Some umbrella insurers have incorporated provisions commonly known as Prior Insurance and Non-Cumulation of Liability provisions and these are also discussed here, along with some court decisions dealing with them.

Topics covered:
Introduction
The genesis of insurer drastic measures
The Montrose case
Standard Montrose provisions
Nonstandard versions and issues
Other alternatives to aggregating damages
The courts' perspective
Conclusion

Introduction

From a standard liability coverage basis, it was in 1957 that bodily injury was first available on an occurrence basis. Property damage coverage was not made available on an occurrence basis until standard general liability policy provisions were revised significantly in 1966. (Manuscript and commercial umbrella policies were written on an occurrence basis long before that coverage basis was first used with standard forms.) When the term “occurrence” was introduced by the National Bureau of Casualty Underwriters (a predecessor to the Insurance Rating Board and the Insurance Services Office) in 1966, it was defined to mean “an accident, including injurious exposure to conditions which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured”. (While bodily injury and property damage usually results immediately upon contact with someone or something, there are exceptions. It is for this reason that the definition of occurrence also included the words “injurious exposure to conditions”.

It was not too long after the introduction of this definition in 1966 when complaints were lodged claiming that the words “injurious exposure to conditions” might still serve to limit coverage to situations where something had to be sudden and definite in time and place. To clarify that the term “occurrence” was meant to encompass not only the usual accident, but also exposure to conditions that could continue for days, weeks, months or years, occurrence was redefined in 1973 to mean, in part “an accident, including continuous or repeated exposure to conditions . . . .” This new wording not only was intended as a clarification but also for purposes of strengthening the intent that a related series of events attributable to the same cause or result would be considered as one occurrence, thereby avoiding the application of policy limits several times. As an extra-added measure of safety, some additional wording was added to the Limits of Liability provision which read “all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence”.

As time progressed however, this liberalization in the definition of occurrence dealing with the continuous injury trigger played havoc with many insurers when the courts awarded coverage, caused by one occurrence, for various injuries and damage over successive policy periods. Finally, it was after a 1995 California court decision where the court adopted a continuous injury trigger that insurers began to take some drastic measures that extended beyond the borders of California and currently affect nearly every liability policy issued today. (The California court case adopting a continuous injury trigger of coverage which resulted in some drastic measures currently impacting many, if not most, insureds that purchase commercial liability insurance is the Montrose Chemical Corp. case.)

The Genesis of Insurer Drastic Measures

It was not too long after insurers began to write liability insurance on an occurrence basis that they turned their attention toward limiting the impact of occurrence coverage. Their problem has always been the fact that occurrence-based general liability coverage is triggered by injury or damage occurring during the policy period; thus, where such injury or damage is progressive, each policy during which injury or damage occurs is triggered. This is in contrast to claims-made coverage, which is ultimately triggered by a claim made during the policy period or an extended reporting period; thus, it is the policy when the claim is reported that responds, regardless of how many years thereafter injury or damage continues to occur for that event. The dilemma faced by insurers has been how to enforce a per occurrence limit when a single occurrence results in injury or damage over multiple policy periods. Their problem has been compounded by the fact that a number of courts have ruled the occurrence to be at the time of injury, and in cases involving progressive injury or damage to hold for coverage over more than one policy period.

The dilemma and the court rulings had insurers arguing that what they believe should be one occurrence and subject to a single per occurrence limit is transformed into a multiple occurrence limit coverage issue. They argue that this, in essence, eliminates the per occurrence limit in many cases, obligating them to pay multiple policy limits in progressive injury cases (which, by the way, is precisely the way occurrence-based coverage is supposed to apply). Insurers have long been unable to alter this approach, given the fact that doing so means altering the occurrence-based coverage trigger, which is injury or damage occurring during the policy period. (On the other hand, attempts to limit coverage for progressive injury or damage to a single per occurrence limit—in essence to one policy period—has been argued to cause confusion and transform occurrence-based coverage into a modified version of claims-made coverage. Given the potential application of the wording implemented by insurers, however, it would appear as though that result is no longer a remote possibility, even in situations involving multiple occurrences.)

The Montrose Case

The seminal case that brought about the drastic measures by insurers, dealing with occurrence-based coverage, is Montrose Chemical Corp. v. Admiral Insurance Company, 42 Cal.Rptr.2d 324 (1995), which dealt with pollution claims. These claims were tendered by Montrose to, among others, Admiral Insurance Company, which had issued a primary layer of liability coverage for a period of four years. Some of the pollution at one site was alleged to have been discovered before the Admiral policy went into effect. Another site was alleged to have experienced a tripling of the amount of suspected carcinogens in the ground, beginning months prior to the first Admiral policy's inception and continuing through the Admiral policy years.

Six weeks before the first Admiral policy went into effect, Montrose was identified by the Environmental Protection Agency (EPA) as a potentially responsible party for response costs. Based on this information, Admiral denied Montrose's request for defense. Admiral maintained it had no coverage obligation, because the pollution was a loss in progress prior to the effective date of its first policy issued to Montrose.

The court adopted the continuous trigger theory (injury or damage is deemed to occur continuously over time as long as the event causing the injury or damage continues to produce injury or damage) and also rejected application of the so-called loss in progress rule (this holds that coverage is not applicable when a loss is known or apparent before the issuance of a policy). Admiral had argued that Montrose had known about the loss prior to the policy's inception. The court, however, held that while Montrose may have known about the potential effects of pollution, Montrose did not know it would ultimately be found liable when it applied for and obtained coverage from the Admiral. The court stated that where there was uncertainty about the imposition of liability and no legal obligation to pay yet established, there was an insurable interest for which coverage may be sought.

