Expert Commentary

Watch Indiscriminate Follow-Form Provisions

In the past, we've warned that follow-form provisions can be dangerous, because they "will indiscriminately take up any and all underlying policy provisions, whether favorable or unfavorable to the policyholder or an additional insured."1 Follow-form provisions pose an equal danger to underwriters, as shown by a recent case from Wisconsin.

August 2010

In Johnson Controls, Inc. v. London Mkt., No. 2007AP1868, 2010 Wis. LEXIS 45 (June 24, 2010), Travelers provided three layers of excess coverage to a manufacturer. A group of London insurers provided a fourth excess layer at the very top. When the manufacturer was identified as a potentially responsible party for a $150 million pollution claim, it filed suit against its insurers that refused to defend. To settle, Travelers paid an amount that was apparently less than the full underlying limits, and the manufacturer subsequently looked to the London insurers for excess defense coverage.

The London insurers argued that its high-level excess policy was for indemnification, only, and that it did not have a duty to defend. As proof, they cited their insuring agreement, which said:

Underwriters hereby agree, subject to the limitations, terms and conditions hereinafter mentioned, to indemnify [the manufacturer] for all sums, which [the manufacturer] shall be obligated to pay by reason of the liability … for … Property Damage … arising out of the hazards covered by and as defined in the underlying [Travelers policies].

The Supreme Court of Wisconsin agreed that the London policy's insuring agreement did not state a duty to defend. However, the Lloyd's policy contained a rather indiscriminate follow-form provision saying:

This policy is subject to the same terms, definitions, exclusions and conditions (except as regards the premium, the amount and Limits of Liability and except as otherwise provided herein) as are contained in [the underlying Travelers policies]…

One of the "terms … and conditions" stated in the underlying Travelers policies was that Travelers "shall have the right and duty to defend any suit against the [manufacturer] seeking [covered] damages." Therefore, the court held that the follow-form provision incorporated the duty to defend provision from the Travelers policies into the London policy as a matter of law.

True, the follow-form provision was somewhat qualified, in that it excepted any underlying terms relating to "the premium" and the "Limits of Liability." As to those matters, the follow-form provision would be "turned off," meaning that those kinds of terms in the underlying policy would not be incorporated into the London policy. But the Travelers duty to defend provision did not relate to either of those.

The follow-form provision also said "except as otherwise provided herein." That means that, in general, the follow-form provision would be "turned off" in any situation where there was an inconsistency between the terms of the underlying Travelers policies and the terms of the London policy, in which case the terms of the London policy would remain in control.

The problem here was that the Travelers policies expressly provided for a duty to defend, but the London policy was silent on that issue. Technically, there was nothing "inconsistent" between them so as to stop the incorporation of the duty to defend provision into the London policy.

There are at least two ways the London Insurers could have revised their high level excess policy to avoid the incorporation of the duty to defend from the underlying Travelers policies.

  1. They could have mentioned the duty to defend in the list of underlying policy terms that were exempt from the operation of the follow-form provision. In other words, the follow-form provision could have been revised to say the London policy "is subject to the same terms, definitions, exclusions and conditions (except as regards the premium, the duty to defend, the amount and Limits of Liability and except as otherwise provided herein) as are contained in [the underlying Travelers policies]…"

  2. They could have left the follow-form provision alone but added a disclaimer elsewhere in the policy saying the London insurers had no duty to defend.

  • The court noted that one policy issued for a later policy period had a disclaimer saying that the London insurers "shall have the right but not the duty to assume … the defense of any suit[.]"

  • Another later policy had a disclaimer saying that the London insurers "shall not be called upon to assume charge of the settlement or defense of any claim[.]"

If the subject London policy had an express disclaimer like that, it would have "provided otherwise" on the duty to defend issue, the follow-form provision would have been "turned off" and the underlying duty to defend provision would not have been incorporated into the subject London policy.

Follow-form provisions are deceptive. They seem to be simple, but they are not. If underwriters don't think very carefully about the effect a follow-form provision would have on the operation of their excess policies, they may end up following underlying terms they didn't want to follow.

1 See Rich Scislowski, "Top Ten Problems with Follow Form Coverage," Expert Commentary (March 2010).

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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