Excess Carrier With "Follow Form" Policy Not Bound By Primary Carrier's Coverage Determination
October, 2007
The Massachusetts Supreme Judicial Court recently ruled that an excess insurer that issued a “follow form” policy, with policy terms identical to the primary policy, was not bound by coverage determinations made by the primary carrier. In Allmerica Fin. Co. v. Certain Underwriters at Lloyd’s London, 499 Mass. 621, 871 N.E. 2d 418 (2007), the Court held that an excess carrier was entitled to make an independent coverage determination and was not bound by the coverage determination of the primary carrier, even if the policy language of the excess policy was identical to the language of the primary policy. The Court reasoned that binding the excess carrier to coverage decisions made by the primary carrier will undermine the distinct and separate nature of the primary and excess carriers’ contracts with the insured.
The case is the result of a federal class action lawsuit filed in 1997, by Plaintiffs alleging that Allmerica Financial Corp., a life insurance company, made misleading sales presentations, induced unnecessary purchases of insurance and improperly marketed its products. Columbia Casualty Company insured Allmerica under a primary policy with limits of $20 million. Certain Underwriters at Lloyd’s (“Lloyd’s”) insured Allmerica under an excess “follow form” policy with limits of $10 million. A “follow form” policy is one in which the excess insurer includes a clause stating that the excess policy “follows the form” of the primary policy and, therefore, contains the same terms, conditions and exclusions as the primary policy. Allmerica settled the class action suit in 2001 for $39.4 million. Columbia Casualty paid the $20 million limit of its policy toward the settlement; however, Lloyd’s refused to pay the remaining $19.4 million, citing certain policy provisions that excluded coverage. Allmerica then filled a lawsuit in Massachusetts Superior Court claiming that Lloyd’s was required to pay the remainder of the settlement amount because the Lloyd’s policy followed the form of the Columbia Casualty policy. In 2004, Judge Peter W. Agnes of the Superior Court found that Lloyd’s was not bound by Columbia’s coverage decision. Allmerica appealed, and the case was transferred directly from the appeals court to the Massachusetts Supreme Judicial Court.
During the underlying class action lawsuit, Allmerica was in contact with both Columbia Casualty and Lloyd’s, although Columbia Casualty was more active in the settlement discussions. In October, 1998, Columbia Casualty gave its consent to Allmerica to settle the class action lawsuit and agreed to make indemnity payments. In August, 2001, Allmerica and Columbia Casualty executed a “Settlement Agreement and Release” wherein Columbia Casualty agreed to pay the entire primary policy limits toward the class action settlement. The Release specifically stated that the “release shall not include any rights or claims for coverage under any excess insurance policies.” Furthermore, the Settlement Agreement and Release included a “No Admissions” clause that provided: “The parties understand and agree that nothing in this Agreement shall be construed or taken as an admission of liability on the part of any of the Parties with respect to the allegations and claims asserted in the [class action], or an admission of coverage or lack of coverage for the claim for coverage submitted by Allmerica under the Policy.”
Although Lloyd’s did not participate in the settlement negotiations, Allmerica did provide Lloyd’s with periodic progress reports. At all times, Lloyd’s reserved its right to coverage. As the settlement negotiations neared a conclusion, Lloyd’s informed Allmerica that it lacked sufficient information to make a coverage determination before the court-imposed settlement deadline. However, Lloyd’s agreed not to assert Allmerica’s failure to obtain its written consent as a defense against any claim Allmerica might bring against Lloyd’s. In January, 2000, eight months after approval of the class action settlement, Lloyd’s denied Allmerica’s claims for indemnity. Lloyd’s generally disclaimed coverage for any loss encompassed by the settlement and cited to the excess policy’s exclusions for wrongful acts alleged in claims prior to the effective date of coverage, and for claims based on promises of future performance. In response to Lloyd’s denial of coverage, Allmerica filed suit in the Superior Court in September, 2002.
Allmerica claimed that Lloyd’s was obligated to provide coverage for the class action settlement because the Lloyd’s policy was a “follow form” excess policy. Allmerica claimed that a “follow form” policy adopts both the language used in the primary policy to describe coverage and exclusion and the intent of the parties to the primary policy. Therefore, Allmerica concluded that Lloyd’s intended to be bound by Columbia Casualty’s interpretation of the policy, including Columbia Casualty’s decision to provide coverage for the class action settlement.
The Supreme Judicial Court of Massachusetts rejected Allmerica’s argument, finding that excess carriers act independently of primary carriers and are not bound by decisions made by primary carriers, even when the excess carrier’s policy follows the form of the primary policy. The Court stated: “An excess carrier’s intent to incorporate the same words used in a separate agreement between the primary insurer and the insured does not imply an intent by the excess carrier to accept decisions made by the primary carrier about the extent of its obligations under its own agreement.” The Court highlighted the separate nature of the two policies by further stating: “By adopting the form words used by Columbia Casualty, the underwriters did not also cede to it the right to make decisions about the underwriters’ obligation to perform in various circumstances. To conclude otherwise would undermine the distinct and separate nature of each insurer’s contract with Allmerica.”
Learning Point: The Court’s decision reaffirms the right of excess carriers to make coverage decisions independent of the primary carriers, even when a “follow form” excess policy contains identical terms and conditions to the primary policy. Insureds, in particular, should be aware that an excess carrier may deny coverage where a primary carrier has provided coverage. Ultimately, settlement with the primary carrier does not guarantee the same coverage from the excess carrier, regardless of the similarity in the coverage forms.
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