Category: Claims handling · Reviewed by Mark Fox, Broker · Renewals · Last reviewed 2026-06-11
Allocation across layers is the process of applying a loss in sequence to the layers of an insurance tower — primary, first excess, second excess, and so on — in accordance with the exhaustion and follow-form provisions of each layer.
Most significant commercial insurance programmes are structured as towers of cover: a primary layer (the first to respond), one or more excess layers attaching above the primary, and sometimes a captive at the bottom or a top umbrella above. Allocation across layers determines how a particular loss exhausts each layer and engages the next.
The tower structure provides cost-effective access to large limits. A single insurer rarely offers £100m of capacity for a specialty risk; a tower may stack ten £10m layers from ten different insurers to reach the same overall limit, each layer priced according to its position. The lower layers carry more frequency exposure and are priced accordingly; the higher layers carry only catastrophe exposure and are priced as such.
There is no statutory framework for tower allocation. The discipline is contractual: each layer’s wording prescribes the conditions for its engagement, including the exhaustion condition (typically full payment of the underlying layer in indemnity), the follow-form provisions (the excess layer follows the wording of the underlying, subject to its own additional terms or exclusions) and the maintenance condition (the insured must maintain the underlying cover).
Key English authorities include:
The Teal case is the leading modern English authority on layer exhaustion. The Supreme Court held that the policyholder cannot artificially manipulate the order of claim presentation to trigger excess layers prematurely; losses must be allocated in the order they crystallise.
For Solvency II purposes, the recoverable element of reinsurance and follow-form excess cover is part of the insurer’s reinsurance accounting and credit-quality assessment.
A typical commercial tower for a professional indemnity programme might look like this:
A loss settled for £8m exhausts the primary £2m, the first excess £3m, and £3m of the second excess. Insurer A pays £2m, B and C pay £1.5m each (50% of £3m), and D pays £3m (with £2m of D’s £5m layer left in place for future claims in the period if aggregate cover applies).
In practice this is not always so clean. Coverage disputes arise at the layer boundaries: was the primary really exhausted, or were some payments mis-classified as indemnity when they were really defence costs (some wordings count both, some only indemnity towards exhaustion)? Did the underlying insurer pay below limit on a settlement that should have exhausted, in which case the excess layer may argue the underlying has not been “exhausted by payment”?
The follow-form principle means the excess layer’s coverage tracks the underlying’s wording subject to the excess’s own deviations. Where the excess wording deviates (a different exclusion, a different aggregation provision) those terms govern the excess layer’s response. A coverage opinion on a tower loss must address each layer’s wording, not just the primary.
For aggregate-limit towers, the question is also whether the loss aggregates with other losses to exhaust the aggregate. If the per-occurrence limit is £2m and the aggregate is £4m, a second loss of £1.5m can only call on £2m of remaining aggregate before the second excess engages.
“Drop-down” provisions in some excess wordings allow the excess layer to drop down to the primary’s attachment point if the primary insurer becomes insolvent. Without drop-down, the policyholder bears the gap.
“Aggregating layers” allow multiple smaller losses in a period to aggregate towards layer exhaustion. “Per-occurrence layers” reset for each new occurrence and so do not aggregate.
“Sublimit” layers cover specific exposures within a wider layer — for example, a £500,000 sublimit for cyber within a £5m PI layer. Sublimits exhaust independently of the main limit.
“Co-insurance quota share” within a layer means multiple insurers share the layer in defined proportions. Each insurer pays its proportion; if one becomes insolvent the others’ shares do not increase (subject to drop-down provisions).
“Vertical exhaustion” requires the limits of one year’s tower to be exhausted before another year’s tower is engaged. “Horizontal exhaustion” allows engagement across multiple years simultaneously.
A FTSE 250 company faces a £35m D&O loss following a regulatory enforcement action and parallel civil claims. The tower is structured: primary £5m (insurer A); first excess £10m excess £5m (insurer B); second excess £10m excess £15m (insurer C); third excess £20m excess £25m (insurer D). Settlement totals £35m. Allocation: insurer A pays its full £5m; insurer B pays its full £10m; insurer C pays its full £10m; insurer D pays £10m of its £20m layer. The remaining £10m of insurer D’s layer remains in force for any further claims in the period (subject to the aggregate provision). All four layers participate in the defence-cost component, with the cost-allocation provision in each wording determining how defence costs are paid and whether they erode the indemnity limit.
By Matt Bartlett, Director, on 2026-06-11. Next review: 2026-12-11.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-11. Apex Insurance Brokers Limited, FCA FRN 724952, Companies House 07014570. Not regulated advice — consult your broker on your specific position.
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