Coverage Corner

DON’T JUDGE A BOOK BY THE COVER – ESPECIALLY WHEN ITS NAME IS “FOLLOW FORM”!

By Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP

Does this conversation sound familiar?

Q: Is this covered under the Commercial Excess Liability Policy?

A: Of course it is – it’s follow form!

While this could be true, it is not necessarily the case.

Excess Liability coverage is written to serve two purposes. It provides additional limits of insurance in the event of a catastrophic claim, and it drops down to replace reduced or exhausted aggregate limits of underlying policies. Excess Liability is often written as a stand-alone coverage but could be part of a policy that includes both Excess Liability and Umbrella coverages. Unlike Commercial Umbrella, Excess Liability coverage does not typically intend to provide coverage that is broader in scope than the underlying policies.

A true follow form Excess Liability Policy is subject to all of the terms and conditions of the underlying policies. A true follow form policy is only a few pages long, including the declarations page. It doesn’t take much space for a policy to convey the idea that it does everything the underlying policies do and simply provides additional limits.

So why is the Excess Liability Policy, the one that includes the term follow form in its description, often so long? You guessed it – it is not a true follow form policy. Most follow form policies are really conditional follow form policies. Sometimes they follow form, and sometimes they don’t. They include language that says their terms, conditions, definitions, and exclusions control if they differ from those in the underlying policies. That doesn’t sound like follow form, does it?

Here are a few of the areas where the assumption that coverage is follow form can cause problems for an agent and the insured.

Are all named insureds on the underlying policies covered as insureds on the Excess Liability Policy? In a true follow form policy, the answer would be yes. In that case, it is only necessary to show one named insured on the policy declarations as the others are automatically included. Not all forms, though, are written this way. With some, it is necessary to list each named insured for coverage to apply.

Are all additional insureds on the underlying policies covered as additional insureds on the Excess Liability Policy? In a true follow form policy, again, the answer would be yes. Some Excess Liability forms, though, state that there is coverage for additional insureds only if there is a written contract or agreement requiring such coverage. This creates a gap if an additional insured is added to the underlying policy without a written agreement requiring such coverage.

A requirement for primary and noncontributory coverage for additional insureds is included in many contracts signed by commercial clients. The fact that the underlying CGL includes primary and non-contributory language doesn’t mean that the Excess Liability Policy does the same. Most Excess Liability forms state that their coverage is excess over any other insurance. Always check the Other Insurance clause in the Excess Liability Policy to see how it is worded. Many Excess Liability insurers are willing to offer primary and non-contributory language, but the agent needs to recognize the problem first to know whether to seek out a solution.

The fact that the underlying CGL includes a per-project and/or perlocation aggregate doesn’t mean that the Excess Liability Policy does the same. It is important to read the Limits of Insurance section in the policy to see if this coverage feature is truly follow form. Often, it is not, and some insurers will not agree to provide this coverage feature. This can create a problem for the insured who has agreed to provide this type of aggregate in a contract.

Underlying policies may include waiver of transfer of rights of recovery language, but that doesn’t mean that the Excess Liability Policy does the same. An endorsement may be needed to provide the waiver of subrogation language required in so many contracts.

Understanding how Excess Liability coverage does and does not follow form is an important part of constructing an insurance program. There is no substitute for a careful review of the terms of both the Excess Liability Policy and the underlying coverage forms. Only then can an agent know how close to follow form that follow form policy truly is. ‘Til next time!

Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP is IA&B’s commercial lines education consultant. She works with our CIC and CISR programs, as well as our live CE webinars. Catch her at one of our upcoming courses: IABforME.com/education