In October 1997, the plaintiff insured was the subject of a class action lawsuit arising from allegedly improper business practices in the sale of life insurance and annuity products. Without admitting liability, the insured settled the lawsuit in May 1999 for approximately $39.4 million.
At the time of the class action, the insured had primary liability coverage of $20 million in excess of a $2.5 million self-insured retention with its primary insurer. The insured also held a $10 million excess policy. The excess policy contained “follow form” language confirming it was “subject to the same conditions, limitations and other terms . . .as are contained in or may be added to the Policy(ies) of the Primary.”
The insured kept both its primary and the excess insurers apprised of developments in the class action and its settlement negotiations. On October 20, 1998, the primary insurer indicated its consent to the class action settlement and acknowledged its indemnity obligation. Ultimately, in a settlement of its own with the insured, the primary insurer agreed to pay its policy limit toward funding the class action settlement. The primary’s settlement with the insured, however, contained a “No Admission” clause that expressly rejected any admission of coverage or lack of coverage for the claim submitted by the insured under the primary policy.
On January 20, 2000, the excess insurer disclaimed coverage for any loss encompassed by the settlement, citing particular exclusions in the primary policy. The insured commenced a lawsuit against the excess insurer on September 30, 2002 seeking a declaration of coverage and judgment for breach of contract. On September 30, 2004, the trial judge granted summary judgment to the excess insurer, finding, among other things, that the excess insurer was not bound by the primary insurer’s decision to settle. The trial judge also ruled that coverage for the settlement was excluded under the primary policy.
On appeal, the SJC unanimously affirmed the trial court’s ruling. The SJC noted that Massachusetts courts have consistently held that an excess insurance policy is a separate and distinct contract from a primary policy:
An excess carrier’s intent to incorporate the same words used in a separate agreement
between the primary insurer and the insured does not imply an intent by the excess carrier to
accept decisions made by the primary carrier about the extent of its obligations under its
own agreement . . . To conclude otherwise would undermine the distinct and separate nature
of each insurer’s contract with [an insured].
The court then concluded that “absent an explicit contractual commitment to do so, an insurer is not bound by the settlement another insurer makes for the same claim, even if the language of the nonsettling policy follows the form of the settling policy.”
Notably, the SJC overturned the trial court’s finding that exclusions in the primary policy barred coverage for the settlement. The Court remanded the case for further proceedings concerning the issue of whether coverage exists for the class action settlement.
A copy of the SJC’s opinion can be found here.
