No insurer carries the risk of a large project alone. Beyond a few tens of millions, cover is built in layers: a primary policy up to a certain amount, then one or more excess layers taking over once the previous one is exhausted. That architecture is well known and looks simple, since it is drawn as a stack. The difficulties it produces come not from the stacking itself but from the fact that each floor is a separate contract, negotiated separately, sometimes on different dates and through different brokers, and that a separate contract carries its own definitions.
The follow-form clause is supposed to settle this: an upper layer declares that it follows the primary's terms, and thereby inherits its definitions, extensions and exclusions. The problem is that the clause almost always comes with reservations, phrased innocuously, of the type except as otherwise stated herein or subject to the particular conditions set out below. Those reservations reopen every point they name, and the upper layer then stops following exactly where the contract says it does, that is, at the points somebody took the trouble to change, therefore at the points that mattered to them.
The definition of an event produces the heaviest divergences, and the typical example arises on natural events. The primary uses an extended definition, aggregating into one loss everything flowing from a single cause. The upper layer has taken an hours clause borrowed from another market, aggregating only what occurs within a seventy-two-hour window. On an ordinary windstorm the two definitions coincide and nobody notices. On a flood developing over eight days, the primary sees one loss, exhausts its limit, and the upper layer sees three distinct losses none of which reaches the attachment point.
That gap must be named for what it is, because it resembles nothing one usually looks for. It is not an exclusion, no wording says the damage is uncovered. It is not a shortfall of limit, the program's total capacity far exceeded the loss. It is a discontinuity between two contracts each coherent on its own: each reads faultlessly, and it is their juxtaposition that opens the breach. A policy audit examining the contracts one by one does not see it; only a cross reading, definition by definition, brings it out.
The attachment point deserves the same attention, because it is the exact place of the join. An upper layer responds above an amount, and that amount must match what the layer below actually pays. Yet the two can diverge in several ways: if the primary settles commercially below its limit, the upper layer is not obliged to treat its attachment point as reached; if the primary has been exhausted by earlier losses, the upper layer's attachment point has not come down for that; and if the primary carries automatic reinstatement and the upper layer does not, the project's second year runs on a different architecture from the first with no endorsement having been signed.
Coinsurance, described in the module on the single policy, combines here with layering and the two notions must be held apart, as they are regularly confused. Coinsurance is horizontal: several insurers share one layer in fixed shares, on the same terms, and a disagreement shows up as a partial settlement. Layering is vertical: several contracts follow one another in height, on terms that may differ, and a disagreement shows up as a gap. A real program combines both, so one must read in two directions: what are the shares on each floor, and which definitions change from one floor to the next.
That leaves the act that brings the flaw out before it costs anything, and it fits on one page. One lists the notions that decide the amount: the definition of an event, the policy period, the definition of the insured, the treatment of design defect, the reinstatement conditions, the deductible and how it applies. Those go in rows, the layers in columns, and the grid is filled by reading each contract. Any cell differing from the column to its left is a potential gap, and there are never many, generally two or three. That grid is made when the program is placed, in two hours, and it is not remade after a loss, where one only discovers which of the cells mattered.
A port project is covered by a three-layer program: a 40 million euro primary, a first excess layer of 60 million above 40, and a second of 100 million above 100. The primary defines an event as all damage arising from one cause, with no time limit. Both excess layers carry a follow-form clause with the usual reservation, and the first of them has taken, in its particular conditions, a 72-hour hours clause for natural events. An exceptional flood develops from November 3 to 11 and damages the works in three successive waves: 34 million, 29 million and 21 million, that is 84 million in all. How does the program respond?
The primary applies its own definition: one cause, therefore one loss of 84 million, of which it pays its 40 million limit. So far everything works as intended. The first excess layer applies its own, and that is where the program comes apart: with a 72-hour window, the three waves are three losses of 34, 29 and 21 million, and none reaches the 40 million attachment point. It owes nothing. The second layer, which follows the first, is no more concerned. The project owner is therefore out 44 million on a program with 200 million of capacity, with no exclusion raised and no limit having been insufficient. The reflex is to look for who was at fault: nobody. The primary is coherent, the excess layer is coherent, and it is their juxtaposition that opens the gap. The non-obvious point is one of provenance: that hours clause is not a drafting error, it was deliberately inserted into particular conditions by somebody who knew it well from another market, where it describes a windstorm very accurately. It describes nothing of an eight-day flood. The definitions grid, made at placement, would have shown it in one line.
- 01Each floor of a program is a separate contract, negotiated separately: the follow-form clause ties it to the primary, its reservations detach it precisely where somebody wanted to change something.
- 02The definition of an event produces the heaviest divergences: two definitions that coincide on a windstorm diverge on an eight-day flood, and the gap appears only then.
- 03That gap is neither an exclusion nor a shortfall of limit: it is a discontinuity between two coherent contracts, invisible to an audit reading them one by one.
- 04The attachment point may not be reached even though the primary is exhausted: commercial settlement, exhaustion by earlier losses, reinstatement present on one side and absent on the other.
- 05Coinsurance and layering are read in two directions: the shares on each floor, and the definitions that change from floor to floor. A two-hour grid at placement reveals them.