Imagine the following scenario: your company faces thousands of lawsuits because, years ago, it produced a product that people now say is dangerous. As the claims quickly burn through your primary liability coverage, you turn to your excess insurance company for help. They decline coverage. Puzzled, since you’ve always been timely with your insurance premiums, you ask why. The insurance company points to obscure language buried in its policy that says something like, “It is agreed that if any loss covered hereunder is also covered in whole or in part under any excess policy issued to the Insured prior to the inception date hereof, the limit of liability . . . shall be reduced by any amounts due to the Insured on account of such loss under such prior insurance.” As you continue to scratch your head, your insurer explains that this “non-cumulation” clause means that if a loss triggers multiple policy years, their responsibility to cover the loss is transferred to all triggered policies prior to theirs. And if those prior policies also happen to have such language, or if the triggered coverage from prior years has already been exhausted, then it’s your responsibility to pay the loss.
If you think there’s a problem with that outcome, you’re not alone. Non-cumulation clauses have been the subject of much debate in recent years, as liability for so-called “long-tail” claims has skyrocketed and insurers have sought to limit their exposure. Policyholders have argued that, at most, these clauses mean that the policyholder cannot get a double recovery (i.e., cannot get two insurers to pay the entire amount of the same claim). Insurers, as noted above, take the position that these clauses completely eliminate their liability if a prior policy even potentially covers the claim (whether or not that policy has any remaining limits).
Courts around the country have split on the meaning of these clauses. In Continental Casualty Co., et al. v. Borg Warner Inc., et al., No. 04 CH 1708 (Ill. Cir. Ct.), the policyholder, represented by Gilbert LLP, obtained a ruling that declined to follow the arguments of several excess insurers that similar language in their policies absolved them entirely from responsibility for paying covered claims that triggered their policy years. The judge stated that he would not construe the non-cumulation language in the relevant policies in such a way that destroys coverage. By contrast, in Liberty Mut. Ins. Co. v. Treesdale, Inc., 418 F.3d 330 (3rd Cir. 2005), the court held that the non-cumulation clause at issue there, contained in policies issued by the same insurer over multiple years, reduced the insurer’s obligation to just one year’s coverage.
Academic commentary is likewise split. In a 2011 article published in the University of Kansas Law Review, Christopher French argued that the language and drafting history of these clauses make it clear that their drafters never contemplated the emergence of long-tail liability claims and the complex trigger and allocation rules that courts have developed to decide them. The clauses first arose during the transition from “accident-based” policies, which responded to claims asserting that the accident happened during the policy period, to “occurrence-based” policies, which are triggered by bodily injury during the policy period, no matter when the accident happened. Thus, non-cumulation clauses sought to prevent a scenario where a policyholder could conceivably recover for the same loss from both the policy covering the period during which the “accident” took place and that covering the period of the “occurrence” of the damage. In essence, according to French, non-cumulation clauses are simply one more variety of “other insurance” clause, another frequent provision inserted into excess policies intended to prevent double recovery. “Other insurance” clauses typically state that the coverage provided by the policy is “excess insurance over any other valid and collectible insurance.” French also points to the courts’ inconsistent holdings on the meaning of non-cumulation clauses as a classic example of ambiguous policy language that, under standard principles of insurance policy construction, should be construed against the drafter of the language and in favor of the policyholder.
Now, the University of Kansas Law Review has published a rebuttal from members of the insurance defense bar, who argue that, by equating non-cumulation clauses to “other insurance” clauses, French violates the principle that insurance policies be construed in such a way that gives effect to all terms and provisions of the policies. Further, they assert that the rise of the “all sums” allocation approach in recent years presents a situation that is analogous to the context in which the non-cumulation clause arose. The authors contend that, by permitting policyholders to select the order in which it presents claims to policies triggering multiple years, an “all sums” regime would allow them to do just what the clause was designed to prevent: target a later, occurrence-based policy that covers the claim first, and then the earlier accident-based policy. According to the authors, this renders the non-cumulation clause “mere surplusage.”
The cases and articles that adopt a narrow reading of the non-cumulation clause have the better of the argument. As they note, a reading that refuses to let insurers use these clauses to escape their payment obligations is more consistent with the policy language, drafting history, and case law. But perhaps the strongest argument against the insurers’ construction of these clauses is that they have disappeared from modern policy forms – because no rational insured, understanding them to mean what certain insurers have asserted they do, would purchase such illusory coverage. We should impute no less rationality to those policyholders who historically purchased policies containing such language.