In Haering v. Topa Insurance Company, Case No. B260235 (Feb. 3, 2016), the Second District Court of Appeal examined which provisions of a primary insurance policy were incorporated by reference in an excess insurance policy, and which provisions were not. This question is often significant because excess policies tend to be brief and incorporate by reference the key terms of an underlying primary policy, which is a separate document often written by a different insurer. In theory, when an excess policy incorporates by reference the terms of a primary policy, both policies should work together to provide a continuous layer of coverage for the insured. Unfortunately, that is not always the case.
A “primary policy” provides immediate coverage to the insured upon the happening of an occurrence that gives rise to liability. An “excess policy” provides coverage after a predetermined about of primary coverage is exhausted. When a claim is made against an insured, the primary policy is immediately triggered to respond to the claim.” It is not unusual for a primary policy to be hundreds of pages long and to contain very detailed definitions and terms. Should an insured wish to purchase additional coverage above and beyond what is offered by the primary policy, the insured may purchase an “excess policy.” An excess policy is often triggered when the primary policy has paid out its entire policy limit, but can be triggered earlier, depending on the specific wording of that policy. Because of this limitation, an excess policy offers a way for an insured to obtain additional insurance coverage at relatively less cost, because an excess policy does not provide first dollar insurance coverage protection.
Unlike a primary policy, an excess policy is typically very short -- perhaps only a handful of pages. The brevity of the excess policy can be misleading, because important terms and definitions are often not found in the excess policy itself but rather are incorporated by reference from the primary policy. To this end, the excess policy often states that it “follows form” to the primary policy. This means that the excess policy defines certain key terms in the same way as the primary policy. An excess policy’s failure to state clearly which terms of the primary policy are incorporated and which terms are not can result in disputes as to whether the coverage provided in the two policies is coextensive, except for the policy limits.
In Haering, the plaintiff was insured under a primary automobile insurance policy issued by State National Insurance Company (“State National”) and an excess insurance policy issued by Topa Insurance Company (“Topa”). The plaintiff was seriously injured in an automobile accident with an underinsured driver, i.e., the at-fault driver’s policy provided coverage in the amount of only $25,000. After settling with the at-fault driver for the limits of his policy, the plaintiff submitted a claim to State National under the uninsured/underinsured motorist provisions of the primary policy and recovered the policy limit of $1 million.
Next, the plaintiff tendered his claim toTopa under the excess policy, which contained a provision stating that it“followed form”to the primary policy, but also limited coverage to“the sum paid in settlement of losses for which the Insured is liable.”Topa denied cover- ageundertheexcesspolicyonthegroundsthatitlimitedcoveragetothirdpartyliabilityclaimsandexcludedcoverageforuninsured/ underinsured motorist claims. Thereafter, the plaintiff suedTopa for breach of contract, arguing that excess policy provided underin- sured motorist coverage because of its“following form”provision and incorporation by reference of the terms of the primary policy.
After reviewing the distinctions between primary and excess insurance policies in general, and the specific language of the State National and Topa policies at issue, the Court of Appeal rejected the plaintiff’s argument. The court reasoned that even when an excess policy contains a “following form” provision, the express terms of the excess policy must be considered and “[a]ny inconsistency or conflict between the provisions of a following form excess policy and the provisions of an un- derlying primary policy [must be] resolved by applying the provisions of the excess policy.” The court further noted that un- insured/underinsured motorist coverage is first party liability coverage, and the Topa policy expressly stated that it “followed form” only with respect to third party liability coverage. First party coverage provides insurance coverage against a loss sus- tained by the insured, while third party coverage provides insurance coverage against a claim asserted against the insured by another person. Because the Topa policy limited its coverage to “‘losses for which the insured is liable,’ i.e., third party claims,” the plaintiff’s claim for uninsured/underinsured motorist benefits did not “come within the scope of [the] agreement.”
While the Haering court noted that the “following form” provision in the excess policy could have been written to provide both first and third party liability coverage, the court concluded that the relevant language did not, and the excess policy only “followed form” to the provisions of the primary policy that provided third party coverage: “The Top a policy’s insuring agreement expressly limits coverage to third party liability claims, and first party [uninsured/underinsured motorist] coverage would be inconsistent with that limitation.”
While Haering was decided in the context of uninsured/underinsured motorist coverage, its analytical framework is applicable to other types of insurance policies and disputes. Following Haering, the coverage provided by an excess policy that“follows form” to a primary policy must be determined by harmonizing the terms of the policy – those stated in the excess policy and those incorpo- rated by reference from the primary policy – to determine the scope of coverage. Haering provides a reminder that an excess policy does not always provide the same coverage as a primary policy, even when the excess policy expressly states that it“follows form”to the primary policy. The terms and conditions of the excess policy must be carefully considered to deter mine its scope of coverage.