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ABA Section of Litigation Insurance Coverage Litigation Committee CLE Seminar, March 1-3, 2012:
Recent Developments in Litigation Over the Non-Cumulation Condition
Recent Developments in Litigation
Over the Non-Cumulation Condition
Alan P. Jacobus
Carroll, Burdick & McDonough
San Francisco, California
I. Executive Summary: Interpretation of the Non-Cumulation Condition Remains a Hotly
Many liability policies contain a condition known as the Prior Insurance and Non-Cumulation of Liability Condition (for brevity’s sake: the “non-cumulation condition”). Though many of the reported cases on the non-cumulation condition deal with the condition in general liability policies (primary, umbrella, and excess), policies other than general liability policies may contain non-cumulation conditions. 1 If the number of reported cases interpreting the non-cumulation condition are any indication, insurers See, e.g., Superstition Crushing, LLC v. Travelers Cas. & Sur. Co. of Am., 2009 WL 5196076 (9th Cir.
Dec. 29, 2009) (applying a non-cumulation condition in an employee dishonesty policy); Bahar v.
Allstate Ins. Co., 2004 WL 1782552 (S.D.N.Y. Aug. 9, 2004) (applying a non-cumulation condition in a homeowner’s policy); Greene v. Allstate Ins. Co., 2004 WL 1335927 (S.D.N.Y. June 15, 2004) (applying a non-cumulation condition in a homeowner’s policy); Hiraldo v. Allstate Ins. Co., 5 N.Y.3d 508, 840 N.E.2d 563, 806 N.Y.S.2d 451 (2005) (applying a non-cumulation condition applicable to a business liability coverage).
ABA Section of Litigation Insurance Coverage Litigation Committee CLE Seminar, March 1-3, 2012:
Recent Developments in Litigation Over the Non-Cumulation Condition infrequently assert it as a defense or limitation to coverage. Insurers probably less frequently litigate the application of the non-cumulation condition. 2 Despite the apparently little attention the condition has received to date, insurance coverage lawyers— both on the policyholder side and the insurer side—should not overlook it. Policyholders, which frequently advocate for all sums allocation rulings, have successfully argued the presence of the noncumulation condition mandates application of all sums allocation. On the other hand, insurers have successfully argued that the non-cumulation condition restricts the total coverage available to a policyholder that is attempting to claim coverage from more than one policy. The fact that certain courts have used the condition to maximize coverage through all sums allocation rulings while other courts have interpreted the condition to restrict or eliminate coverage underscores the need to know how different jurisdictions apply the condition. It is also critical to know the arguments on both sides of the issue when litigating in jurisdictions that have not, to date, interpreted the non-cumulation condition one way or the other.
II. The Non-Cumulation Condition Applies When a Policyholder Seeks Coverage from Policies in Different Policy Periods.
The non-cumulation condition is most likely to apply when a policyholder faces a claim where:
The claimant’s alleged injury existed in more than one policy period and The claim’s value is more than the limits of liability of any one of the liability policies the policyholder bought.
When policyholders began to face claims of this kind (mainly environmental and asbestos claims) in the 1970s and 1980s, policyholders fashioned theories that allowed them to maximize their insurance assets. 3 These new theories allowed policyholders to obtain coverage from more than one policy for a single claim or group of claims. Even though insurers contended the actual language and intent of the liability policies did not support theories of coverage that allowed policyholders to obtain coverage from more than one policy, 4 policyholders were at times successful on their coverage maximizing theories. 5 See, e.g., OneBeacon Ins. Co. v. Georgia-Pac. Corp., 474 F.3d 6, 8 (1st Cir. 2007) (remarking that even though the policies at issue contained non-cumulation conditions, the parties did not rely on them).
See, e.g., Montrose Chem. Corp. of California v. Admiral Ins. Co., 10 Cal. 4th 645, 913 P.2d 878, 42 Cal. Rptr. 2d 324 (1995); Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 52 Cal. Rptr. 2d 690 (1996).
