Two Policies, One Loss
A Flagstaff restaurant owner carries a commercial package policy with a $500,000 building limit and a separate surplus lines policy written for a specific exposure the admitted market would not cover, with a $200,000 limit and a $5,000 deductible. A kitchen fire causes $300,000 in building damage and $60,000 in business interruption. The admitted policy has a $10,000 deductible and includes business interruption. The surplus lines policy covers only the building and contains an 'other insurance' clause stating it is excess over any other valid and collectible insurance. Neither policy was coordinated at placement.
1. Explain how the two policies likely respond and why the order of response matters.
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The surplus lines policy's other insurance clause makes it excess, so the admitted policy responds first on the building loss. The admitted carrier pays up to its $500,000 limit, subject to the $10,000 deductible, which fully covers the $300,000 building damage. The surplus lines policy, as excess, would generally owe nothing on the building because the primary limit was not exhausted.
Business interruption is covered only by the admitted policy, so the $60,000 BI loss is handled there, subject to the same deductible treatment and any BI sublimit.
The order matters because the insured may have believed it had $700,000 of building coverage and $200,000 of dedicated protection. In practice it has $500,000 of primary building coverage and a $200,000 excess layer that sits idle until the primary is exhausted - a very different risk profile than the client probably assumed.
2. What should the agent have done differently at placement, and what should be done at the next renewal?
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At placement, the agent should have read both policies' other-insurance and coordination clauses together and explained the stacking order to the client in writing. The client should have understood that the surplus lines layer was excess, not additive, and that its $5,000 deductible would rarely come into play.
The agent should also have tested whether the admitted policy's limit was adequate on its own, since the excess layer only matters above $500,000. If the building's replacement cost exceeded that, the client needed more primary limit or a lower attachment point on the excess policy.
At renewal: re-run the replacement cost estimate, confirm the other-insurance wording on both policies, and consider whether the surplus lines policy should drop down to a first-dollar or lower-attachment layer for the specific exposure it was written for. Document the coordination discussion in the file.