claims in excess of the local policy where the corresponding master policy did not provide coverage.
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