(Article from Insurance Law Alert, January 2024)
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Holding
A California appellate court ruled that language in two policies created new aggregate limits for policy extension periods, whereas language in a third policy maintained a single aggregate limit notwithstanding a several-month extension of an annual policy. The Pep Boys Manny Moe & Jack of California v. Old Republic Ins. Co., 2023 Cal. App. LEXIS 998 (Cal. Ct. App. Dec. 28, 2023).
Background
After being named as a defendant in asbestos-related bodily injury suits, Pep Boys sought coverage from its primary and excess insurers. Each of the relevant policies had been extended beyond its original term, at the request of Pep Boys. Pep Boys paid an additional prorated portion of the premium for each extension. The insurers took the position that their respective policies provided only one aggregate annual limit for the underlying claims, notwithstanding the extensions. In response, Pep Boys sought a declaration that each policy provided two aggregate limits: one for the first 12 months and one for the remaining extension period. The trial court ruled in the insurers’ favor and the appellate court reversed in part and affirmed in part.
Decision
A policy issued by Old Republic provided that it was subject to a limit of $10 million “in the aggregate for each annual period during the currency of this policy.” The parties agreed that Old Republic was obligated to pay up to $10 million for the first 12 months of the term, but disagreed as to the meaning of the phrase “each annual period” with respect to a five-month extension of the policy term. Old Republic argued that “annual period” meant the entire 17-month term of the policy, whereas Pep Boys claimed that the policy term consisted of two annual periods, each with its own $10 million aggregate limit. Finding neither interpretation “more reasonable than the other,” the court deemed the policy ambiguous. Turning to extrinsic evidence, the court noted that Pep Boys chose to extend its insurance policies for administrative convenience in order to align its insurance program with its fiscal year end accounting, not to reduce its costs or alter the scope of coverage. Further, the court noted that under Old Republic’s approach, Pep Boys’ coverage would be “diluted” by spreading the original aggregate limit over 17 months.
The court reached the same conclusion with respect to a policy issued by Fireman’s Fund that was extended to 15 months and contained similar language. That policy contained a $15 million aggregate limit “for all damages sustained during each annual period of this policy.” Employing the same reasoning used in interpreting the Old Republic policy, the court deemed the Fireman’s Fund policy ambiguous and construed it as providing two aggregate limits.
However, the court reached a different conclusion with respect to an American Excess policy, which stated that the $5 million aggregate limit applied “with respect to loss excess of the Underlying Insurance which occurs during the term of this Certificate.” The court ruled that this language was unambiguous and established an aggregate limit for the entire duration of the policy, not based on annual periods within the entire term. In so ruling, the court rejected Pep Boys’ assertion that a reference to annual premiums in the extension endorsement indicated an intent to create an additional annual aggregate limit, finding such language “insufficient to overcome the policy’s plain definition of its limits as applying to the entire policy period.”
Comments
Addressing this matter of first impression under California law, the court made several noteworthy observations. First, the court recognized that its consideration of the aggregate limit issue was “artificially constrained” because Pep Boys sought only a ruling on the policies at issue and the factual record did not reference the presence or absence of coverage for the period of time immediately following the policies’ extensions. As the court noted, if Pep Boys obtained coverage for the period immediately following the partial-year extensions, then its ruling could result in Pep Boys receiving more coverage than expected for that calendar year. The court noted the unfairness of that result, but reasoned that the insurers’ interpretation could lead to a gap in coverage, which would be an equally unfair result.
Second, the court acknowledged that the “most conceptually satisfying resolution” of this case might involve a pro rata calculation of aggregate limits in order to “bridge coverage between different policies.” However, the court deemed such an approach impossible in practice, stating: “we interpret insurance policies, not multi-year, multi-layer insurance policy frameworks, and we must apply each policy’s language as written.” And in any event, no policy explicitly allowed for the proration of aggregate limits.
Finally, the court noted the lack of judicial consensus on this issue and the “even split” across jurisdictions.