Excess Judgment Loss

Excess judgment loss is the amount of additional loss that an insurer is required to pay above the policy limit. This is often due to actions on the part of the insurance company that are found to be in violation of good business practices.

Excess judgment loss is awarded by a judge if it is found that the insurance company acted in bad faith when settling a claim. Insurance companies can act in bad faith in a variety of ways. They may use unreasonable or illegitimate ground to deny coverage or refuse to pay claims. They may deliberately slow the process of investigating claims or paying damages. Or they may raise baseless objections as an excuse to deny claims.

When underwriting a new policy, insurance companies set a limit to the amount of loss that the policy will cover in the event of a claim. Insurers are paid a premium for coverage up to this limit, and use the premium to make investments to generate a profit. If the insurer is able to limit the losses resulting from claims, it is able to retain more premiums, and thus be more profitable. This creates a financial incentive to limit claims whenever possible.

While insurance companies have an incentive to limit the amount of money that they pay out in claims, they are still legally obligated to act in good faith when processing a claim. This requirement may result in the insurer being taken to court if a claimant believes that the insurer was either negligent or acting in bad faith while settling a claim. A court may determine that the insurer behaved improperly, and may award the claimant an amount in excess of the policy limit.

An excess judgment loss represents an even deeper loss for the insurance company: not only does the insurer have to pay for losses up to the policy limit, but it also must pay for losses above that limit.

For example, a business purchases a liability insurance policy in order to protect itself from claims made by employees who are injured on the job. The policy provides coverage against losses up to $100,000. During the settlement process, the business believed that the insurer acted in bad faith, and sued the insurer. A court determines that the insurer acted in bad faith, and awards the business $150,000. The difference between the claims limit and the award, $50,000, represents the excess judgment loss.