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Excess insurer not bound by primary settlement


BOSTON--A following-form excess liability insurer is not bound to follow an underlying insurer's decision to settle a claim, the Massachusetts Supreme Judicial Court has ruled.

In a case of first impression in the state, Massachusetts' high court ruled Monday that an excess liability policy issued by Lloyd's of London underwriters does not automatically require Lloyd's to follow an underlying insurer's 1999 agreement to pay its policy limit toward the settlement of class action litigation against a life insurer.

"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," the six-judge panel ruled unanimously.

The coverage dispute arose from a 1997 class action suit charging that Worcester, Mass.-based Allmerica Financial Corp. misled customers about the cash value of life insurance products it sold. Without admitting or denying the allegations, Allmerica settled the case two years later for $39.4 million.

The company has since sold its runoff life and annuity operations to Goldman Sachs Group and continued its property/casualty business under the new name of Hanover Group Inc.

At the time of the class action, Allmerica had primary liability coverage of $20 million in excess of a $2.5 million self-insured retention with Columbia Casualty Co., a unit of Chicago-based CNA Financial Corp. Lloyd's underwriters wrote an additional $10 million layer in excess of Columbia.

Both insurers were kept abreast of the underlying litigation, and--after its own negotiations with Allmerica--Columbia agreed to pay its policy limit toward the settlement, court filings say.

Lloyd's underwriters, however, denied coverage, and Allmerica sued in Massachusetts state court in 2002.

In 2004, a state court judge granted summary judgment to Lloyd's, finding, among other things, that the excess underwriters were not bound by Columbia's decision to settle. The Supreme Judicial Court affirmed that ruling Monday.

"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," the panel concluded. "By adopting the form of words used by Columbia Casualty, the underwriters did not also cede to it the right to make decisions about the underwriters' obligation to perform in various circumstances."

At the same time, though, Massachusetts' high court overturned the lower court's findings that exclusions in the Lloyd's policy barred coverage. The provisions excluded coverage for claims made prior to the effective date of the policy and for losses known to Allmerica at the time the policy was issued. While Lloyd's argued that the exclusions were triggered by claims that were similar to the class action and that were filed before the policy's issuance, the high court found that Lloyd's had not offered sufficient facts to support summary judgment.

The panel remanded the coverage dispute to the state trial court to decide the exclusions issue.