Expert Commentary

Top 10 Problems with Follow-Form Coverage

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.


March 2010

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).


1The term "lead umbrella" refers to the fact that in multilayer excess programs, higher level excess policies typically contain follow-form provisions making them follow the "lead" of the terms and conditions of the umbrella.


Note: See Watch Indiscriminate Follow-Form Provisions (August 2010) for a Wisconsin case dealing with this issue.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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