Indemnity policies cover an insured for liability incurred as a result of an “occurrence.” These polices are typically excess, umbrella or reinsurance policies meant to cover losses after the limits of primary insurance policies are exhausted but do not require the insurer to pay the fees and costs of litigation. A different analysis now applies however to indemnity policies that also contain a “follow-form” provision (i.e. that incorporate by reference the terms of a primary policy).
The Wisconsin Supreme Court recently expanded an excess insurer’s potential liability and imposed a duty to defend when a primary insurer does not provide coverage. In Johnson Controls, Inc. v. London Market, Case No. 2007AP1868, the Court held that London Market, an excess umbrella insurer, had a duty to defend Johnson Controls even though the policy did not have a specific duty to defend provision. The Court made two significant holdings: (1) London Market had a duty to defend because its umbrella policy contained a “follow form” provision that incorporated the duty to defend language in the underlying Travelers’ policies; and (2) Travelers’ denial of primary liability under its policies triggered London Market’s duty to defend, even though the underlying Travelers policies had not been exhausted.
Duty to Defend
The Court wrote that London Market had a duty to defend because the London Market policy incorporated the duty to defend found in the Travelers policies. The Court’s holding was based on the London Market “follow form” provision (that incorporated many provisions of the policies issued by Travelers). Importantly, the London Market policies follow form provision did not expressly disclaim the duty to defend found in the Travelers policies. The London Market form differed from the Travelers polices only in: (1) the premium; (2) the amount and limits of liability; and (3) except as “otherwise provided herein.”
The Court purportedly based its holding on the language of the policy, not extrinsic information. Thus, the Court noted that subsequent London Market policies that expressly excluded any duty to defend were irrelevant. The Court also rejected London Market’s argument that the low premiums charged evinced an understanding that there was no duty to defend.
When the Duty to Defend is Triggered
The Court also held that London Market’s duty to defend was not conditioned upon exhaustion of the underlying Travelers policies. Instead, the Court looked to the language of the Travelers policies to determine when the duty to defend was triggered. However, the language in the Travelers policies only explained when the duty to defend ends – not begins. Therefore, the Court looked to the “other insurance” provision of the Travelers policies to hold that London Market’s duty to defend was triggered when the underlying insurer “denie[d] primary liability under its policy.” The Court reasoned that defense and indemnification are separate duties and that, “even if London Market’s duty to indemnify does not attach until exhaustion of the underlying policies that does not mean that its duty to defend requires exhaustion to attach.”
Implications of the Wisconsin Supreme Court’s Decision
Follow form provisions are now a problem for insures under Wisconsin law. Excess insurers should not rely on a “follow form” provision unless they are comfortable with all the language of the underlying policy and they are willing to review policies to confirm they specifically exclude the cost of defense. In addition, excess insurers should reevaluate the terms of their policies to protect themselves on exhaustion issues and when the duty to defend is triggered.