Excess Judgment
A court judgment exceeding the insured's policy limits, potentially exposing the insured to personal liability for the difference.
What It Is
An excess judgment occurs when a court awards damages that exceed the insured's policy limits, leaving the insured personally liable for the difference between the judgment amount and the policy limit. For example, if the insured has a $1M GL policy and the jury returns a $3.5M verdict, the $2.5M excess is the insured's personal responsibility unless umbrella or excess coverage exists.
Excess judgments are particularly significant in the context of the carrier's duty to settle. When a plaintiff offers to settle within policy limits and the carrier unreasonably refuses, exposing the insured to an excess judgment, the carrier may be liable for the full judgment under bad faith theories. This is known as an excess judgment or failure-to-settle bad faith claim. The insured essentially argues that the carrier gambled with the insured's money by refusing a reasonable settlement.
The rise of nuclear verdicts, jury awards exceeding $10M, has made excess judgments more common across commercial lines, particularly commercial auto, general liability, and products liability. Verdicts that were unthinkable a decade ago are now occurring with increasing frequency, making limits adequacy a critical broker advisory function.
Why It Matters for Brokers
Excess judgment exposure is the most severe financial risk a commercial insured faces from a liability claim. Brokers have a duty to discuss limits adequacy with clients and document those conversations. If a broker fails to recommend appropriate limits and the client suffers an excess judgment, the broker faces E&O liability. The nuclear verdict trend has made this conversation more important than ever.
Real-World Example
A trucking company with $1M CSL auto liability and a $5M umbrella receives a settlement demand of $4.5M after a fatal accident. The auto carrier offers $1M. The umbrella carrier is prepared to contribute up to its $5M limit. Combined, they could settle for $4.5M within the total available limits. But the auto carrier insists the case is worth less and refuses the $4.5M demand. At trial, the jury returns a $12M verdict. The auto carrier pays $1M, the umbrella pays $5M, and the trucking company faces $6M in excess judgment exposure. The company files a bad faith claim against the auto carrier for the excess.
Common Mistakes
- 1Not annually reviewing liability limits with clients in light of the nuclear verdict trend, which has made formerly adequate limits dangerously insufficient.
- 2Failing to document the limits discussion and the client's decision when a client declines recommended higher limits.
How brokerageaudit.com Handles This
brokerageaudit.com's Policy Checker evaluates total available limits across primary and umbrella/excess layers for each liability line and compares them against industry benchmarks for the client's revenue and risk profile. The system generates limits adequacy summaries that brokers can present to clients during renewal reviews, with documented evidence of the discussion.