To follow or not to follow: that’s the question

October 2023

In the Dutch co-insurance market, brokers and insurers often include a broad 'to follow' clause in the policy conditions. On 4 May 2022, the Amsterdam District Court handed down a judgment on the scope of this clause. This judgment is of interest to insurance practitioners.

The 'to follow' clause

The ‘to follow clause’ or ‘follow the leader’ clause regulates that the decisions of the so-called  leading underwriter(s) must be followed by the other insurers. This can go so far as to include so-called ex gratia decisions and payments. The clause may cover provisions relating to change of cover as well as recognition of loss. If the clause is intended to apply only to claims settlement, this must be stated in the clause.

Amsterdam Court 4 May 2022

In the judgment rendered by the Amsterdam District Court on 4 May 2022, the policy had a broad to follow clause.[1] The clause stipulated that the to follow insurers should follow the lead insurer in all cases, even if it was an 'ex gratia' payment. One of the to follow insurers argued that the lead insurer had wrongly approved and paid multiple claims and it refused to pay its share of the claims. The broker, who had paid the claim amounts to the insured and had consequently obtained the rights of the insured,  demanded that the follow insurer would pay its share.

Based on the wording of the to follow clause, the Amsterdam District Court concludes that the to follow insurers are not authorized to independently assess claims and take their own position on them. On the contrary, the to follow insurers have left the assessment to the lead insurer and have undertaken to follow the lead insurer in all cases, even if there would be no right to payment based on the policy. In other words, the to follow insurers have handed over their pen to the lead insurer. In this respect, the Court also referred to an earlier ruling by the Amsterdam District Court on the to follow clause.[2]

An unanswered question is towards whom the to follow insurers have undertaken to follow: towards the lead insurer or towards the insured. In other words, who can enforce the obligation to follow? Is this the lead insurer, since there is some kind of proxy arrangement between insurers, or is it the insured under the policy?

The Amsterdam District Court does not expressly rule on this question. The Court considers that there is only no duty to follow, if this would be unacceptable by the standards of reasonableness and fairness. The court cites as an example the hypothetical situation where the insured and leading insurer fraudulently collude to have the other insurers make an unjustified payment or the situation where an employee of the leading insurer is bribed. Errors of judgment on the part of the lead insurer cannot result in the to follow insurers not having to follow. The Court therefore concludes that the dissident to follow insurer should follow and pay its share of the claims.

In our view, the outcome is correct, but dogmatically the decision is not entirely clear. In our opinion, the to follow insurers have committed to the insured to follow the lead insurer in all cases. The insured can sue the to follow insurers on that basis regardless of whether the lead insurer that approved the claims was acting outside its authority. That is an issue beyond the insured's control. If to follow insurers believe that the lead insurer wrongly approved the claim, the to follow insurers should resolve this internally with the lead insurer.

With the Court, we believe that the bar should be set high. The relationship between lead and to follow insurers is governed by the requirements of reasonableness and fairness. In our opinion only if a decision taken by the lead insurer should be deemed unacceptable by the standards of reasonableness and fairness there will be liability of the lead insurer towards the to follow insurers. The above implies that the lead insurer is allowed a wide degree of discretion in assessing coverage. The latter has been readily recognized by the District Court of Amsterdam.

* * *

[1] Amsterdam District Court, 4 May 2022, ECLI:NL:RBAMS:2022:3090
[2] Amsterdam District Court, 7 May 2008, ECLI:NL:RBAMS:2008:3371