Friend or Foe: Understanding Follow-Form Endorsements

Follow-form endorsement quiz: A company purchases umbrella and excess insurance policies for liability coverage in addition to its primary policy. A claim exceeds the limits of the primary policy but falls within the coverage threshold of the additional policies. Is the company free from out-of-pocket costs?

If you answered “not necessarily,” you get an A. How insurers write the policies to work together makes a big difference. Companies thinking the policies include the exact same coverages by “following form” may find themselves exposed. Understanding follow-form endorsements could be the difference between an insurance company covering the claim and the insured left holding the bill.

Let’s start with the policies. While often thought of interchangeably, umbrella and excess policies have distinct differences.

Umbrella policies provide liability coverage in addition to that of the primary policy. They can be written to restrict or broaden coverage from the underlying policy and often serve to fill coverage gaps. Umbrella policies can cover multiple underlying policies concurrently.

Excess policies, like umbrella policies, provide additional liability coverage. Unlike umbrella policies, they provide no broader protections than the underlying policy and often are written to be more restrictive. Excess policies typically only apply to one underlying policy at a time.

Companies often request a follow-form endorsement with both types of policies. This ensures the policies, regardless of how written, adhere to the same terms and conditions of the underlying policy they support in the event of a claim or judgement.

Follow-form endorsements can be a company’s best friend. They are designed to eliminate confusion and provide policy alignment for peace of mind. However, failing to understand their broader impact on coverage can turn them into a business’s worst nightmare. Policyholders should beware of these potential problems before a well-intentioned follow-form endorsement leaves their company underinsured:

• Closing the umbrella – when a true follow-form endorsement is applied to an umbrella policy providing broader coverage than its primary policy, the insured loses the benefits of that broader coverage. The umbrella now follows the primary policy exactly.
• Exceptions with exclusions – an umbrella policy might include an exclusion to something covered in the primary policy. The follow-form endorsement creates an exception nullifying the exclusion. However, this can create conflicts with other exclusions in the umbrella policy that could prevent coverage.
• Policy inconsistencies – some insurers write follow-form endorsements to cover inconsistencies between the coverages of the primary, umbrella, and excess policies. In the event of a discrepancy, the umbrella or excess policy terms get priority. Should those policies have more restrictive coverage, they now trump the underlying policy’s coverages.
• Following the wrong policy – excess policies can follow the primary or umbrella policy. If one policy includes a loss and the other excludes it, the excess policy follows only the designated policy in the endorsement. If the more limiting policy applies this could void the excess coverage.
• Multiple policy associations – companies may choose to stack many insurance policies to maximize coverage. In this model, an excess policy may follow an umbrella policy which follows multiple primary policies. The potential problem occurs if the insurer lists all the underlying policies on the excess policy declarations page. Associating multiple policies with the excess coverage can create confusion and potential lawsuits over which policy applies should there be coverage conflicts between the underlying policies.
• Additional terms – some follow-form endorsements require that the excess policy follow the underlying policy containing any “additional terms” not included in the primary policy. The has good intent by giving the insured the broadest coverage possible under the primary and umbrella policies. However, the additional terms could include something unfavorable, like a coverage exclusion. Regardless of the additional terms, the follow-form endorsement strictly follows the underlying policy.
• Most restrictive provisions – some follow-form endorsement language for excess policies follows the “most restrictive” underlying policy. This ties the excess policy to the umbrella or primary policy providing the least amount of coverage.
• Broad as primary endorsement – to minimize the negative effects of a follow-form endorsement, companies often request a broad as primary endorsement instead. This amendment allows the umbrella to follow the primary policy without limiting any of its additional coverages.

Don’t let follow-form endorsements be your foe. Take time to read the language and identify the red flags. For more help with follow-form endorsements, follow the leader – myCOI. Learn why hundreds of companies consider myCOI’s team of insurance experts and technology their most useful friend.  

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