Excess Insurer Is Not Bound By Primary Insurer’s Settlement Decision

The Massachusetts Supreme Court, relying on a 1988 Third Circuit decision, Keystone v. Home Insurance Company, has held that an excess insurer was not bound by the primary insurer’s decision to settle. The excess carrier had declined to provide coverage for a settlement due to exclusions in the policy even though the primary carrier had agreed to the settlement. The insured sued the excess liability insurer for declaration of coverage under a “follow form” excess liability insurance policy for settlement of the underlying class action. 

The Massachusetts Supreme Court, in Allmerica Financial Corp. v. Certain Underwriters at Lloyd’s, affirmed the trial court’s ruling that excess insurers with “follow form” policies are entitled to make their own coverage and settlement decisions, regardless of decisions made by the primary carrier.  In making its decision, the Court reasoned:  “a basic point about excess insurance policies: they are separate and distinct contracts from the primary policy.”  Thus, the court held,  even where an excess policy “follows form,”  excess insurers act independently of each other with respect to decisions about their policies, including coverage determinations and settlements.

The decision is the right one, of course, but it underscores the fact that any settlement discussion must include the excess carrier. Otherwise, the claimant may end up receiving only the primary's portion of the money due. 

Leily Schoenhaus