| The California Court of Appeal recently handed down an opinion addressing an issue of first impression in California: if a liability insurance policy is in effect for longer than a year but less than two years, is the insured entitled to two yearly policy limits, or just one?
This issue arose in a case involving more than 500 asbestos exposure claims filed in California against Pep Boys for products the company sold. Specifically, in 2004 Pep Boys sought coverage for hundreds of these claims from insurers who sold several layers of liability insurance policies to Pep Boys. All of the policies involved were in effect for more than 12 months, but less than 24.
Old Republic Insurance Company and American Excess Insurance Company both participated in the second layer of excess coverage for Pep Boys. The Old Republic policy initially ran from February 1, 1981 to June 30, 1982. Pep Boys combined provided $10,000,000 “in the aggregate for each annual period during the currency of this policy.” When it applied for this policy, Pep Boys’ insurance broker sent a letter to Old Republic which proposed calculating the premium for 17 months of coverage by prorating the 12-month premium. Like New England, Old Republic agreed to extend its policy to July 1, 1982, for an additional prorated premium.
American Excess issued the other policy in the second layer. Its policy was originally effective from February 1, 1981 to February 1, 1982, but was later extended to July 1, 1982, for an additional prorated premium. This policy stated that its liability was “limited, where and as applicable, to the amount stated” in the declarations as the insurer’s “aggregate with respect to loss excess of the underlying Insurance which occurs during the term of this Certificate”.
Fireman’s Fund Insurance Company participated in the third layer of coverage to Pep Boys. Its policy was in effect during the period from April 3, 1981 to July 1, 1982. Its policy’s limits were $15,000,000 in the aggregate “for all damages sustained during each annual period of this policy.”
The trial court found that these policies only provided one year’s aggregate limit, although all four policies were in effect for more than one year. Pep Boys appealed.
The Court of Appeal first took a look at the language of the Old Republic Policy. The Court found that the “annual period” language in the Old Republic policy was ambiguous, and therefore, it looked to Pep Boys’ insurance broker’s letter to resolve that ambiguity. After reviewing the letter, the Court held that Pep Boys’ payment of a pro-rated 5-month premium to extend the policy to 17 months meant that Pep Boys wanted two annual aggregate limits.
The Court then turned to the American Excess policy, which defined the $5,000,000 aggregate limit as applying “with respect to loss excess of the Underlying Insurance which occurs during the term of this Certificate.” The Court of Appeal held that this policy language was unambiguous and that the limits of the policy were based on the entire duration and not on annual periods. Therefore, American Excess was only liable for a single $5,000,000 aggregate limit.
Finally, the Court looked at the language of the Fireman’s Fund Policy which set a $15,000,000 aggregate limit “for all damages sustained during each annual period of this policy.” The Court found that this language was substantially similar to the Old Republic Policy, and accordingly held that Pep Boys were entitled to two separate aggregate limits for this Policy.
Now that this issue has been decided in California, insurers and policyholders are now able to get some certainty about the number of aggregate limits available when policies cover more than one year or less than two. Specifically, if such a policy’s aggregate limits mention an “annual period,” then it is very likely that California courts will find that two aggregate limits apply.
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