UK Court Declares That Master Insurance Policy Does Not Drop Down Leaving Insured with A Multi-Million Dollar Gap in Coverage

Posted by

Flexsys America L.P. and XL Insurance Company Ltd. (2009 EWHC 1115)


Flexsys America is an Ohio Corporation and subsidiary of a global company based in Belgium. Flexsys purchased a Public and Products Liability Policy from XL Capital Group, termed “Master Policy,” by the Court, and provided US$25 Million in coverage.  Flexsys was also insured under a XL Capital Group Commercial General Liability policy issued in Ohioand providing US$1 Million in coverage.

The plaintiff “KKPC” filed suit against Flexsys alleging that Flexsys engaged in a range of illegal and improper conduct in an effort to monopolize the American market concerning rubber products. Flexsys incurred legal costs in excess of US$2 Million. XL remitted payment of US$1 Million to cover the defense costs, exhausting the CGL policy. Flexsys then sought payment for the remaining costs and coverage under the Master Policy. The Master Policy contained a number of relevant provisions, including the following:


Memorandum D: Difference in Conditions

This policy will provide indemnity where the terms and Conditions hereon are broader than the local policy for an Insured company outside Great Britain Northern Ireland the Channel Islands or the Isle of Manin respect to claims made which are not recoverable under such local policies.

Memorandum E: Drop Down Clause

In the event of partial exhaustion of a local policy this Policy will pay in excess of the reduced underlying Limit of Indemnity.


In the event of total exhaustion of a local policy this Policy will continue in force as the underlying insurance subject to the terms Exceptions and Conditions of the particular local Policy. 


Flexsys’ contention was simple, the local policy (CGL policy) was exhausted and, under the second sentence of Memorandum E, the Master Policy dropped down to provide further coverage. XL denied the policy operated in this fashion, i.e., essentially as an excess policy for a single loss that exhausts the local policy.


Initially, the Court noted that coverage under the Master Policy was narrower then under the local policy, and the claims levied by KKPC would not be covered. Since the policy expressly states it will provide coverage where the terms of the Master Policy are broader then the local policy, the policy would indicate that coverage would be available in a situation such as the instant case – where the claim is outside the scope of coverage under the Master Policy.


Regardless, the Court rejected Flexsys’ contention and held that based on the terms of the policy it is unlikely it was intended for the Master Policy to simply provide excess coverage for any claim that exhausts the local limits. In interpreting the coverage provided under the drop down clause the Court stated:

It provided a reinstatement of the local policy to be available to meet subsequent claims, i.e. claims subsequent to that or those which achieve total exhaustion of the local policy. It provides new cover from the ground up, but subject, as is logical to the local terms, conditions and limits. It means that in the case of either partial or total exhaustion there is cover available from the ground up for the next claim. [emphasis added]


Accordingly, the drop down provision did not function to create a layer of pure excess coverage where a single claim exhausts the limit of liability for the local policy, rendering Flexsys uninsured for this loss, with respect to the Master Policy.


Moreover, the Court held there was no duty to defend as the allegations contained in the complaint were devoid of any claim of negligence and clearly outside the scope of coverage provided.


For a copy of this decision click here


By Brian R. Biggie and Sharon Angelino