ECO and XPL (extra-contractual obligations and excess of policy limits)

Under US law, an insurer that mishandles a claim can be held liable well beyond what its policy provides. Two situations are distinguished. Extra-contractual obligations, ECO, are damages, often punitive, awarded against the insurer itself for bad faith in handling a claim, for example an unjustified denial or an unreasonable delay. Excess of policy limits, XPL, arises when the insurer refuses to settle within policy limits despite a reasonable opportunity, and the final judgment then exceeds that limit: the insurer must pay the excess. These sums are not covered losses in the strict sense, and an ordinary treaty does not reinsure them. ECO and XPL extensions bring them back in, most often at 90 percent, the insurer retaining a share so that it remains incentivized to handle claims well, and with an exclusion of fraud and deliberate acts by its officers. For the reinsurer, it is an exposure to the cedent's claims handling behavior more than to the insured's risk, underwritten by examining its settlement practices and the judicial environment of the states where it operates.