The Supreme Judicial Court of Massachusetts held in a case of first impression that a follow-form excess insurer is not bound by the primary insurer's coverage determination. Allmerica Financial Corp. v. Certain Underwriters at Lloyd's, London, 2007 WL 2215589 (Mass. Aug. 6, 2007).
The policyholder was a company that sold life insurance. A lawsuit filed in 1992 alleged that one of its agents misrepresented the expected performance of a life insurance policy, including a "vanishing premium" representation, and that the company failed to supervise the agent. The case later settled.
In 1996, the company purchased a $20 million professional services liability policy from a primary insurer and a $10 million follow-form excess insurance policy from the excess insurer. A class action suit filed during the policy period alleged that the company engaged in a scheme of misrepresentations, including "vanishing premium" representations, through a number of its agents. The company settled the class action lawsuit and sought coverage from both the primary and excess insurers. The primary insurer agreed to pay its policy limits, but the excess insurer denied coverage based on the priorclaim exclusion, the known loss doctrine, and the future performance exclusion. The company sued for breach of contract, contending that because the excess insurer issued a follow-form policy, it should be bound by the primary insurer's coverage determination. The appellate court first ruled that the excess insurer was not bound by the primary insurer's coverage determination. It held that, although this was an issue of first impression, the court's prior rulings had demonstrated "a basic point about excess insurance policies: they are separate and distinct contracts from the primary policy." The court rejected the company's argument that, by adopting the language of the primary policy, the excess insurer expressed its intent to be bound by the primary insurer's decisions about coverage and settlement. According to the court, "[t]o conclude otherwise would undermine the distinct and separate nature of each insurer's contract . . ." The court concluded that because the excess insurance policy is a separate agreement, which does not specifically bind the excess carrier to the primary insurer's coverage determinations, the excess insurer is entitled to make its own coverage determination.
The court then ruled that the record did not establish similarities between the 1992 suit and the 1997 class action sufficient to establish the degree of commonality required to trigger the prior claims exclusion. The 1992 "complaint alleged misrepresentation by a particular agent, and accused [the company] of negligent failure to supervise that agent. In contrast, the . . . class action alleged a scheme of misrepresentations perpetrated by Allmerica through its agents." According to the court, there was not sufficient "commonality" given that "the alleged wrongdoing . . . took place at different times and locations, and involved different policyholders, different sales agents, and separate transactions."
The court also ruled that the record did not support summary judgment for the insurer on the known loss doctrine, which applies under Massachusetts law only when the insured actually knows before the effective date of a policy that a loss has occurred or is substantially likely to occur. The court distinguished its earlier opinion in SCA Services Inc. v. Transportation Insurance Co., 646 N.E.2d 394 (Mass. 1995), in which it found that the known loss doctrine barred coverage for environmental claims arising out of a site the policyholder had been ordered to close for environmental contamination two years before it purchased the policy at issue. By contrast, the fact that the company here knew that it would face future "vanishing premium" lawsuits when it purchased the policy was not sufficient to convert any particular case from a risk of loss to a probable or certain loss. The court stated that "[w]hile a prior adjudication may not be necessary to implicate the known loss doctrine, its centrality to our analysis in SCA Servs. suggests a greater degree of certainty of loss than the [excess insurer] argue[s] is required."
Finally, the court ruled that questions of fact precluded summary judgment on the future performance exclusion, which "bars coverage of any claim involving a representation about the past performance or future value of an insurance product." The court noted that application of the exclusion hinged on whether the company authorized its agents' statements regarding past performance or future value, in which case the claim would be excluded, or if the agents independently made such statements, in which case the exclusion would not apply. The court noted that the settlement of the class action did not result in any admission of liability and that the insurer had not presented evidence before the lower court indicating the circumstances regarding the "vanishing premium" misrepresentations. The court, therefore, held that a material question of fact remained for trial.