Allmerica Fin. v. Underwriters at Lloyd's

• Decision Date: 06 August 2007
• Docket Number: SJC-09834.
• Citation: 449 Mass. 621,871 N.E.2d 418
• Parties: ALLMERICA FINANCIAL CORPORATION & others<SMALL><SUP>1</SUP></SMALL> v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON.<SMALL><SUP>2</SUP></SMALL>
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

871 N.E.2d 418

449 Mass. 621

ALLMERICA FINANCIAL CORPORATION & others¹ v. CERTAIN UNDERWRITERS AT LLOYD'S, LONDON.²

SJC-09834.

Supreme Judicial Court of Massachusetts.

Worcester.

Argued May 8, 2007.

Decided August 6, 2007.

Stephen R. Mysliwiec, of the District of Columbia (Robert B. Gibbons with him) for the plaintiffs.

Fred A. Smith, III, Chicago, IL (David M. Goldhaber, of Illinois, George A. Berman, & Susan E. Cohen, Boston, with him) for the defendants.

The following submitted briefs for amici curiae:

Richard J. Riley, Boston, & William P. Mekrut for Complex Insurance Claims Litigation Association.

Martin C. Pentz & Karen L. Crocker, Boston, for Keyspan New England, LLC.

Joseph P. Dougher & Steven D. Urgo, Philadelphia, PA, for United Policyholders, Inc.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, & CORDY, JJ.

CORDY, J.

After the plaintiff Allmerica Financial Corporation, along with its affiliated companies (together, Allmerica), settled a class action lawsuit alleging, inter alia, improper practices in the sale of its life insurance policies, it sought indemnification from its insurers. Allmerica's primary insurer had participated in the settlement negotiations and agreed to pay its policy's limit into the settlement fund. Allmerica also held an excess insurance policy written by the defendants, who are certain underwriters at Lloyd's, London (underwriters). That policy was a so-called "follow form" policy, meaning that its terms, conditions, and exclusions were the same as those in the primary policy. When Allmerica sought indemnification for the settlement beyond the primary policy's limits, the underwriters denied coverage. Allmerica then filed suit seeking a declaration of coverage. Both parties moved for summary judgment. A judge in the Superior Court granted the motion in favor of the underwriters. Allmerica appealed, and we transferred the case here from the Appeals Court on our own motion.

Whether a follow form excess insurer is bound by the decision of a primary insurer to settle a claim is an issue of first impression in the Commonwealth. We conclude, as did the motion judge, that an excess insurer is not bound by settlement decisions made by a primary insurer. We also conclude, however, that factual questions remain on the applicability of the policy's exclusions. Accordingly, we reverse and remand for further proceedings.³

1. Background. We recount the facts as described in the judge's memorandum, supplemented by the record, reserving for discussion the language of the insurance contracts at issue.

Allmerica is a Massachusetts corporation engaged primarily in the business of life insurance. From July 1, 1997, through July 1, 1998, Allmerica held a primary liability policy written by Columbia Casualty Company (Columbia Casualty).⁴ The policy included an "Insurance Company Professional Services Liability" provision, which covered wrongful acts committed by Allmerica and its agents.⁵, ⁶ Allmerica also held an excess follow form policy issued by the underwriters and effective over the same term.⁷ The follow form language in the underwriters' policy provided that, "[t]his Policy is subject to the same conditions, limitations and other terms ... as are contained in or may be added to the Policy(ies) of the Primary Insurer(s)." The underwriters' policy had a liability limit of $10 million, which "shall attach only when the Underlying Insurer [Columbia Casualty] shall have paid or have been held liable to pay, the full amount of the Underlying Limit(s)." The underlying limit on the Columbia Casualty policy was $20 million, payable after a self-insured retention amount of $2.5 million. Thus the underwriters' obligation to pay a covered loss would attach after Allmerica had paid its retention amount and Columbia Casualty had paid its $20 million policy limit.

