Many of you may know that I have been appointed counselor for the class of victims at Champlain Towers South. This collapsed condominium tragedy has made international news and is very emotional for everyone involved. There are some insurance lessons that can be learned when dealing with surplus insurance in a tower stack that insurance agents, brokers and policyholders should be aware of from a recent legal application involving that tragedy.
The vast majority of all insurance letter stacks require that the coverage terms of the primary carrier’s form be followed by surplus insurance companies participating in a layered stack of coverage. This week, Starr Indemnity, an additional insurer in a tower of insurance, filed a lawsuit, claiming it had no coverage for an entrepreneur sued by the class because it did not follow the form and had an “anti-stacking”
; exemption from coverage. A copy of the lawsuit is attached.What does “follow form” mean? IRMI gives this definition:
Follow the form – when an umbrella policy provision follows the underlying policy on how the provision applies. The follow-up form also identifies an “excess” liability policy that follows the underlying policies of most policy provisions. The insurance can stand alone for certain exceptions, conditions, etc., while it relates back to the underlying coverage for most provisions. This type of insurance form is usually used for surplus of planned underlying insurance and usually contains a requirement that the insured must have a planned underlying insurance.
Friend or foe: Understand recommendations according to forms noted the importance of insurance approvals that require policies to follow the form:
Companies often request a follow-up form … This ensures that the policies, no matter how written, follow the same terms and conditions for the underlying policy that they support in the event of a claim or judgment.
Recommendations in follow-up forms … are designed to eliminate confusion and provide policy adaptation for peace of mind … Insured persons should beware of these potential problems before a well-meaning recommendation makes their company underinsured:
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Policy inconsistencies – some insurance companies write follow-up forms to cover inconsistencies between the coverages of primary, umbrella and surplus insurance. In the event of a discrepancy, priority is given to the umbrella or excess insurance terms. Should these insurances have more restrictive coverage, they now trump the coverage of the underlying insurance.
Following the wrong policy – surplus policies can follow the primary or umbrella policy. If one insurance includes a loss and the other excludes it, the surplus insurance only follows the insurance specified in the recommendation. If the more restrictive policy applies, this may invalidate the coverage.
Insurance gaps always occur when insurers provide surplus insurance that does not follow the form. An excellent article that warns brokers about their exposure to errors and omissions can be found in
Excess liability: Do the form policies really follow the form?:
Too much responsibility, small language differences in policies that follow the form can lead to significant gaps in coverage if they are not addressed. Unless the wording is identical or changes are made to the policy, deviations are likely to occur, especially with regard to approvals of surplus policies. This becomes even more complex on large accounts with many layers and many carriers, each taking a different layer of risk, or quotas sharing one layer. This makes it important to understand what each stock does and does not cover and where the policies do not follow the form.
The potential for cover gaps due to different policy formulations makes it important to work with knowledgeable wholesale specialists who can identify where problems may arise. Coordinating the coverage between the different layers in a deductible program requires specialized expertise. Experienced wholesale specialists know where differences are likely to occur, where changes may be possible and how to structure programs to get the widest coverage available.
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Expertise and relationships are really important for creating robust, consistent deductible programs. Experienced wholesale brokers know the differences in carrier forms and what changes may be possible in a tough market. Where change is not possible, experienced wholesale specialists can identify potential gaps for customers to manage expectations. Creating deductible programs is a complex process that requires specialist knowledge. This is where experience and expertise can make a real difference.
The same goes for property insurance deductibles policy tower. The first rule is to obtain and read all the surplus forms. Read the full policy – RTFP – can be even more important when surplus policies are involved.
IRMI has written an article, Top 10 problems with follow-form coverage, which I suggest that those dealing with surplus policies with following the form of concern should read. For me, when insurers bid on companies with the knowledge that there is a follow the form and they intentionally do not follow the form without significant warning, it shows the bad faith that is going on in the insurance industry at a time when good faith is most deserved. Even if the claims never occur and the excess forms are never reached, when they do, and there is no follow-up of the form, it is the policyholder who is harmed. The public is also losing confidence in those who make the rules for the insurance industry.
From the point of view of a lay insurance consumer, it must seem as if insurance companies intentionally write insurance that does not follow the form, that the industry tolerates illusory coverage. That is not right.
Today’s thoughts
We live in a fantasy world, a world of illusion. The great task in life is to find reality.
– Iris Murdoch
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