Top 10 Problems with Follow-Form Coverage
March 2010
Insurance practitioners tend to overlook the
complexity of "follow-form" coverage. It seems that it should be simple to make
an umbrella or excess policy cover the same set of exposures as covered by the
primary policy. But it is not. There are lots of ways that an improperly drafted
follow-form provision can ruin a casualty program.
by
Rich Scislowski
IRMI
A study of court cases considering coverage issues arising out of follow-form
provisions paints an ugly picture. Each case represents a situation where something
went wrong (usually in the coverage placement process). Many policyholders bought
supposedly follow-form coverage, thinking that their lead umbrella1
or higher level excess policy would automatically respond to the same losses
as the underlying policy, only to find out that the follow-form language actually
used was insufficient to do the job.
Lessons from the court cases can be distilled to a Letterman-style "Top-10"
list of the most significant coverage problems with follow-form provisions from
the perspective of the policyholder.
#10: Umbrella Exception Conflicts with Umbrella Exclusion
In this instance, your umbrella contains a follow-form provision in an exception
to one umbrella exclusion, but the follow-form coverage appears to conflict
with another umbrella exclusion. This occurs in some umbrella policies that
offer stand-alone excess coverage with isolated "pockets" of follow-form coverage
provided in exceptions to one or more umbrella exclusions. That is, an umbrella
exclusion may say that there is no coverage for a particular exposure (like
pollution) unless the underlying policy covers that exposure, in which case
the umbrella will follow form to the underlying policy.
One problem with this approach is that the coverage granted in an exception
to one umbrella exclusion can appear to conflict with another umbrella exclusion.
What happens, for example, when the pocket of follow-form coverage for a gradual
pollution loss in the exception to the umbrella pollution exclusion seems to
conflict with the umbrella's "expected or intended" injury exclusion? Is the
gradual pollution loss covered or not? The policyholder may be required to file
a lawsuit to find out.
#9: Misidentifying Underlying Policy
Here, your underwriter mistakenly lists the wrong underlying policy which
your higher level excess policy is supposed to follow. Some follow-form provisions
say that a higher level excess policy will follow whatever policy is specifically
designated on the declarations page. Coverage disputes can arise if the policy
being followed is incorrectly identified.
In one case, the underwriter wrote the wrong umbrella policy number on the
declarations page, making a higher-level excess policy follow the umbrella that
had just expired! The insurer was forced to file a lawsuit to get the excess
policy reformed so that it followed the umbrella covering the same policy term.
Mistakes like these could very easily hurt either party, so carefully check
the serial number of the policy the underwriter says the excess policy is following.
#8: Confusion over Applicable Underlying Policy(ies)
This one expands on #9. Say the follow-form provision uses a strategy making
the higher level excess policy follow the policy that is manually designated
in the declarations. What happens if the underwriter lists more than one underlying
policy? Which one is the followed policy?
Underwriters may feel compelled to list each and every underlying policy
to emphasize that the excess policy will apply only after all of them are exhausted.
But in situations where the terms of the various underlying policies conflict—as
where the primary excludes a loss but the lead umbrella covers it—listing each
and every underlying policy in the declarations as the followed policy only
leads to confusion, ambiguity, and lawsuits.
#7: Follow-Form Endorsement Converts an Umbrella to a Straight Excess Policy
Not all uses of a follow-form endorsement are beneficial to the policyholder.
What happens if the policyholder had a perfectly good umbrella policy that covered
additional exposures beyond the scope of the primary policy, but the policyholder
insists that a true follow-form provision be added anyway?
Regardless of the previous scope of the unendorsed umbrella, the minute the
true follow-form endorsement is attached, the umbrella will only respond to
the same set of losses as the primary policy. Where the underlying policy actually
provides narrower coverage than the umbrella, there is a risk that the umbrella
will be converted into a straight excess policy, and the policyholder will lose
the benefit of the horizontal umbrella coverage feature.
#6: Contract Requires a "Broad as Primary" Endorsement but a Follow-Form
Endorsement Is Procured
Frequently, policyholders sign contracts requiring them to obtain commercial
general liability (CGL) and umbrella insurance to cover losses associated with
the contract work and to name some other entity as an additional insured. The
insurance specifications in those contracts may require that the umbrella be
endorsed to say it is "broad as primary." Purchasing regular follow-form coverage
would probably not be sufficient.
"Broad as primary" endorsements are special umbrella provisions that have
a number of coverage enhancements beyond regular follow-form coverage. For example,
these endorsements have been held to prevent exclusions in the underlying policy
from being taken up into the umbrella. A regular follow-form provision will
indiscriminately take up any and all underlying policy provisions, whether favorable
or unfavorable to the policyholder or an additional insured.
#5: Excess Policy Follows Form to an Underlying Policy That Excludes the
Loss
Most follow-form provisions use "boilerplate" language embodying different
strategies as to which underlying policy the excess policy will follow. Some
boilerplate language makes a higher level excess policy follow the primary.
Other boilerplate language makes the higher level excess policy follow the lead
umbrella. Still other language adopts other strategies.
