The highest court in Massachusetts held in Allmerica Financial Corp. v. Certain Underwriters at Lloyd’s London, 449 Mass. 621, 2007 Mass. LEXIS 519 (Aug. 6, 2007), that a “follow form” excess insurer is not obligated to fund a settlement negotiated by the primary insurer. This decision, in a case of first impression under Massachusetts law, echoes similar holdings from other jurisdictions that, “absent an explicit contractual commitment to do so, an insurer is not bound by the settlement another insurer makes for the same claim, even if the language of the non-settling policy follows the form of the settling policy.” Id. at *28.

Factual Background

Allmerica involved a claim under Allmerica’s excess liability insurance. The primary contract, with a $20 million aggregate limit, was issued by Columbia Casualty Company (“Columbia”), and the excess policy, with a $10 million limit, was written by certain underwriters at Lloyd’s London (the “Underwriters”). The Underwriters’ policy “followed form,” with terms, conditions and exclusions identical to those in the Columbia policy.

Allmerica was engaged in the life insurance business. In October of 1997, the company was sued in a class action alleging that it had, through its agents, engaged in improper practices such as making misleading sales presentations involving the “vanishing premium” concept, and inducing the systematic and unnecessary purchase of life insurance policies by marketing them as investment vehicles. When the class action was filed, Allmerica tendered the claim to Columbia, and Columbia agreed to defend under a reservation of rights. The Underwriters were also notified of the claim and kept apprised of the progress of settlement negotiations, but fully reserved their right to disclaim coverage. In August of 2001, Allmerica and Columbia settled the class action for $39.4 million. Columbia agreed to pay its policy limits of $20 million above Allmerica’s $2.5 million self-insured retention. Allmerica then demanded that the Underwriters contribute up to their $10 million limit. The Underwriters declined coverage, citing policy exclusions for wrongful acts alleged in claims prior to the effective date of coverage, and for claims based on promises of future performance. 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.

Implications

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.