Excess Insurance Policies in a Tower Stack Can Have a Tower of Property Coverage Issues

Many of you may know that I am the appointed coverage counsel for the Class of victims at Champlain Towers South. This collapsed condominium tragedy has made international news and is very emotional for all involved. There are some insurance lessons that can be learned when dealing with excess insurance policies in a tower stack that insurance agents, brokers, and policyholders should be aware of from a recent legal filing involving that tragedy.

The vast majority of all insurance policy stacks require that the coverage terms of the primary carrier’s form be followed by excess insurance companies that participate in a layered stack of coverage. This week, Starr Indemnity, an excess insurer in a tower stack of insurance, filed a lawsuit arguing it did not have coverage for a contractor sued by the Class because it did not follow form and had an “anti-stacking” exception to coverage. A copy of that lawsuit is attached.

What does “follow form” mean? IRMI provides this definition:

Follow Form — when an umbrella policy provision follows the underlying policy as to how the provision applies. Follow form also identifies an “excess” liability policy that follows the underlying policies for most policy provisions. The policy may stand alone for certain exclusions, conditions, etc., while relating back to the underlying coverage for most provisions. This type of policy form is typically used excess of scheduled underlying insurance and usually contains a requirement that the insured maintain scheduled underlying insurance.

Friend or Foe: Understanding Follow-Form Endorsements noted the importance of insurance endorsements which require policies to follow form:

Companies often request a follow-form endorsement…This ensures the policies, regardless of how written, adhere to the same terms and conditions of the underlying policy they support in the event of a claim or judgement.

Follow-form endorsements…are designed to eliminate confusion and provide policy alignment for peace of mind….Policyholders should beware of these potential problems before a well-intentioned follow-form endorsement leaves their company underinsured:

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Policy inconsistencies – some insurers write follow-form endorsements to cover inconsistencies between the coverages of the primary, umbrella, and excess policies. In the event of a discrepancy, the umbrella or excess policy terms get priority. Should those policies have more restrictive coverage, they now trump the underlying policy’s coverages.

Following the wrong policy – excess policies can follow the primary or umbrella policy. If one policy includes a loss and the other excludes it, the excess policy follows only the designated policy in the endorsement. If the more limiting policy applies this could void the excess coverage.

Insurance coverage gaps invariably occur when underwriters provide excess policies that do not follow form. An excellent article warning brokers of their Errors and Omission exposure is found in
Excess Liability: Do Follow-Form Policies Really Follow Form?:

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.

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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.

The same is true for property insurance excess policy towers. The first rule is to obtain and read all the excess forms. Read the full policy — RTFP — might be even more important when excess policies are involved.

IRMI has written an article, Top 10 Problems with Follow-Form Coverage, which I suggest those dealing with excess policies with follow the form concerns should read. For me, when underwriters are bidding for business knowing that there is a follow the form endorsement and they intentionally do not follow the form without significant warning, it shows the bad faith that goes on in the insurance industry at a time when good faith is most called for. While the claims may never occur and those excess forms never reached, when they do, and there is not a following of the form, it is the policyholder that is harmed. The public also loses trust in those who make the rules for the insurance industry.

From a lay insurance consumer’s point of view, it must seem like when insurance companies intentionally write policies that do not follow form, that the industry condones illusory coverage. That is not right.

Thought For The Day

We live in a fantasy world, a world of illusion. The great task in life is to find reality.
—Iris Murdoch