4 Key Areas For Claims Handlers To Review When Dealing With Follow Form Policies

By Marc Lanzkowsky – April 15, 2010

Follow-Form Coverage Does Not Mean All Your Ducks Are Going To Be In A Row

A follow form excess or umbrella policies is a type of policy where the terms and conditions of an underlying layer of coverage are adopted and incorporated into the “following” layer. While these policies may still have independent provisions and exclusions, they will nonetheless relate back to the underlying, “followed” policy for most of the terms.  In many situations this way of handling excess coverage prevents inconsistencies and ensures there are no gaps in coverage. However, in complex matters involving multiple layers of coverage, or when the language conflicts with the underlying layer, many problems can occur. In claims involving these types of policies, claims handlers must fully analyze all the terms and conditions of all the policy provisions to truly understand the coverage applicable.

There are many forms of language such provisions can take, but below is a good general version of a follow form provision:

“The terms and conditions of insurance of this policy are the same as those of the “underlying insurance” in effect at the inception of this policy except as specifically set forth in this policy and any endorsements attached hereto.”

Follow form policies have been effectively in use for a while. Regardless, as insurance layers have become more complex, so have the issues surrounding these types of coverage. Problems can occur for multiple reasons and the end result could be an expansion or contraction of coverage. Recently, Dennis Wall, Esq., pointed out, in his Insurance Claims and Bad Faith Law Blog, a court decision that addressed a problem with a follow form policy:

“Following form” is a term of art in the insurance industry, and it is not to be used blindly, according to a recent judicial decision.  An Excess Liability Insurance Policy containing that phrase to describe its coverage, may find that its coverage will be held by a Court to provide coverage which the carrier may not have contemplated.  This happened in a recent case in which there were two (2) underlying policies, one which did not exclude coverage for punitive damages and a second underlying policy which did expressly exclude coverage for punitive damages…. Having failed to either expressly provide for which of any underlying policies it would be “following form,” or to expressly exclude coverage for punitive damages, the Federal Court held in that case that the subject Excess Liability Insurance Policy provided coverage within the limits of Tennessee Law for punitive damages assessed against its Insured.

In the case above, coverage was expanded beyond what was originally intended.  Rich Scislowski, an attorney and Senior Research Analyst for IRMI.com, gave the following list of the Top 10 Problems With Follow-Form Coverage, to point out the complexity of these types of policies:

1. Umbrella Exception Conflicts with Umbrella Exclusion
2. Misidentifying Underlying Policy
3. Confusion over Applicable Underlying Policy(ies)
4. Follow-Form Endorsement Converts an Umbrella to a Straight Excess Policy
5. Contract Requires a “Broad as Primary” Endorsement but a Follow-Form Endorsement Is Procured
6. Excess Policy Follows Form to an Underlying Policy That Excludes the Loss
7. Higher Level Excess Policies Follow Different Underlying Policies
8. Excess Policy Follows any Underlying Policy with “Additional Terms” Not in the Primary Policy
9. Follow-Form Provision Makes Higher Level Excess Policy Follow the “Most Restrictive” Underlying Policy
10. Follow-Form Provision Excepts “Anything Inconsistent” with the Umbrella or Higher Level Excess Policy

The overriding theme in the above list is that coverage issues are going to be present when underlying layers are not properly defined. While many of these concerns should have been addressed in the underwriting process, the reality is any problem with follow form policies will be the claims handler’s responsibility once the claim is filed.

So what are the key issues that should be looked at by claims professionals when reviewing a follow form policy?

At the minimum claim handlers should do the following:

1. Understand which underlying policy is being followed: This sounds easy, but can be very complicated when there are multiple policies and multiple layers. Check with underwriting to ensure that the policies intended to be followed are correctly identified. Are the correct layers identified by policy number in a schedule of underlying insurance? If multiple layers are identified, does the policy correctly specify which layer will be followed?
2. Secure copies of all underlying policies: As any experienced claims professional knows, getting copies of underlying policies can be a challenge. Stating the obvious – clearly having copies of the underlying terms is essential in conducting a coverage analysis. It can never be assumed that the underlying provisions are “standard” and that no conflicts exist. Different layers may have different follow form language that may expand or contract coverage offered in your policy. In multiple layer situations it is very possible that the coverage you thought you were sitting over may not even exist for a particular claim.
3. Analyze how all layers connect: Diagramming multiple layers, as well as how their follow-form language applies, is extremely valuable when dealing with high exposure multiple tier coverages. While you maybe the 4^th layer following the primary lead umbrella, the 3^rd layer may follow the primary layer and have some conflict negating coverage. After the analysis, you may learn that your coverage attaches lower in the tower than was intended.
4. When in doubt – get help: The key for a good claims person is to know how to SPOT the issue and seek assistance where needed. These provisions and policies can get confusing, and how the language is written as well as the intent of the parties, will determine how much coverage is truly exposed. When in doubt, engage coverage counsel for a written opinion on the applicability of all layers of coverage. Its better to be safe early on then to find out later that your exposure is much greater than expected.

Follow-form provisions can work to both limit or expand coverage in different situations.  Understanding exactly what is covered, and how much is exposed, is imperative for a proper coverage determination. Once a claim comes in it is the claims handlers’ responsibility to effectively analyze all the possibilities to know how much is potentially exposed.

When problems do occur, use the information to help improve future policies. Discuss the issues and possible solutions with underwriting and become a more effective operation and help limit future issues.