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An excess insurer is entitled to make its own independent decision, even if the language of the excess policy follows the form of the primary policy.

Mass. court rules excess insurers not bound by primary settlements

An insurer of a so-called “follow form” excess policy is not bound by the decision of a primary insurer to settle a claim, the Massachusetts Supreme Judicial Court has ruled.

The state’s highest court ruled that an excess insurer is entitled to make its own independent decision, even if the language of the excess policy follows the form of the primary policy.

In Allmerica Financial Corporation & others vs. Certain Underwriters at Lloyd’s London, decided on Aug. 6, the state’s high court ruled that underwriters at Lloyd’s of London who issued an excess policy for Allmerica were not as a matter law required to go along with the August, 2001 decision of Allmerica and its primary insurer, Columbia Casualty, to settle a class action relating to the sale of certain life insurance products.

The follow form language in the Lloyd’s underwriters’ policy provided that, “[t]his Policy is subject to the same conditions, limitations and other terms … as are contained in or may be added to the Policy(ies) of the Primary Insurer(s).” The Lloyd’s policy had a liability limit of $10 million, which “shall attach only when the Underlying Insurer [Columbia Casualty] shall have paid or have been held liable to pay, the full amount of the Underlying Limit(s).”

The underlying limit on the Columbia Casualty policy was $20 million, payable after a self-insured retention amount of $2.5 million. Thus the Lloyd’s underwriters’ obligation to pay a covered loss would attach after Allmerica had paid its retention amount and Columbia Casualty had paid its $20 million.

The total cost of the class action and settlement was $39.4 million, including attorney’s fees, relief management and relief payments to class members.

After Allmerica settled the class action lawsuit, it sought indemnification from its insurers. Columbia Casualty had participated in the settlement negotiations and agreed to pay its policy’s limit into the settlement fund.

When Allmerica sought indemnification for the settlement beyond the primary policy’s limits, the underwriters at Lloyd’s denied coverage. Allmerica then filed suit seeking a declaration of coverage. A judge in the Superior Court granted a summary judgment in favor of the Lloyd’s underwriters. Allmerica appealed, and the Supreme Judicial Court assumed the case from the Appeals Court on its own.

According to the high court decision, an insurance program involving a primary policy and one or more excess policies divides risk into distinct units and insures each unit individually: “The individual insurers do not (absent a specific provision) act as coinsurers of the entirety of the risk. Rather, each insurer contracts with the insured individually to cover a particular portion of the risk. Use of a follow form clause is advantageous in crafting such an insurance program because it makes an excess policy a carbon copy of the primary policy, with the only differences being the names of the parties and the coverage limitations. Follow form language thus allows an insured to have coverage for the same set of potential losses (and with the same set of exceptions) in each layer of the insurance program. The language does not, however, bind the various insurers to a form of joint liability should coverage at a prior layer fail. The layer of risk each insurer covers is defined and distinct.”

The court rejected Allmerica’s argument that Lloyd’s adopted not only the language that Columbia Casualty used to describe the coverage and exclusions but also the “intent of the parties” and thus was bound by Columbia’s interpretations of the policy, including any settlements Columbia made.

“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. By adopting the form of 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,” the decision states.

The court noted that coupled with the right of the excess insurer to make its own decision is the risk that it might ultimately face greater liability.