Following the leader on an ex gratia settlement
A UK property portfolio owner (gross asset value £340m, estimated maximum loss £41m) places its property damage and business interruption cover in the London subscription market. Five syndicates write lines of 40%, 20%, 15%, 15% and 10%. The Market Reform Contract contains a 'Follow the Leader' clause and a 'Follow the Settlements' clause, and states that claims are to be administered by the lead underwriter. In February a fire destroys a Leeds warehouse. The policy excludes loss caused by defective design. The lead underwriter accepts the claim but, because the exclusion wording is ambiguous, settles at 85% of the claim 'ex gratia and commercially' to avoid litigation. The four following syndicates refuse to pay the 15% ex gratia element, arguing the exclusion clearly applies and that they are bound only by a settlement within the policy terms. The insured's broker asks you to advise.
1. Are the four following syndicates obliged to fund the 15% ex gratia element? Explain how the 'Follow the Leader' and 'Follow the Settlements' clauses interact and identify the test a court would apply.
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Start with the structure of the subscription. Each syndicate is severally liable for its own line only; there is no joint liability. The question is therefore whether each follower's several liability is enlarged by the claims clauses.
Follow the Leader is narrower than it sounds. It binds followers to the leader's decisions on terms, rating and the handling of claims, but only within the policy as agreed. It does not authorise the leader to rewrite the policy or to make payments that are not due under it.
Follow the Settlements goes further and is the key clause here. It obliges followers to follow the leader's settlement of a claim even where the followers might have taken a different view, provided the settlement is:
- within the scope of the policy;
- made in a businesslike manner;
- not dishonest, arbitrary or reckless; and
- reached after a proper assessment of the coverage position.
That is the test a court would apply: not whether the followers agree with the leader's view of the exclusion, but whether the leader acted as a prudent insurer in settling a genuine coverage dispute. A settlement of an ambiguous exclusion to avoid litigation is the classic case in which the test is satisfied. If, by contrast, the exclusion was plainly worded and the leader simply made a commercial gesture unrelated to the policy, the followers have a strong argument that the payment is outside the clause.
Practical advice: obtain the leader's written coverage rationale, call a market meeting, and seek a market agreement. If deadlock remains, use the slip's dispute resolution clause rather than forcing the insured to sue each follower.
2. If the MRC had contained only a Follow the Leader clause and no Follow the Settlements clause, how would your advice change? What should the broker have done at placing to avoid the dispute?
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Without Follow the Settlements, the followers' obligation is only to follow the leader's decisions within the policy. An ex gratia payment is not a payment 'within the policy'; it is a voluntary payment made for commercial reasons. On that wording the followers would not be liable for the 15% ex gratia element unless they had expressly authorised the leader to settle on that basis or had subsequently ratified the settlement. The leader would bear its own 40% share of the ex gratia amount and would have to look to the followers for their shares of the strict policy liability only.
What the broker should have done at placing:
- Included a clearly drafted claims clause allocating authority to the lead underwriter, including authority to settle disputed coverage.
- Used a Follow the Settlements wording with a defined standard, rather than relying on an unqualified Follow the Leader clause.
- Included a market agreement or dispute resolution clause so that a disagreement between leader and followers does not leave the insured exposed.
- Called a market meeting before any ex gratia settlement and recorded each insurer's position.
- Ensured the MRC was contract-certain, with no ambiguity about who decides coverage disputes.
Examination point: Follow the Leader and Follow the Settlements are not interchangeable. The first binds followers to leadership; the second binds them to the leader's settlement, subject to the businesslike test.
3. The insured argues that the leader's acceptance of the claim binds all insurers because the slip says claims are 'administered' by the lead underwriter. Assess that argument.
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Administration is not authorisation. A clause giving the lead underwriter the administration of claims is an operational provision. It allows the leader to receive notifications, appoint adjusters, correspond with the broker and manage the claims process. It does not, without more, give the leader authority to compromise coverage in a way that binds followers, and it does not convert several liability into joint liability.
The argument would only succeed if the wording went further - for example, if it said that the leader's acceptance or settlement 'shall be binding on all subscribing insurers', or if the followers had held the leader out as having authority to settle on their behalf. Acquiescence over time can also create a course of dealing, but that requires evidence of consistent practice, not a single clause.
Conclusion: the administration clause supports the leader's factual handling of the claim but does not answer the coverage question. The answer depends on the Follow the Settlements wording and the businesslike test. The broker should not concede the point without reading the full claims clause and any market agreement incorporated into the slip.