• Additional Ambiguities: Prorated Aggregate CGL Policy Limits
  • May 13, 2003
  • Law Firm: Marshall, Dennehey, Warner, Coleman & Goggin - Cherry Hill Office
  • Relying upon the simplistic notion of ambiguous contract language, in United States Mineral Products Company v. American Insurance Company, 2002 N.J. Super. LEXIS 119 (App. Div. 2002), New Jersey's Appellate Division has set forth a relatively simple methodology for determining if the annual aggregate limits of a CGL policy have been prorated when the coverage period is for something short of a 365-day term. Unless the relevant policy or endorsement specifically states otherwise, the insured is entitled to the total aggregate limit of coverage that would have been applicable had the policy provided coverage for a full year term.

    United States Mineral concerned a declaratory judgment action by United States Mineral Products Company ("USM") against Twin City Fire Insurance Company ("Twin City"), one of USM's excess policy carriers. USM manufactured products containing asbestos from 1954 through 1971. USM was eventually faced with over 15,000 asbestos-related claims, including 500 filed in New Jersey.

    Twin City had previously sold USM a third-layer excess policy for the 15-month period from August 8, 1983, through November 11, 1984. The limits of this policy were $10 million each occurrence and $10 million aggregate. An endorsement to this policy specifically defined two separate annual $10 million aggregate periods: August 1, 1983, to November 11, 1983, and November 11, 1983, to November 11, 1984. USM paid $5,040.00 for this coverage.

    Pursuant to a restructuring of its insurance programs, USM purchased additional coverage from Twin City for the two-week period of November 11, 1984, through November 25, 1984. The endorsement memorializing this purchase stipulated that the premium paid for this coverage was $152.00 and that "all other terms and conditions remain the same."

    Argued initially before the trial court on a motion for summary judgment, Twin City maintained that the two-week extension did not create an additional aggregate limit. The trial court rejected Twin City's argument, holding that it would be contrary to an insured's reasonable expectations to find that, where an insured pays an additional prorated premium for coverage that is identical to that provided by the original policy, the coverage provided constitutes a reduction of the original aggregate limits. The trial court held that what the prorated premium reflects is merely a reduction of the insurer's time on the risk, and not a reduction in coverage.

    In upholding the trial court's decision, the Appellate Division first referred to the often cited litany of doctrines regarding the interpretation of insurance contracts: the purpose of judicial review is to search broadly for the probable intent of both parties in an effort to find the reasonable meaning in maintaining the express general purposes of the policy, Erdo v. Torcon Const. Co., Inc., 275 N.J. Super. 117, 120 (App. Div. 1994); to determine if the policy language is ambiguous, Pittston Co. Ultramar America Ltd. v. Allianz Ins. Co., 124 F. Supp. 3d 508, 520 (3rd Cir. 1997); that clear and unambiguous language must be enforced as written, Cobra Products v. Federal Ins. Co., 317 N.J. Super. 392, 400 (App. Div. 1998); that ambiguities must be resolved against the insurer and in accord with the reasonable expectations of the insured, Lilliston Chrysler v. Universal, 329 N.J. Super. 318, 324 (App. Div. 2000); ambiguities in policy language exist where it is so confusing that the average policyholder cannot determine the boundaries of coverage, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 247 (1979); and, that where language is considered ambiguous, if whether more precise language had been included in the policy by the insurer the ambiguity would be resolved, Gibson v. Callaghan, 158 N.J. 662, 670 (1999).

    The Appellate Court then affirmed the trial court's decision, based substantially on the reasons outlined in the trial court's oral opinion rejecting Twin City's arguments. However, the Appellate Court did provide further justification for its decision by examining similar outcomes from other jurisdictions. In Stonewall Ins. Co. v. Asbeston Claims Mgmt. Corp., 73 F.3d 1178 (2d Cir. 1995), the district court found that an eight and one-half month policy extension provided the same $5 million aggregate limit as the initial policy because the policy was devoid of any language regarding the proration of aggregate limits where the policy was in effect for less then a year and because the premium payments roughly corresponded to a prorated reduction for a full year of coverage.

    The USM Court also looked at Board of Trs. of Univ. of Ill. v. Insurance Corp. of Ireland, Ltd., 750 F. Supp. 1375 (N.D. Ill. 1990), which looked almost exclusively at the relationship between the insured's full-year premium and four-month premium. Because they were clearly related, the court found the insured certainly intended that it was purchasing the same aggregate policy limits for the four-month extension period, "the result flows from the one item of totally objective evidence, the premium itself." Id at 1383-84.

    However, the USM Court was also sure to point out that the Stonewall Court did not find that full annual aggregate coverage applied where there was either a change in insurance carrier or a change in the limits. Further, the USM Court articulated several "pivotal factors" it considered important when reviewing a policy for guidance under such circumstances: the existence of any policy provisions regarding the reduction or proration of annual aggregate limits in the event of cancellation; if the policy provides for proration of annual aggregate limits where the policy is in effect for less then one year; whether the policy addresses cancellation; whether the policy involves a change in insurance carrier; whether the policy involves a change in excess coverage limits or a change in the level at which a carrier becomes liable; and whether the percentage relationship of the premium paid for the short-term policy is roughly equivalent to the percentage of the year covered. Of course, all of the forgoing is tempered by New Jersey's insurance construction law grounded in resolving ambiguities in favor of the insured.

    Applied to the present matter, the USM Court looked at the relationship between the $152 premium paid by USM for the two-week extension period and the $5,040 it paid for the original policy premium. The USM Court then found that the percentage relationship of the two-week premium to the original policy premium was roughly equivalent to the percentage relationship to the two-week period to the original policy period: 1/26. The USM Court also harkened back to the policy language, finding it ambiguous. Because the endorsement language, stating that all terms and conditions of the policy would remain the same, was subject to several interpretations, the court found reasonable USM's expectation that the reduced premium paid to Twin City reflected only a reduction in Twin City's time on the risk, and not a corresponding reduction in aggregate policy limits. Finally, the USM Court stated that if Twin City had intended to reduce its exposure during the two-week extension period, "insurance policy interpretation principles required that it be specifically so stated in the endorsement extending coverage." USM at 69.

    In its rational and outcome, the decision in this case is neither illogical nor outrageous. Its significance stems from its continued reminder that all aspects of an insurance policy, including all endorsements, must be crafted with great care and specificity. Despite what an insurer perceives as a clearly worded provision, New Jersey's courts have, and will continue to carefully scrutinize disputed policy language, unabashedly resolving ambiguities against insurance carriers and in favor of insureds.