Occurrence-based liability policies insure against the risk that the policyholder will be held liable for injury during the policy period. When injury occurs over more than one policy period, however, questions sometimes arise as to whether the insurance policy in each year applies and if they all apply how much does each policy pay.
Some insurers recognize the possibility that when they issue insurance policies across time they are at risk from their insured’s collecting under successive policies for essentially one tort. To protect themselves from paying multiple limits, some insurers use a non-cumulation of liability clause. The New York Court of Appeal recently addressed the impact of a non-cumulation clause, holding that it confined the insured’s recovery to a single year’s loss limit.
In Hiraldo v. Allstate Ins. Co., (N.Y. Oct. 25, 2005), the policyholder was the owner of a building where a tenant was injuriously exposed to lead in the paint on the premises. It was alleged that the tenant suffered neurological injuries as a result.
Allstate issued three successive policies, each with a limit of $300,000, that stated the policy applied “only to losses which occur during the policy period.” The New York court considered whether it might be unfair in the circumstances to require that Allstate pay three policy limits when it simply renewed its coverage and whatever loss-causing conduct engaged in by the insured had already happened. Without deciding the point, the court nevertheless recognized that, if instead of renewal policies from the same insurer, different insurers were involved each year, it would seem to follow that each insurer should be liable to pay a full policy limit (in the circumstance meaning a $900,000 recovery). Thus, the court explained: “Some courts have held that successive policy limits may be cumulatively applied to a single loss, where the policies do not clearly provide otherwise.”
In Hiraldo, however, the Court of Appeal found that the policies at issue “clearly provide[d] otherwise,” because they contained the following non-cumulation provision:
Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under Business Liability Protection coverage for damages resulting from one loss will not exceed the limit of liability for coverage X shown on the declarations page. All bodily injury, personal injury and property damage resulting from one accident or from continuous or repeated exposure to the same general conditions is considered the result of one loss.
The Court of Appeal found that this policy language applied across time, that is, that the reference to “policies” refers to policies issued before and after the policy in question such that only one of Allstate’s triggered policies can apply (or one limit be paid).
The court does not engage in the usual method of construing policy language when interpreting the meaning of the word “policies.” The language is a limitation of coverage for which the carrier has both the burden of proof and the burden of plain drafting – that is, the policy language must plainly and unambiguously confine coverage. In my view, this language does not do so.
Nothing in this language refers to policies issued in other policy periods. In a single year, an insurer may have issued both a premises policies and another liability policy (say, an E&O policy) that both could apply in a given circumstance; in that event, under Allstate’s language, the policyholder cannot collect under more than one policy. But the Hiraldo court goes further and applies the language to policies whose existence are not known at the time the policy was issued – e.g., policies issued in the future. It’s hard to believe that any policyholder would understand from this language that future policies are swept up, and indeed that if it renews its coverage it is not purchasing additional limits (where there is indivisible injury reaching into that policy year). In Hiraldo, there was no evidence that the policyholder received some sort of discount in each renewal policy for Allstate’s reduced exposure.
But let’s go further and take the example the Court of Appeal gives of three different insurers issuing successive policies. The court appears to presume (though does not hold) that each policy in that case would pay its full policy limit. But what if they all used the same policy language as in the Allstate form? Nothing in the non-cumulation clause refers to policies issued by Allstate: it refers to “policies”. The logic of the Hiraldo holding thus would permit two of the insurers not to perform (though they might be subject to a contribution claim from the one who pays). Nevertheless, it is unfathomable that either the policyholder or a given insurer actually would have thought that by purchasing a new policy the policyholder was not purchasing additional limits. The Court of Appeal grasps this point and thus questions rulings that a policyholder cannot stack the limit of renewal policies: “If each of the successive policies had been written by a different insurance company, presumably each insurer would be liable up to the limits of its policy. Why should plaintiffs recovery less money because the same insurer wrote them all?”
The New York case also does not consider what the effect of the non-cumulation clause would be if the policy limits across time were different, say, 300 one year, 400 the next, and 500 in the third year. The court’s holding would suggest that only one of those limits is available, but the court’s ruling doesn’t explain which one or why – certainly the policy language does not do so. Relatedly, the Hiraldo court doesn’t consider what would happen if, for example, one or more of Allstate’s policies was exhausted or if one contained significantly higher deductibles – in other words, the Hiraldo ruling doesn’t address which of Allstate’s three policies apply (a question that might be important to Allstate too in order for Allstate to be able to collect from its reinsurers). This all underscores that despite the intuitive appeal of the Hiraldo ruling the court’s rationale does not connect the dots.
Non-cumulation clauses are concededly difficult to deal with in coverage cases – they lie in wait unnoticed until they spring like a trap. For this reason, some courts have simply overridden their terms, recognizing that like the disfavored “escape” type other-insurance clause they are inserted into policies simply to afford a carrier an ability to wiggle out of paying. (In fact, in a form policy there are arguments available that such an exceptional, constrictive provision may not be enforced on the ground that it is not within the scope of the prospective assured’s assent in purchasing the policy. See Restatement 2d Contracts 211.)
If an insurance company that issues successive policies wishes to confine its exposure, then it (i) should write policy language that states that the limits will be reduced in the event that more than one policy it issues across time is triggered (whether prior to or subsequent to the policy year) and (ii) appropriately reduce the policyholder’s premium in each successive year to account for the fact that the insurer’s exposure has not been increased. Similarly, prospective policyholders need to be vigilant in looking for such mischief-making clauses, for otherwise they may find to their surprise their coverage reduced or find themselves in litigation fighting for the full coverage for which they had paid.