In light of this decision, the continuous injury trigger adopted by the court meant that numerous liability policies could be similarly activated in many cases involving injury or damage over successive policy periods. As a result of this decision, some insurers doing business in California wasted no time in introducing endorsements designed to restrict coverage to address the court's ruling. Interestingly, it appeared that the insurers of excess and surplus lines market were the first to introduce the endorsements on the policies of project owners and contractors. Some of the endorsements reduced coverage drastically on construction-related risks, in fact, far more restrictive than one might have expected, based on a court case that involved issues over pollution. Furthermore, although the ruling in the Montrose case focused on the insurer's defense obligation, most of these progressive loss provisions applied to both defense and indemnity. And, while most endorsements applied to bodily injury and property damage, some endorsements also applied to personal and advertising injury claims and suits.

(Note that the Montrose decision also set forth two general items that insurers are seeking to deal with through the use of provisions incorporated into liability coverage or by endorsement: the proper trigger of coverage to be applied to a liability policy where injury or damage is continuous or progressively deteriorating over successive policy periods; and, the loss in progress rule that holds that coverage is not applicable when a loss is known or apparent before issuance of a policy.)

Standard Montrose Provisions

In response to a perceived need to address the Montrose ruling in standard commercial general liability coverage forms, the American Association of Insurance Services (AAIS) and the Insurance Services Office (ISO) introduced endorsements to address situations involving a known loss or loss in progress. The endorsement introduced by ISO in 1999 was titled, Amendment of Insuring Agreement—Known Injury or Damage, CG 00 57 09 99, and applied to its CGL occurrence coverage form. This endorsement was withdrawn in 2001 when its provisions were added to the occurrence form's insuring agreement. The endorsement of AAIS, which also was introduced in 1999, still exists and, according to its manual rules, is a mandatory endorsement. (Since the AAIS provisions comprise an endorsement and the one of ISO forms a part of the CGL coverage form, reference herein is made to “provisions” instead of “endorsements”.) The intent has been to issue provisions that state coverage will not respond to injury or damage known prior to the policy inception date. The approach taken is to also address, in the same provisions, situations of continuing, changed, or recurring injury or damage to the same person or entity.

The concept alleged to underlie the Montrose provisions is said to be the intent to provide coverage only for fortuitous losses. However, the impact of these Montrose provisions appears to go far beyond limiting coverage to fortuitous injury or damage. While the Montrose endorsement issued by AAIS and the policy provisions of ISO use different formats, their content is similar. The operative wording of both the AAIS endorsement and ISO provisions is reproduced in Exhibits 1 and 2. (“Operative wording” means that certain portions of the respective provisions are omitted. Specifically what is not reproduced is insuring agreement 1.a. of the ISO provisions of its December 2007 edition of the CGL coverage form, and the “designated insured” definition of the AAIS endorsement.)

Note that, unlike the definition of insured in the ISO Commercial General Liability coverage form, which includes employees in a separate category of that definition, the AAIS endorsement's definition of designated insured includes any employee who is authorized to give or receive notice of an occurrence or claim. Also, the ISO provision refers to any employee who is authorized by the named insured to give or receive notice of an occurrence or claim. The difference here is that an employee, as a designated insured, can be authorized by anyone under the AAIS endorsement, whereas authorization must be by the named insured under ISO provisions.

Exhibit 1: GL 0950 12 99 (AAIS)

Known Injury or Damage Amendments

2.Under Principal Coverages, Coverage L, and, if applicable, Coverage N are amended by the addition of the following:

This insurance applies only to:

a.”Bodily injury” or “property damage” which is not a continuation of, resumption of, or change in “bodily injury” or “property damage” that was known by a “designated insured” prior to the inception date of the policy period. If a “designated insured” knew, as stated under the Knowledge of Bodily Injury or Property Damage Condition, prior to the inception date of the policy period, that “bodily injury” or “property damage” had occurred, any continuation of, resumption of, or change in such “bodily injury” or “property damage” will be deemed to have been known by the “designated insured” prior to the inception date of the policy period.

b.”Bodily injury” or “property damage” that occurs during the policy period and which is not a continuation of, resumption of, or change in “bodily injury” or “property damage” which was known by a “designated insured”, as stated under the Knowledge of Bodily Injury or Property Damage Condition, to have occurred prior to the inception date of this policy period, will include any continuation or, or change in such “bodily injury” or “property damage” after the end of this policy period.

3.Under Defense Coverage, the following is added:

“We” have no duty to defend a suit or claim seeking “damages” because of “bodily injury” or “property damage” which was known by a “designated insured”, as stated under the Knowledge of Bodily Injury or Property Damage Condition, prior to the inception date of the policy period.

4.Under Conditions, the following condition is added:

Knowledge of Bodily Injury or Property Damage—Knowledge of “bodily injury” or “property damage” will be deemed to have occurred at the earliest of the following times:

a.when a suit, claim or demand for “damages” alleging “bodily injury” or “property damage” is received by any “designated insured”;

b.when any “designated insured” reports the “bodily injury” or “property damage” to “us” or any other insurer; or

c.when any “designated insured” becomes aware of anything that indicates that “bodily injury” or “property damage” may have occurred or is occurring.

Copyright, American Association of Insurance Services, 2000

Exhibit 2: COMMERCIAL GENERAL LIABILITY COVERAGE (CGL) FORM