In a decision last year, the Massachusetts Supreme JudicialCourt ruled that an excess professional liability insurer is notbound by the decision of a primary insurer to settle a claim.

In Allmerica Financial Corporation et al vs. CertainUnderwriters at Lloyd's, London, Massachusetts' highest court ruledthat an excess insurer is entitled to make its own decision withrespect to whether coverage exists for a settled claim, even if thelanguage contained in the excess policy follows the form of theprimary policy.

This case echoes similar rulings from other jurisdictions.

Furthermore, it demonstrates that unless the wording of anexcess policy expressly provides otherwise, "follow-form" languagedoes not necessarily mean "follow-form" coverage.

The facts of the case were these. The insured, AllmericaFinancial Corporation, had primary liability coverage of $20million in excess of a $2.5 million self-insured retention withColumbia 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 byCertain Underwriters at Lloyd's, London. The Lloyd's excess policycontained "follow-form" language confirming it was "subject to thesame conditions, limitations and other terms...as are contained inor may be added to the policy(ies) of the primary."

In October 1997, Allmerica was the subject of a class actionlawsuit arising from alleged improper business practices in thesale of life insurance and annuity products. Without admittingliability, Allmerica settled the lawsuit in May 1999 forapproximately $39.4 million.

Allmerica kept both Columbia and Lloyd's apprised ofdevelopments in the class action and its settlementnegotiations.

Ultimately, in a settlement of its own with Allmerica, Columbiaagreed to pay its policy limit toward funding the class actionsettlement.

Columbia's settlement with Allmerica, however, contained a "noadmission" clause, which expressly rejected any admission ofcoverage for the claim submitted by Allmerica under the primarypolicy. Interestingly, although this clause was recognized by theMassachusetts Supreme Judicial Court in its decision, it ultimatelyplayed no role in the court's ruling.

As Columbia's primary policy limit did not cover the entireamount of the settlement, Allmerica sought indemnification fromLloyd's for the amount in excess of the primary policy'slimits.

Lloyd's denied coverage citing various exclusions of the primarypolicy. Thereafter, Allmerica commenced a lawsuit against Lloyd'sseeking a declaration of coverage. On Sept. 30, 2004, the trialjudge granted summary judgment to Lloyd's, finding, among otherthings, that Lloyd's, as excess carrier, was not bound byColumbia's decision to settle. The trial judge also ruled thatcoverage for the settlement was excluded under the primarypolicy.

In a unanimous decision, the Supreme Judicial Court affirmed thetrial court's ruling that an excess carrier is not bound by thesettlement decision of a primary insurer. The court explained thatunder Massachusetts law, insurers providing excess cover on afollow-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 insurercontracts with the insured individually to cover a particularportion of the risk."

Furthermore, the follow-form language in the excess policy doesnot bind the various excess insurers to "form a joint liabilityshould coverage at a prior layer fail."

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

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

"An excess carrier's intent to incorporate the same words usedin a separate agreement between the primary insurer and the insureddoes not imply an intent by the excess carrier to accept decisionsmade by the primary carrier about the extent of its obligationsunder its own agreement....To conclude otherwise would underminethe distinct and separate nature of each insurer's contract withAllmerica."

The court concluded that "absent an explicit contractualcommitment to do so, an insurer is not bound by the settlementanother insurer makes for the same claim, even if the language ofthe nonsettling policy follows the form of the settling policy."Notably, the court acknowledged that inherent with the right of anexcess insurer to make its own decisions with respect to coverageis the risk that it might ultimately face greater liability.

Unfortunately for Lloyd's, however, the court also overturnedthe trial court's rulings that exclusions in the primary policybarred coverage for the settlement. The court remanded the case tothe trial court for further proceedings concerning the issue ofwhether coverage existed for the class action settlement.

The Allmerica decision confirms that merely because an excesspolicy includes "follow-form" language, the excess carrier stillhas the right to make an independent coverage analysis for aparticular claim.

The opinion emphasizes that excess insurers act independently,and that each layer of risk covered by an insurer is separate anddistinct, unless the "follow-form" policies expressly provideotherwise.