Follow-form policies are meant to help simplify and provide consistent coverage for excess liability programs. Ideally, follow form policies would provide excess coverage under the same terms and conditions as the underlying policy, that is follow the underlying form. In the real world, such policies often fall short of that ideal. Even though the coverage is labeled follow form, it’s not safe to assume that the policy actually provides the same coverage.
For excess liability, small differences in language on follow-form policies can lead to significant gaps in coverage if unaddressed. Unless the wording is identical, or modifications are made to the policy, discrepancies are likely to arise, particularly in the endorsements of excess policies. This becomes even more complex on large accounts with many layers and many carriers each taking a different layer of the risk, or quota sharing a layer. That makes it critical to understand what each layer does and doesn’t cover and where the policies don’t follow form.
The potential for coverage gaps due to different policy wordings makes it essential to work with knowledgeable wholesale specialists who can identify where problems may occur. Coordinating coverage among the various layers of an excess liability program requires specialized expertise. Experienced wholesale specialists know where differences are likely to arise, where modifications may be possible, and how to structure programs to obtain the broadest coverage available.
Generally, carrier excess coverage forms state that they are follow form of the underlying policy unless otherwise noted by a term or condition, or exclusion in the excess policy. This is to say, that unless it’s to the contrary, the excess policy is follow form. The devil is in the details.
For primary coverage, almost every major carrier uses the ISO general liability form, which behaves the same for every insured and for which a great deal of case law has been developed. That lowers the potential for surprises. There is no standard form for excess follow form policies; wording and coverage vary from one carrier to the next, and forms used in the Bermuda and London markets differ significantly from domestic forms.
Carriers have different risk appetites, and their policy language reflects that. Reinsurance treaties play a role as they may require specific language that may not match the wording in underlying policies. For instance, an underlying policy may provide broad worldwide coverage, while the wording of an excess policy restricts coverage to North America so that a claim that occurs in Europe would not be covered by the excess policy. There may be differences in the duty to defend wording, which varies significantly from carrier to carrier, under which an excess policy might not provide coverage if the underlying limits were exhausted. Wording may vary when it comes to whether the insurer is agreeing to pay on behalf of the insured or to indemnify them, that is whether the insurer will pay first or reimburse the insured after they have paid.
Jurisdiction also plays a role as carriers may seek to avoid what they see as difficult legal climates. For instance, few carriers may be willing to adapt wording or provide coverage, for construction risks in New York because of that state’s so-called “Scaffold Law” that mandates strict liability on falls from height.
When assembling large excess liability towers, the intent is to make sure that coverage is consistent throughout the tower and that the coverage will drop down to the layers below. With many layers, it becomes more difficult to make sure each of the layers provides coverage under the same terms and conditions as the layer below. If differences in exclusions are not coordinated properly, coverage may not drop down from one layer to the next. Many carriers will add non-drop-down provisions if something is excluded lower down in an excess program.
Constructions risks provide a valuable example of where discrepancies can arise. For instance, owners generally require general contractors to have coverage with limits on a per-project aggregate basis that provide full limits for each project so that the contractor’s limits are not exhausted by claims on other projects. Some policies, however, state in the declarations that the coverage limits are the most the insurer will pay regardless of the number of claims. General contractors typically mandate this same insurance requirement and others from their subcontractors.
Another standard requirement is that coverage is provided on a primary non-contributory basis so that the general contractor’s policy pays first, and the insurer won’t seek contribution from the owner’s coverage. Excess forms may include an ‘other insurance provision’ that states that the coverage is excess to any insurance available to the insured, meaning that the owner might be required to access its insurance first.
An owner will want a waiver of subrogation to prevent a general contractor’s insurer from pursuing subrogation against the owner after the claim is paid to recover a portion of the payment. Often, excess policies may include the transfer of rights of recovery wording, which requires the insured to maintain subrogation rights.
Coordinating exclusions is important because it can change how a claim is handled and what coverage will ultimately be provided. Mistakes here can raise the potential of an E&O claim. Communication with clients to manage expectations is crucial.
DEVIL IN THE DETAILS
While shorter excess forms have generally been viewed as less problematic, that is not always the case because even small differences in wording can make a big difference in coverage. A shorter form may not provide the same “givebacks” as a longer form, such as the waiver of subrogation or the aggregate limit. If the form states the coverage is in excess of $100 million, it may not drop down to $50 million without proper adjustments to the wording.
One key point in assembling a liability tower is which policy is listed as the controlling underlying insurance. That governs which policy form is being followed by the next higher policy. That controlling underlying policy dictates how the higher policy behaves.
Most excess policy forms may need modifications. In a hard market, however, carriers are much less willing to negotiate wording than in a soft market. Carriers may be willing to amend some, but not all discrepancies in wording. Risk appetites may vary greatly from carrier to carrier, and while specific wording may be acceptable to one carrier, another may not be willing to change their wording to conform to the other. Where changes are not possible, it’s critical to identify for the insured where the coverage gaps may occur.
Expertise and relationships really matter in creating robust, consistent excess liability programs. Experienced wholesale brokers know the differences in carrier forms, and which modifications may be possible in a hard market. Where modifications are not possible, experienced wholesale specialists can identify the potential gaps for clients to manage expectations. Creating excess liability programs is a complex process that requires specialist knowledge. That’s where experience and expertise can make a real difference. Contact your CRC Group producer for more information.
- Bob Greenebaum is located in Chicago, IL, and is an Executive Vice President and the Central Regional Director. He is also CRC Group’s National Casualty Practice Leader.
- Andy Horan is an Inside Broker in the CRC Woodland Hills, CA office and a member of the Casualty Practice Group.