Where the primary policy excludes the loss but the lead umbrella covers it,
the danger is that a follow-form provision in a higher level excess policy may
use boilerplate language making it follow the primary, not the umbrella. Or
the reverse could happen: the primary could cover the loss, the lead umbrella
could exclude it, and the higher level excess policy could follow the lead umbrella.
Either way, the higher level excess policy would coincidentally follow the underlying
policy with the exclusion, and the policyholder would be deprived of the excess
coverage.
#4: Higher Level Excess Policies Follow Different Underlying Policies
This problem expands on #5. If different follow-form provisions use different
boilerplate language making the higher level excess policies follow different
underlying policies, gaps may very quickly open in a multilayered tower of insurance.
Say the primary excludes the loss, but the lead umbrella covers it. If Excess
Policies 1 and 3 use boilerplate language that makes them follow the primary,
but Excess Policies 2 and 4 use boilerplate language that makes them follow
the lead umbrella, the tower of supposedly follow-form coverage would resemble
more of a patchwork:
-
Excess Policy 4—Covers the damages in this layer
-
Excess Policy 3—No coverage
-
Excess Policy 2—Covers the damages in this layer
-
Excess Policy 1—No coverage
-
Lead Umbrella—Covers the damages in this layer
-
Primary Policy—No coverage
Try explaining that result to a board of directors.
#3: Excess Policy Follows any Underlying Policy with "Additional Terms"
Not in the Primary Policy
Some follow-form provisions use boilerplate language making a higher level
excess policy follow any underlying policy that contains "additional terms"
that are not contained in the primary policy. The intent of this kind of boilerplate
language is probably to make a higher level excess policy follow the lead umbrella
in situations where the umbrella contains additional terms covering an exposure
not covered by the primary policy.
One problem with this strategy is that the underlying policy could contain
an "additional term" that is adverse to the policyholder, like an exclusion
or a stringent claim reporting requirement. Whatever the "additional term" is,
it is indiscriminately incorporated into the higher level excess policy.
Another problem here is that this kind of follow-form provision also does
not clearly indicate which underlying policy is being followed. A higher level
excess policy could follow any of the underlying policies (or even multiple
underlying policies), depending on where the additional terms appear. Without
close scrutiny of the various policies involved, it is very difficult to predict
how follow-form provisions using an "additional term" following strategy will
operate.
#2: Follow-Form Provision Makes Higher Level Excess Policy Follow the "Most
Restrictive" Underlying Policy
Some newer excess policies use more insidious boilerplate language, making
them follow the "most restrictive" underlying policy. They are intended to make
a higher level excess policy follow whichever underlying policy provides the
least amount of coverage.
-
If, on the one hand, the primary policy excludes the loss, but the lead
umbrella covers it, these follow-form provisions make the higher level excess
policy automatically follow the primary.
-
If, on the other hand, the primary policy covers the loss but the lead
umbrella excludes it, these follow-form provisions make the higher level
excess policy automatically follow the umbrella.
Stated differently, wherever the exclusion appears, the excess policy automatically
follows.
There are several problems with this approach. It undermines the insured's
attempt to coordinate the excess coverage with the primary coverage. It may
contravene the insured's reasonable expectations as to how follow-form coverage
is supposed to operate. And, to the extent that it attempts to incorporate an
underlying exclusion in an unexpected manner, a "most restrictive" follow-form
provision may not comply with state laws requiring all policy exclusions to
be clear and conspicuous.
#1: Follow-Form Provision Excepts "Anything Inconsistent" with the Umbrella
or Higher Level Excess Policy
Frequently, insurers write supposedly follow-form provisions that broadly
except "anything inconsistent" with the umbrella or higher level excess policy.
Where the terms of the umbrella or higher level excess policy and the primary
policy are "inconsistent," the exception says that the terms of the umbrella
or higher level excess policy will control.
To illustrate, the follow-form provision at issue in one case stated the
umbrella applied on the same terms as the underlying policy "except as otherwise
provided herein." The court held that no excess coverage was available whatsoever
because the umbrella contained an extra exclusion that the primary policy did
not.
In another case, the follow-form provision stated that the umbrella applied
on the same terms as the underlying policy except "any ... provision that is
not consistent with a provision of this policy." The umbrella policy had a slightly
different definition of "advertising injury" than the primary policy. The court
held that, because the two definitions were not consistent, the umbrella definition
controlled.
What this means is that, where a supposedly follow-form provision contains
a broad exception for "anything inconsistent" with the umbrella or higher-level
excess policy, it does not actually provide follow-form coverage. Instead, the
policy is essentially providing stand-alone excess coverage that applies according
to its own terms and conditions.
Unfortunately, such broad exceptions to follow-form provisions are very common,
and the wording used to accomplish this effect varies considerably from insurer
to insurer. Follow-form provisions must be read very, very carefully to be sure
that follow-form coverage is actually being provided.
Conclusion
While not an exhaustive list of all of the problems that can arise when using
follow-form provisions, based on a review of a substantial number of actual
court cases, these are the problems that seem to be the most likely to arise
for average policyholders. For more information, or to read the court cases,
see Commercial Liability Insurance, section
XII.C. (IRMI online;
Vertafore).
1
Note: See
Watch
Indiscriminate Follow-Form Provisions (August 2010) for a Wisconsin case
dealing with this issue.
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