Why it matters: Read your policies carefully: A "follow form" excess policy may not actually follow form in some surprising and significant ways. The insureds in this coverage dispute successfully demonstrated that the claims-made-and-reported nature of the primary policy had not, in fact, been incorporated into the excess policy. Accordingly, the insureds' failure to provide written notice to the excess carrier during the policy period of underlying claims brought by multiple governmental entities was no defense to coverage, and the trial court entered judgment in the insureds' favor accordingly. A Texas appellate court affirmed the decision on appeal.
Detailed discussion: In March 2004, Sabre Holdings LLC and related company Travelocity.com LLC obtained a primary insurance policy from American International Specialty Lines Insurance Company (AISLIC) and an excess policy from Illinois Union Insurance Company. Both policies ran for the period of March 15, 2004, until March 15, 2005.
When Sabre was sued by multiple government entities in December 2004 for allegedly failing to fully remit hotel taxes collected from consumers, the insured provided written notice to AISLIC. The primary insurer accepted defense of the suits and made payments totaling $15 million, the policy's limit, for defense costs.
Sabre sent a letter to Illinois Union in December 2010 to notify the excess insurer that it expected to exhaust its primary policy. But the excess insurer denied coverage, taking the position that its policy was a "follow-form" policy, meaning it replicated all of the terms and conditions of the primary policy—including the requirement to provide written notice of a claim during the policy period.
Sabre responded with a declaratory judgment action that it was entitled to coverage for defense costs. Ruling on the policyholder's motion for summary judgment, a Texas trial court judge sided with Sabre, and the appellate court affirmed.
The court first examined the language of the excess policy, which stated it was a claims-made policy and that the insurer agreed "to provide insurance coverage to the Insureds in accordance with the terms, definition, conditions, exclusions and limitations of the Followed Policy, except as otherwise provided herein."
That section was amended by a Non-Follow Form endorsement that read in part: "the Insurer agrees to provide insurance coverage to the insureds in accordance with the terms, definitions, conditions, exclusions and limitations of the Followed Policy … However, the Insurer shall not provide Insurance coverage to the Insureds in accordance with the terms and conditions … as set forth in the endorsement of the [AISLIC] policy."
"The language added by the endorsement at first glance appears to render the insuring clause ambiguous," the court said. "It seemingly contradicts itself, stating that the excess policy follows form to the primary policy, yet does not follow form to the primary policy." Given this confusion, the court dug deeper.
"Upon close inspection of the two parts of the clause together, it can be discerned that three key words are not included in the nonfollow form language that are included in the follow form language: definitions, exclusions, and limitations," the panel wrote. "Thus, the insuring clause as amended by the endorsement could be reasonably interpreted to mean that the excess policy follows form to the definitions, exclusions, and limitations of the primary policy but not the terms and conditions of the primary policy. Because the reporting requirements in the primary policy are more properly characterized as conditions rather than definitions, exclusions, or limitations, the amended insuring clause can be read as not incorporating the notice conditions of the primary policy."
The court recognized that this interpretation appeared to conflict with other sections of the policy but said it was "the only reasonable way to resolve the apparent conflict in the two sentences of the clause."
Adopting this reading, the panel held "that the excess policy, regardless of any apparent intent between the parties, does not follow form to the reporting requirements in the primary policy," and turned to the notice provision in the excess policy itself.
The excess policy contained a stand-alone notice provision stating that notice "shall be given as provided in the Followed Policy" as well as two additional sections that required the giving of notice when changes to the policy occurred such as receivership or when the aggregate limit of liability on an underlying policy is exhausted. In those circumstances notice was required "as soon as practicable."
There were no corresponding notice provisions in the primary policy.
These notice provisions were fact-specific and controlled over the more general provision that Illinois Union argued incorporated the claims-made-and-reported notice provisions of the primary policy, the court said. According to the rules of construction of insurance policies, specific provisions trump more general provisions, the panel explained.
"The general notice provision in the excess policy requiring that notices under the excess policy be given as provided in the primary policy could not apply to the specific provision regarding the exhaustion of limits when there is no corresponding provision in the primary policy," the court added, affirming judgment for the policyholder.
To read the opinion in Illinois Union Insurance Company v. Sabre Holdings, click here.