Indemnity payments inside the underlying policy limits do what with respect to the retained limit?

• A. Count toward retained limit
• B. Do not count toward retained limit
• C. Count only if defense costs are included
• D. Are unlimited

Answer: (B)

The key idea is how the retained limit works in a layered liability structure. The retained limit is the portion of a loss that the insured must bear before the excess policy pays. Indemnity payments made inside the underlying policy limits are covered by the underlying insurer and do not reduce or count against the excess policy’s retained limit. In other words, payments that stay within the underlying layer don’t touch the excess layer at all.

For example, if the underlying policy has a limit of, say, one million and the insured’s retention for the excess policy is a separate amount, a claim settled entirely within that underlying limit is handled by the underlying insurer, and the retained limit of the excess policy remains unused. Only the portion that exceeds the underlying policy’s limit would begin to use up the retained limit and trigger the excess policy.

Defense costs, when applicable, aren’t the factor in this specific question, and the retained limit is not unlimited.