Can a follow clause in an insurance policy require an insurer to pay even when a settlement entered into by other insurers in respect of the same loss is expressed as not binding other insurers? Apparently, it can.
Follow clauses take many different forms but generally require following underwriters to follow the lead underwriter in respect of certain matters; for example the settlement of claims. Although there is no joint liability between participating insurers, the lead insurer takes responsibility for dealing with any claims on the policy and negotiating any settlements for itself and following insurers. If the lead insurer settles then the following insurers are bound to settle on the same terms with the assured. Their recourse (if any) for a bad settlement is against the lead insurer. Such follow clauses reduce cost and simplify the resolution of claims involving multiple insurers, resulting in co-insurance being more attractive to those buying insurance.
When the vessel St Efrem suffered a generator breakdown and had to be towed from Brazil to the Ivory Coast, a claim was brought under its insurance. That insurance was split between one policy subscribed by three Lloyd's syndicates (Catlin, Ark, and Brit, with the leader being Catlin) and a Greek insurer Aigaion (20 per cent of the risk was uninsured).
Catlin, Ark, and Brit settled the claim against them for USD $780,000. The settlement between them and the assured expressly provided that the settlement was made by each syndicate for its respective participation only, and that the settlement did not "bind any other insurer providing hull and machinery cover" for the vessel.
However, the Aigaion policy contained a follow clause providing that Aigaion "agreed to follow London's Catlin and Brit Syndicate in claims excluding ex-gratia payments." The assured therefore brought a claim against Aigaion on the basis that they were obliged to follow the settlement by virtue of that follow clause. Aigaion responded that the settlement, expressed as not binding any other insurer, did not trigger the follow clause and so oblige them to follow the settlement.
The High Court emphasised that because follow clauses differ in scope, the wording of the clause must be examined to determine its meaning. In this case, the follow clause obliged Aigaion to follow the terms of the settlement entered into by the syndicates. It was irrelevant that the syndicates had settled only on their own behalf, as Aigaion had separately agreed with the assured to follow any such settlement. This interpretation of the clause was consistent with the purpose of the follow clause to simplify the process of claims settlement.
This is a point for insurers and insured parties to consider whenever contemplating a settlement. An insurer with a follow clause may wish to engage with leading insurers early on – whether to try and encourage a more advantageous settlement or no settlement at all. Lead insurers must also take care not to expose themselves to liability to following insurers for the settlements they negotiate. As the discussion in this case illustrates, the law in this area is very uncertain.