In a recent decision, the Massachusetts Supreme Judicial Court ruled that an excess professional liability insurer is not bound by the decision of a primary insurer to settle a claim.

In Allmerica Financial Corporation et al vs. Certain Underwriters at Lloyd's, London, Massachusetts' highest court ruled that an excess insurer is entitled to make its own decision with respect to whether coverage exists for a settled claim, even if the language contained in the excess policy follows the form of the primary policy. This case echoes similar rulings from other jurisdictions.

Furthermore, it demonstrates that unless the wording of an excess policy expressly provides otherwise, “follow-form” language does not necessarily mean “follow-form” coverage.

The facts of the case were these. The insured, Allmerica Financial Corporation, had primary liability coverage of $20 million in excess of a $2.5 million self-insured retention with Columbia Casualty Company. The primary policy included an “Insurance Company Professional Services Liability” provision, which provided coverage for Allmerica and its agents.

Allmerica also held a $10 million excess policy issued by Certain Underwriters at Lloyd's, London. The Lloyd's excess policy contained “follow-form” language confirming it was “subject to the same conditions, limitations and other terms…as are contained in or may be added to the policy(ies) of the primary.”

In October 1997, Allmerica was the subject of a class action lawsuit arising from alleged improper business practices in the sale of life insurance and annuity products. Without admitting liability, Allmerica settled the lawsuit in May 1999 for approximately $39.4 million.

Allmerica kept both Columbia and Lloyd's apprised of developments in the class action and its settlement negotiations.

Ultimately, in a settlement of its own with Allmerica, Columbia agreed to pay its policy limit toward funding the class action settlement.

Columbia's settlement with Allmerica, however, contained a “no admission” clause, which expressly rejected any admission of coverage for the claim submitted by Allmerica under the primary policy. Interestingly, although this clause was recognized by the Massachusetts Supreme Judicial Court in its decision, it ultimately played no role in the court's ruling.

As Columbia's primary policy limit did not cover the entire amount of the settlement, Allmerica sought indemnification from Lloyd's for the amount in excess of the primary policy's limits.

Lloyd's denied coverage citing various exclusions of the primary policy. Thereafter, Allmerica commenced a lawsuit against Lloyd's seeking a declaration of coverage. On Sept. 30, 2004, the trial judge granted summary judgment to Lloyd's, finding, among other things, that Lloyd's, as excess carrier, was not bound by Columbia's decision to settle. The trial judge also ruled that coverage for the settlement was excluded under the primary policy.

In a unanimous decision, the Supreme Judicial Court affirmed the trial court's ruling that an excess carrier is not bound by the settlement decision of a primary insurer. The court explained that under Massachusetts law, insurers providing excess cover on a follow-form basis as part of an insurance program do not serve as a “coinsurers of the entirety of the risk.”

The court explained that in such a program, “each insurer contracts with the insured individually to cover a particular portion of the risk.”

Furthermore, the follow-form language in the excess policy does not bind the various excess insurers to “form a joint liability should coverage at a prior layer fail.”

The court then acknowledged that Massachusetts courts have consistently recognized that an excess insurance policy is a separate and distinct contract from a primary policy.

In response to Allmerica's argument that the intent of the parties was that the excess carrier be bound by the primary carrier's interpretation of the primary policy, the Supreme Judicial Court explained that:

“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….To conclude otherwise would undermine the distinct and separate nature of each insurer's contract with Allmerica.”

The court concluded that “absent an explicit contractual commitment to do so, an insurer is not bound by the settlement another insurer makes for the same claim, even if the language of the nonsettling policy follows the form of the settling policy.” Notably, the court acknowledged that inherent with the right of an excess insurer to make its own decisions with respect to coverage is the risk that it might ultimately face greater liability.

Unfortunately for Lloyd's, however, the court also overturned the trial court's rulings that exclusions in the primary policy barred coverage for the settlement. The court remanded the case to the trial court for further proceedings concerning the issue of whether coverage existed for the class action settlement.

The Allmerica decision confirms that merely because an excess policy includes “follow-form” language, the excess carrier still has the right to make an independent coverage analysis for a particular claim.

The opinion emphasizes that excess insurers act independently, and that each layer of risk covered by an insurer is separate and distinct, unless the “follow-form” policies expressly provide otherwise.

Attorney John D. Hughes is a partner in the insurance and reinsurance department of Edwards Angell Palmer & Dodge, a national law firm. He may be reached at jhughes@eapdlaw.com.

Attorney Robert D. Laurie is an associate also in the firm's insurance and reinsurance department. He may be reached at rlaurie@eapdlaw.com.

Special Reports /

Mass. High Court Says Excess Carrier Not Bound By Primary's Settlement Decision

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