Studying Surplus Strains Property Insurance policies in a Tower of Insurance coverage After Ohio Casualty v. Patterson-UTI Power
Business property losses involving surplus traces insurance coverage hardly ever implicate a single coverage. As an alternative, they set off towers of insurance coverage composed of a main coverage and a number of extra or follow-form layers, lots of that are positioned within the London market. When protection disputes come up, they usually stem from a elementary misunderstanding of how these follow-form insurance policies should be learn.
In December 2024, the Texas Supreme Court docket issued a choice that gives a transparent framework for analyzing follow-form insurance policies inside an insurance coverage tower. Whereas the dispute arose in a legal responsibility context, the court docket’s reasoning applies on to surplus traces property packages. That call is Ohio Casualty Insurance coverage Firm v. Patterson-UTI Power, Inc., 703 S.W.3d 790 (Tex. 2024).
On the identical time, the 2025 Extra and Surplus Strains Legal guidelines Guide, revealed by Troutman Pepper Locke LLP, reinforces the identical foundational precept. A surplus traces coverage is its personal contract. Comply with-form language doesn’t convert it right into a carbon copy of the underlying coverage. The handbook emphasizes that surplus traces insurers are permitted to make use of manuscript wording, different definitions, and bespoke protection grants, even when these insurance policies sit inside a bigger insurance coverage program.
Collectively, the court docket’s resolution and the up to date handbook appropriate a widespread analytical error. Protection evaluation should start with the coverage that’s being requested to reply, not with the coverage beneath it.
The Core Rule Clarified by the Texas Supreme Court docket
The Texas Supreme Court docket rejected the strategy taken by the decrease courts, which started by analyzing the underlying coverage after which requested whether or not the follow-form coverage clearly excluded that protection. In accordance with the court docket, that technique inverts the contractual evaluation.
As an alternative, courts should begin with the surplus or follow-form coverage itself. Solely after figuring out what that coverage affirmatively covers might the reader look to the underlying coverage, and solely to the extent the follow-form coverage expressly incorporates it. Even when a coverage is labeled “follow-form,” it stays the governing contract for that layer of protection.
This rule is very essential in surplus traces property claims, the place follow-form insurance policies often redefine key phrases, slim insuring agreements, or apply situations that don’t exist within the main type.
How the 2025 Surplus Strains Guide Reinforces This Framework
The 2025 version of the Extra and Surplus Strains Legal guidelines Guide confirms that surplus traces insurance policies are usually not constrained by uniform type necessities and are sometimes deliberately drafted to vary from admitted-market insurance policies. As Troutman Pepper Locke LLP explains, surplus traces insurers are permitted to tailor coverage language, together with definitions and scope of protection, even when collaborating in a layered insurance coverage construction.
This flexibility is a defining characteristic of the excess traces market. It additionally explains why follow-form language should be learn with precision. The handbook makes clear that incorporation of underlying coverage phrases isn’t computerized. The diploma of incorporation relies upon completely on what the follow-form coverage says, not on what the insured or claims handler assumes it ought to say.
In property insurance coverage towers, which means that a follow-form extra coverage might undertake the construction of the underlying type whereas concurrently narrowing protection by means of its personal definitions or insuring settlement. The label “follow-form” doesn’t resolve that pressure. Solely the textual content does.
Why This Issues in Surplus Strains Property Claims
Massive business property claims usually set off a number of layers of protection. When that occurs, claims handlers often depend on the first coverage’s definitions to judge the complete tower. That observe is inconsistent with each the Ohio Casualty resolution and the rules outlined within the 2025 handbook.
The proper strategy requires every layer to be analyzed independently. The underlying coverage might inform the evaluation, nevertheless it doesn’t management it. That is notably true for London market property insurance policies, the place follow-form wording is commonly paired with manuscript endorsements or modified insuring agreements.
Policyholders are most frequently harmed not by hidden exclusions however by misreading or misunderstanding the insurance policies they bought. When protection disputes come up, they often hint again to assumptions made lengthy earlier than the declare was submitted.
Persuasive Authority Past Texas
Though Ohio Casualty is a Texas resolution, its reasoning just isn’t jurisdiction-specific. The court docket relied on primary rules of contract interpretation that apply nationwide. Courts throughout the nation confront the identical concern when analyzing layered insurance coverage packages. For that purpose, the choice is persuasive authority effectively past Texas.
The 2025 Surplus Strains Guide additional helps that nationwide relevance by documenting constant surplus traces practices throughout jurisdictions. Whereas regulatory necessities differ by state, the contractual nature of surplus traces insurance policies doesn’t. Every coverage stands by itself phrases.
A Last Statement for Policyholders and Professionals
Surplus traces property insurance coverage towers are complicated by design. They don’t seem to be meant to be learn as a single doc. The Texas Supreme Court docket’s resolution, bolstered by the 2025 Extra and Surplus Strains Legal guidelines Guide revealed by Troutman Pepper Locke LLP, confirms a disciplined technique for studying them.
Begin with the coverage being requested to pay. Learn its insuring settlement. Study its definitions. Then, and solely then, look downward to see what it incorporates. Something much less invitations confusion, delay, and avoidable disputes.
For policyholders, property homeowners, threat managers, public adjusters, and attorneys, the lesson is easy. Evaluate current towers rigorously, and contain skilled protection counsel early, earlier than assumptions about “following type” dictate the end result of a big property declare.