On July 31, 1997, Victor Bussie filed an action against Allmerica in the District Court for Jefferson Parish, Louisiana. That action was voluntarily dismissed. A class action complaint was subsequently filed in the United States District Court for the District of Massachusetts on October 17, 1997 (Bussie class action). The final amended complaint alleged that Allmerica, directly and through its agents, engaged in improper practices by making misleading sales presentations using the "vanishing premium" concept, by inducing the systematic and unnecessary purchase of insurance policies using cash value in earlier policies (known as "churning"), by improperly marketing its policies as a savings or investment vehicle, and by using policy illustrations and other sales materials that promised that policies would have a certain cash value after a period of time.⁸ Bussie v. Allmerica Fin. Corp., 50 F.Supp.2d 59, 65 (D.Mass.1999) (Bussie). The parties eventually reached a settlement, and by memorandum and order dated May 19, 1999, a Federal District Court judge certified a settlement class, approved the settlement agreement, and dismissed the Bussie class action. Id. at 78-81.

The Bussie class action settlement agreement did not provide for the payment of a fixed amount. Rather, the amount owed was to be calculated after an individual review of class members' claims.⁹ This involved class members' choosing between two optional methods of relief. Under the first method, class members had the opportunity to submit their claims for review by a panel of neutral adjudicators. To do this, they would submit a claim form describing "the circumstances under which the policies were purchased," along with supporting documentation and any relevant personal declarations. Bussie, supra at 73. The agent who sold the policy would complete a similar form describing the sale. The adjudicators would then review each claim individually, assigning it a relief-determining score based on objective criteria. Relief could range from nothing to "an award of relief designed to provide the Claimant with the benefit of his or her bargain or appropriate rescissory relief." Id. In approving this method, the judge noted that "Claimants will be able to obtain relief even where they otherwise would not be able to prove each element of a particular legal theory or where that claim might otherwise be barred by a dispositive legal defense." Id. Alternatively, class members could elect a second method known as "General Policy Relief." This method "offers each Class member who chooses not to submit a claim to the [neutral adjudicators] an opportunity to obtain—without a showing of fault or damages—an array of relief options," including enhanced policy and annuity benefits. Id. at 74. The total cost of the Bussie class action and settlement was $39.4 million, including attorney's fees, relief management, and relief payments to class members.¹⁰

When the Bussie class action was filed, Allmerica gave notice to Columbia Casualty. In the meetings and correspondence that followed, Columbia Casualty discussed the details of possible settlements with Allmerica while repeatedly asserting that it did so under reservation of rights; it also advanced funds to cover Allmerica's defense costs. On October 20, 1998, Columbia Casualty wrote to Allmerica indicating its consent to settling the case, and its expectation that it would make an indemnity payment as a result. Columbia Casualty did not, however, admit coverage or liability, "reserv[ing] its rights until such time as we have been able to review the factual data" about the settlement. Thereafter, Allmerica and Columbia Casualty continued to discuss the settlement and related coverage issues. Finally, on August 27, 2001, Allmerica and Columbia Casualty executed a "Settlement Agreement and Release" (agreement) in which Columbia Casualty agreed to pay its policy's limit ($20 million) toward funding the Bussie class action settlement. The agreement included a full release of claims against each other and acknowledged that the "release shall not include any rights or claims for coverage under any excess insurance policies," including the policy issued by the underwriters. The agreement also included a "No Admissions" clause, which provided: "The parties understand and agree that nothing in this Agreement shall be construed or taken as an admission of liability on the part of any of the Parties with respect to the allegations and claims asserted in the [Bussie class action], or an admission of coverage or lack of coverage for the claim for coverage submitted by Allmerica under the Policy."

During the pendency of the Bussie class action, the underwriters were also in contact with Allmerica. Although not direct participants in the settlement negotiations, the underwriters were apparently provided with periodic reports on their progress. The underwriters at all times reserved their rights as to coverage. By November, 1998, the Bussie class action settlement talks were nearing a conclusion. In a letter dated November 4, 1998, the underwriters indicated to Allmerica that they lacked sufficient information to make a coverage determination before a court imposed settlement deadline. To help expedite the settlement, however, the underwriters agreed not to assert Allmerica's failure to obtain their advanced written consent to the settlement as a defense against any claim Allmerica might make.¹¹

On January 20, 2000, eight months after the order approving the settlement of the Bussie class action had entered, the underwriters sent a letter to Allmerica outlining their position on coverage. The underwriters generally disclaimed coverage for any loss encompassed by the settlement, citing particularly (but without limitation) the policy's exclusion for wrongful acts alleged in claims prior to the effective date of coverage (exclusion III.b) and its exclusion for claims based upon promises of future performance (exclusion III. g).

Allmerica filed suit against the underwriters on September 30, 2002, in the Superior Court. The complaint...