Legal Definitions - drop-down clause

A drop-down clause is a provision in an insurance policy that requires an excess insurer to provide coverage to the insured even if the underlying coverage has not been exhausted. This usually happens when the underlying insurers are insolvent and cannot provide coverage.

Let's say a company has a liability insurance policy with a limit of $1 million. The company is sued for $2 million, and the primary insurer pays out the $1 million limit. However, the company still owes $1 million in damages. If the excess policy has a drop-down clause, the excess insurer will provide coverage for the remaining $1 million, even though the primary coverage has not been exhausted.

This clause is important because it ensures that the insured is protected even if the underlying insurers are unable to provide coverage. Without a drop-down clause, the insured would be responsible for any damages that exceed the primary coverage limit.