See Bolton Metro. Borough Council v. Mun. Mut. Ins. Ltd.,  1 W.L.R. 1492, 1504 (Ct. App. Civ.
Div.) (remarking that these expansive theories of coverage are unsupported in the language of the policy and are a creature of judicial “policy” to maximize coverage).
See, e.g., Montrose., 10 Cal. 4th at 645, 913 P.2d at 878, 42 Cal. Rptr. 2d at 324; Armstrong, 45 Cal.
App. 4th at 1, 52 Cal. Rptr. 2d at 690.
-2ABA Section of Litigation Insurance Coverage Litigation Committee CLE Seminar, March 1-3, 2012:
Recent Developments in Litigation Over the Non-Cumulation Condition To maximize coverage, policyholders argued that the limits of their liability policies could be “stacked.” Stacking allows a policyholder to use general liability policies from different policy periods to provide coverage for the same occurrence, claim, or group of claims. Insurers have argued with some success that, in policies containing a non-cumulation condition, the condition is a contractual bar to stacking policy limits. Before evaluating how the non-cumulation condition impacts a policyholder’s attempt to stack limits, a brief review of several more basic concepts, including the so-called triggers of coverage and the pick-and-choose / all sums rules is useful.
III. Expansive Triggers of Coverage Allow Policyholders to Potentially Obtain Coverage from Policies in Different Policy Periods.
The expansive triggers of coverage, including the exposure trigger, injury-in-fact trigger, and continuous trigger, are one of the policyholders’ theories for maximizing coverage. 6 These triggers make liability policies in different policy periods potentially responsible for providing coverage for a single claim or group of claims against a policyholder. These three triggers of coverage most often potentially apply when the policyholder has caused injury over a period of time longer than the policy period of any one of several policies the policyholder bought. These trigger concepts have been applied most frequently to long-term, environmental contamination claims and to asbestos bodily injury claims, where the injuries involved continue to exist long after they began. 7 It is much easier to understand these trigger concepts through examples than in the abstract. For purposes of illustrating these coverage concepts, assume the following facts. A person named John Smith worked for a company that performed work from time to time at a plant, owned by XYZ Corporation, which used asbestos insulation. John Smith worked at the plant at least one week a year from 1965 until 1975. In 1970, the asbestos John Smith inhaled began to cause slight, but demonstrable, injury in his lungs. In 1995, a doctor diagnosed John Smith with mesothelioma (a cancer believed to be caused by exposure to asbestos) and the doctor linked John Smith’s cancer to his asbestos exposure while working at the plant.
John Smith sues the plant’s owner, XYZ Corporation, and alleges that XYZ Corporation is responsible for causing his cancer. XYZ Corporation turns to its insurance companies to defend the company against John Smith’s claim and to pay John Smith’s claim if he wins his lawsuit. But which insurance company or companies are responsible? The answer may depend on the trigger of coverage that applies to the insurance policies. 8 Different jurisdictions apply different triggers of coverage and the result may vary significantly.
When an exposure trigger of coverage applies to the claim, John Smith’s bodily injury is deemed to begin upon his first exposure to asbestos fibers at the plant and, presumably, to end the last time he is exposed. 9 In our example, John Smith worked at the plant from 1965 to 1975. When John Smith sues XYZ Corporation, every liability insurance policy (otherwise applicable to John Smith’s claim) issued to XYZ Corporation from 1965 to 1975 potentially provides XYZ Corporation coverage for John Smith’s claim, because 1965 to 1975 is the period when John Smith was exposed to asbestos at XYZ Corporation’s plant.
In jurisdictions that apply an injury-in-fact trigger of coverage, John Smith’s bodily injury begins when it is shown that he is in fact injured and continues, presumably, until the date John Smith makes a claim or dies, whichever occurs first. 10 The period of John Smith’s injury-in-fact (1970 when slight but demonstrable injury exists until date of his claim or death, whichever occurs first (assuming injury continues to occur through the period)) is the period of coverage that potentially provides coverage to XYZ Corporation for John Smith’s claim against XYZ Corporation. Thus, all policies (otherwise applicable to John Smith’s claim) issued to XYZ Corporation from 1970 until the earlier date of John Smith’s claim or death potentially provide coverage to XYZ Corporation for the John Smith claim. In our example, the triggered policies are the ones issued to XYZ Corporation from 1970 to 1995.
