Excess Follow Form? The Problem
Imagine a $100 million D&O (or E&O, EPL, Cyber) program made up of 10 insurance companies each providing a $10 million limit. The market standard dictates that each insurer use its own “excess follow form.”
Shortly after the CEO is briefed that his company has secured $100 million “state of the art” D&O program, a securities class action is filed, followed by parallel derivative litigation. The litigation progresses and ultimately the Insured resolves the litigation costing $70 million (defense and settlement).
During the litigation process, the insurance companies on the program reserved their rights each referencing provisions of their excess policies. Now that the insured seeks to collect on the insurance, one by one each Insurer sites a provision that is different than the primary and underlying Insurers. It may be the definition of Insureds, or different Reporting Provisions, or even differences in the Insuring Clauses.
Reality sets in and the CEO finds out that the “state of the art” $100 million D&O program Is not state of the art and has inherited numerous obstacles.
This scenario is not imagined. Despite the name, “excess follow form” policies do not completely follow the primary policy’s wording. Although the differences might seem small at the time of binding they can have significant consequences at the time of a claim.
Qualcomm, Inc. v. Certain underwriters at Lloyd’s London, 161 Cal. App. 4th 184, 73 Cal. Rptr. 3d 770 (ct.App, 4th Dist. 2008) is a clear example why it is necessary to have true follow form excess wording.
AIG wrote Qualcomm’s primary D&O policy with $20 million limit, followed by a Lloyd’s excess “follow form” policy. After incurring $28 million in defense and indemnity, Qualcomm sought insurance recovery for the loss.
Despite the name, “excess follow form” policies do not completely follow the primary policy’s wording. Although the differences might seem small at the time of binding they can have significant consequences at the time of a claim.
Qualcomm settled a coverage dispute with AIG for $16 million (AIG’s policy has a $20 million limit). Lloyd’s refused to pay anything towards the $28 million because Lloyd’s “excess follow form” policy included a provision stating: “underwriter shall be liable only after Insurer(s) under each Underlying Policies have paid or been held liable to pay the full amount of the Underlying Limit of Liability”. Qualcomm sued and the court held in favor of Lloyd’s.
This is a clear example how “excess follow form” policies are not. Or as some would say “Excess Policies Matter.”
Another example of an “excess follow form” myth, is the arbitration provision that is in each policy.
Most D&O (E&O, EPL, and Cyber) policies require coverage disputes to be resolved by arbitration. Remember our $100 million D&O program with 10 insurers? The primary policy requires AAA arbitration in the laws of New York, the first excess may require that resolution be in London under the Arbitration Act of 1996, the next layer require may require arbitration under the laws of Bermuda, and so on.
Not only do these inconsistencies require different venues for resolution, but it is also likely that each arbitration location could have different results, thus compounding an already serious problem.
Hopefully, we can all agree that “excess follow form” policies are not excess follow form policies. Insureds need to recognize that not all excess programs are the same and there is a need to place significant importance on all the contractual wordings, not simply the primary.
I’ve now presented you with the problem. In my next post I’ll discuss the solution.