The Supreme Judicial Court of Massachusetts Rules That a “Follow Form” Excess Insurer Is Not Bound by a Settlement Negotiated by the Primary Insurer
The highest court in
Allmerica involved a claim under Allmerica’s excess liability insurance. The primary contract, with a $20 million aggregate limit, was issued by
Allmerica then sued the Underwriters in Superior Court, seeking declaratory judgment as to coverage, and damages
for breach of contract. The Underwriters counterclaimed for a declaration of noncoverage, and both parties moved
for summary judgment. The trial court found in favor of the Underwriters in all respects, holding that the Underwriters
were not bound by the settlement and that they were entitled to summary judgment based on the policy exclusions.
Allmerica appealed to the Appeals Court of Massachusetts. See Allmerica Fin. Corp. v. Certain Underwriters at Lloyds’s London, 18 Mass. L. Rep. 333, 2004 Mass. Super. LEXIS 420 (Mass. Super. Ct. 2004). Presumably because the case presented novel questions of law, the Supreme Judicial Court of Massachusetts transferred the case from the Appeals Court on its own initiative.
The Court’s Decision
The Court first addressed whether the Underwriters, as excess, “follow form” insurers, were bound by Columbia’s
decision to settle. Columbia argued that, under a “follow form” excess policy, the Underwriters adopted not only the
policy provisions, but also the intent of the primary insurer with regard to coverage and settlement decisions.
Allmerica, 2007 Mass. LEXIS 519 at *24. In response, the Underwriters emphasized the independent nature of
excess policies, and argued that they were not bound to contribute to a settlement they did not negotiate. Because
it was a matter of first impression for Massachusetts, the Court looked to analogous case law involving the primary/
excess insurer relationship. In two previous opinions, the Supreme Judicial Court held that excess insurers were
not obligated to “drop down” and fill in coverage gaps created when underlying carriers became insolvent. See Mass.
Bay Transp. Auth. v. Allianz Ins. Co., 413 Mass. 473, 474-477, 597 N.E.2d 439 (1992); Vickodil v. Lexington Ins. Co.,
412 Mass. 132, 587 N.E.2d 777 (1992).
According to the Court, these decisions “demonstrate a basic point about excess insurance policies: they are separate
and distinct contracts from the primary policy.” Allmerica, 2007 Mass. LEXIS 519 at *17. Further, “primary and excess
insurers act independently of each other with respect to decisions about their policies, including coverage determinations
and settlements,” even when the excess policy “follows form.” Id. at *19. The Court also looked to decisions in other jurisdictions, particularly Keystone v. Home Insurance Co., 840 F.2d 181 (3d Cir. 1988), where the Third Circuit
Court of Appeals found that an excess insurer was not obligated to participate in a settlement negotiated by other
insurers “so long as its own evaluation [of the policy and any proposed settlement] is not unreasonably low and it
has acted in good faith in advancing and adhering to that evaluation in the absence of a contract which can be
construed to impose such an obligation.” Id. at 182-83. The Court found Keystone “consonant with our conclusions in the
‘drop down’ cases, all of which respect the right of the insurer to make coverage and settlement decisions independent
of third parties, including other insurers.” Allmerica, 2007 Mass. LEXIS 519 at *23.
Accordingly, the court affirmed the lower court’s decision that the Underwriters were free to reject forced participation in
a settlement they did not negotiate. The Court reversed summary judgment on the Underwriters’ coverage disclaimer,
however, and remanded to the trial court for a resolution of material factual disputes regarding the applicability of
policy exclusions (for prior claims and promises of future performance) raised by the Underwriters.
Allmerica confirms that excess insurers with “follow form” policies are entitled to make their own coverage and settlement
decisions, regardless of decisions made by the primary carrier. This opinion, from the highest court in Massachusetts,
emphasizes that excess insurers act independently, and that each layer of risk covered by an insurer is defined and
distinct, and based on the terms, conditions and exclusions of each insurers’ policy.