Follow Form Excess Policy Does Not “Drop Down” Following Rescission of Primary Policy (NY)
In a split-decision, the New York Court of Appeals recently ruled in favor of excess insurer Insurance Company of the State of Pennsylvania (ICSOP), finding that the policy follow-form provision did not override the policy’s defined limits of coverage.
The coverage dispute involved the insurance contracts covering general contractor Kam Cheung Construction for a personal injury suit brought by Plaintiff Jin Ming Chen. Kam Cheung had a procured primary general liability coverage from Arch, and excess follow form coverage from ICSOP. The Arch policy provided $1 million in coverage per occurrence, and covered certain accrued interest under a supplementary payments provision. During the course of the underlying personal injury action, Arch initiated and prevailed on a declaratory judgment action voiding its policy due to material misrepresentations made by the insured in the insurance application.
Following rescission of the Arch policy, Kam Cheung sought coverage under ICSOP’s follow form policy, arguing that the excess insurer must “drop down” to cover interest payments that Arch would have covered pursuant to that policy’s supplementary payments term. The Court disagreed, finding the ICSOP policy terms clear in defining the scope of the excess coverage as losses in excess of that covered by the controlling underlying insurance, regardless of the bankruptcy, insolvency or “inability to pay” of that underlying insurance. Here, the rescission of the Arch policy equated to an “inability to pay.”
ICSOP, by its terms, covered only losses in excess of those covered by Arch, both the $1 million limits and the supplementary payments amounts. “Follow form” does not mean the excess policy “drops down” in the event that the primary policy is voided. The Court held that the coverage gap was unavoidable, and a direct result of the insureds actions in making material misrepresentations.
Thanks to Vivian Turetsky for her contribution to this post. Please email Georgia Coats with any questions.