In jurisdictions where the continuous trigger (sometimes also called the triple trigger) applies, John Smith’s bodily injury is assumed to occur the instant he first inhales asbestos, whether or not he actually suffers injury at that point. 11 (The chief difference between the injury-in-fact trigger and the continuous trigger of coverage is the date the earliest policy is triggered. Typically, the continuous trigger will trigger more policies because the claimant is presumed to have suffered injury upon first exposure, whether or not the claimant incurs injury at that point, whereas the injury-in-fact trigger will trigger fewer policies because exposure in the absence of demonstrable injury is insufficient to trigger a policy. Thus, for injuries that take time to develop, the continuous trigger will trigger policies during that developmental stage, whereas the injury-in-fact trigger will not trigger a policy until the developmental stage is over and actual injury exists.) Every liability policy (that otherwise provides coverage for John Smith’s claim) from the date when his injury is presumed to occur (the date of first inhalation) until the earlier date of his claim or death, potentially provides coverage for his claim. In our example, the policies issued to XYZ Corporation from John Smith’s first exposure to asbestos at the XYZ Corporation plant until John Smith makes a claim or until his death, whichever occurs first, are triggered. Thus, the policies from 1965 to 1995 are triggered.
It is important to understand how the trigger of coverage works in many jurisdictions by explaining what it does not do. Recall that in a pure pick-and-choose jurisdiction, the trigger of coverage defines the policies that are potentially answerable for the claim against the policyholder and the policyholder may select any one triggered policy period to provide coverage for the claim. Stacking allows the policyholder to pick-and-choose any one triggered policy period but, if the picked policy period has insufficient limits to cover the claim, the policyholder can continue to pick triggered policy period after triggered policy period until the policy holder has enough coverage for the claim. In jurisdictions that apply the so-called pick-and-choose / all sums rules, the policyholder XYZ Corporation cannot seek coverage from all triggered policies. Thus, if the continuous trigger applies to John Smith’s claim, all policies issued to XYZ Corporation that otherwise provide coverage for John Smith’s claim from 1965 (date of first exposure) until 1995 (the date of John Smith’s claim) are triggered, which only means that they potentially provide coverage to XYX Corporation for John Smith’s claim. In a pure pick and choose / all sums jurisdiction, the policyholder may choose from one and only one of those triggered policy periods to provide it coverage for John Smith’s claim. 12 The picked (paying) insurer must then pay “all sums” for which XYZ Corporation is obligated to pay John Smith up to the policy limits of that insurer’s policy. At that point, XYZ Corporation is done: it cannot go outside of the policy period it picked to obtain additional coverage for John Smith’s claim.
There is an obvious benefit to the policyholder in a pick-and-choose / all sums jurisdiction: it can pick the policy with the fewest or no policy defenses to coverage and thereby maximize its ability to obtain coverage easily and quickly.
A. Stacking Combines an Expansive Trigger of Coverage and Pick-and-Choose / All Sums Concepts To Provide Maximum Coverage to the Policyholder.
Stacking is the intersection of one of the expansive triggers of coverage and the pick-and-choose / all sums concept. Recall that in a pure pick-and-choose jurisdiction, the trigger of coverage defines the policies that are potentially answerable for the claim against the policyholder and the policyholder may select any one triggered policy to provide coverage for the claim. Stacking allows the policyholder to pick-and-choose any one triggered policy but, if the picked policy has insufficient limits to cover the claim, the policyholder can continue to pick triggered policy after triggered policy until the policyholder has enough coverage for the claim. 13 Stacking is a favorite concept of policyholders that face big liabilities and whose insurance coverage, especially in any single policy period, is insufficient to cover those liabilities. Instead of limiting the