In many industries, an entity will obtain "primary" insurance coverage and "excess" insurance coverage from different insurers. Assuming the loss at issue is covered, the excess policy will only be triggered if the monetary policy limits of the primary coverage are exceeded by the value of the loss.
In Cronos Group Inc. v Assicurazioni Generali S.p.A.,1 the Court of Appeal for Ontario was tasked with interpreting the common "follow form" clause found in excess insurance policies where the primary policy provided an optional extension of coverage that was not expressly provided for or excluded from the excess policy.
Cronos Group held a primary insurance policy with AXA XL and an excess insurance policy with Assicurazioni Generali S.p.A ("Generali") which covered the same policy period. The primary policy included an optional extension period ("OEP"). If purchased, the OEP would allow Cronos, in a situation where their policy was not renewed, to obtain coverage for claims made against them after the expiry of the primary policy regarding acts or omissions that occurred within the original policy period. The cost of the OEP premium was $1,500,000, twice the policy's basic premium of $750,000.
Generali's excess policy contained what is colloquially referred to as a "follow form" clause. Such a clause states that the policy is subject to the same terms and conditions as the primary policy, subject to certain exceptions. The relevant clauses in the excess policy are as follows. Notably, the OEP is not listed as an exception (emphasis added):
This Policy is subject to the same terms, conditions, limitations, and exceptions (except as regards the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend, and the renewal agreement (if any)) as are contained in the Primary Policy. The Primary and Underlying Policy will be maintained in full effect during the currency of this Policy.
No amendment to the Primary or Underlying Policy during the Period of Insurance, in respect of which the primary or underlying insurers require an additional premium or a deductible, shall be effective in extending the scope of cover of this Policy unless and until agreed in writing by the Company.
In lieu of renewal, AXA and Cronos agreed to a 13-month extension of the primary policy in exchange for a $1,500,000 OEP premium. Shortly thereafter, two class actions were commenced against Cronos for alleged conduct that occurred during the original policy period. Cronos sought to exercise the OEP under Generali's excess policy and delivered $486,000 USD (twice the premium of the excess policy), but Generali advised Cronos that it did not have a right to an OEP under the excess policy. Cronos then applied for declarations that it was entitled to purchase OEP coverage under Generali's excess policy, at a premium of twice the basic excess policy premium.
The application judge held that Cronos was entitled to the OEP under the excess policy because: (1) the exclusion of "premium" in Condition 2 did not relate to the OEP option; (2) the OEP option did not result in a "policy renewal" that would be caught by Condition 2's exclusion of a "renewal agreement"; and (3) the amendment of the Primary Policy to extend it for another 13 months did not offend Condition 8 of the Excess Policy, which required Generali's consent to certain amendments, because it did not change the scope of the coverage to be provided by the Excess Policy. Generali appealed the decision.
The Court of Appeal Decision
The Court of Appeal affirmed the application judge's decision and substantially restated her findings. Condition 2 in Generali's excess policy did not preclude Cronos from exercising an OEP under that policy because the exclusions listed did not explicitly exclude an OEP. Further, the exercise of an OEP did not constitute a "renewal agreement" under condition 2 because the OEP was not a renewal; in fact, it was the non-renewal of the AXA policy that triggered Cronos's right to exercise the OEP.
The court also agreed with the application judge that condition 8 of the excess policy did not operate to prevent Cronos from exercising the OEP under the excess policy because the OEP did not change the "scope of cover" as required under condition 8. The type of wrongful conduct covered, the monetary limits of coverage, and the period of coverage were not modified by the OEP; the only effect of the OEP was to extend the discovery period for claims.
Finally, Generali argued that if the OEP applied under its excess policy, then the excess policy's OEP should not follow the form of the 2:1 premium structure in the primary policy. Rather, the premium for the excess policy's OEP should be identical to the $1,500,000 premium under the primary policy OEP. Following this approach, with the basic premium under Generali's excess policy being $243,000, the excess OEP premium would be over six times this amount.
The court argument. First, condition 2 of Generali's excess policy used the word "premium" in the singular, which must refer to the original premium paid for the excess policy. If the word "premiums" were used or other language excluding additional premiums payable for extensions, then the calculation of the OEP premium under the excess policy would not have followed the form of the primary policy. Second, that the OEP premium under the excess policy follow the form of the 2:1 premium structure of the primary policy was more consistent with the plain language of the policies, the degree of risk known to the parties at the time of contract formation, and was the more commercially reasonable result.
In my recent blog post, I wrote about another decision that demonstrated that when insurers include clauses in their policies that are meant to act as exclusions or otherwise limit their liability or obligations, specificity is key. Although the use of broader language has the potential to capture more, the decision in Cronos Group Inc. v Assicurazioni Generali further shows that broader is not always better. In many cases, the courts will be unforgiving to insurers who are not specific enough with their policy language. This is consistent with the court's general approach to contract interpretation that exclusionary or limiting clauses in insurance policies are to be interpreted narrowly, while clauses providing coverage are to be interpreted broadly.