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Risk Management

Beware of insurers' surprise cuts in coverage

"Non-cumulation of limits" endorsement is used to deny claims

By Donald S. Malecki, CPCU

Producers have to exercise caution more today than at any time in the past because standard line insurers are adding provisions to their policies that have the potential to reduce or eliminate some of the coverage that buyers have long come to expect. This applies to both property and liability insurance.

One of the advantages of standard coverage forms is that the court-tested language enables producers to better understand what the forms and endorsements provide, thereby simplifying the task of selling insurance.

The problem today is that a growing number of standard line insurers are adding endorsements with their own wording or in combination with standard ISO provisions. At least with the latter situation, the red flag of endorsements that can tip off the producer commonly includes the wording that states: "includes copyright material of the Insurance Services Office, with its permission."

What producers need to do is not only read the policies of the insurers they represent but also determine the nature of the endorsements being issued because insurers are not always as generous with coverages as they once were. It is not clear if this practice is by underwriting design or claims practice philosophy.

The best example of this is when insurers deny coverage under liability policies for property damage to work performed on behalf of general contractors by subcontractors by maintaining that there has been no occurrence and that defective work is not property damage.

This coverage, referred to as broad form property damage including completed operations, has been available since 1966. The only good news is that this coverage denial does not work in every state, and not all insurers want to avoid having to pay the kinds of claims that are intended to be covered. But in those jurisdictions where coverage denials have been upheld, some otherwise reputable standard line insurers will deny coverage whenever they get the chance.

This has to be strictly a claims philosophy because the CGL policies as written by underwriters include the coverage. The challenge is to overcome the claims person's contention that there has been no occurrence, and that construction defects are not considered to be property damage when work is performed on behalf of the named insured by a subcontractor.

Unorthodox approach

Several standard line insurers that have long been flexible and competitive have been observed issuing an endorsement to their independently filed CGL coverage forms that can only be construed as a way to pay out even less in terms of coverage. It is an underwriting philosophy.

The endorsement in question is labeled in different ways, depending on the insurer, but a generic term that describes it is "non-cumulation of limits," or "non-cumulation of occurrence limit." This endorsement commonly says this: If one occurrence causes bodily injury and/or property damage during the policy period and during the period of one or more prior and/or future policies that include a CGL coverage form, the amount the insurer has to pay is limited. How? The policy's per-occurrence limit is reduced by the payment made under other policies because of such an occurrence.

This provision, in essence, seeks to curb coverage to the limits available to any one policy, even where there are progressive injuries or damages over multiple periods. (As mentioned subsequently, most CGL policies already have a built-in provision that serves this purpose.)

An example of the above provision is where a defective product causes progressive water damage over a period of two years. If a court were to determine that this amounted to two occurrences, instead of one, the limits of the second policy would be reduced by the amount paid under the first policy.

This kind of provision was found earlier in some commercial umbrella policies and later in some policies issued by insurers in the excess and surplus lines market. For the most part, however, these provisions are seldom understood and have been largely ignored.

 With the resurrection of these provisions, producers will have to be prepared to explain the mechanics to their insureds who are going to want an explanation of why they are getting less coverage without a commensurate reduction in premium. (A euphemism for being ripped off.)

As a point of interest, standard line insurers contemplated implementing these non-cumulation of limits provisions in the early 1980s but, after giving some additional thought to the idea, withdrew them because they felt insureds would not understand them.

What may confuse the situation here is that most of today's CGL policies also include what is referred to as a "progressive loss" limitation. Incorporated into the insuring agreement in 2001, it states, in essence, that coverage does not apply to injury or damage known prior to the policy inception. To the extent injury or damage first occurs during the policy period, coverage will include the continuation, change, or resumption of that injury or damage after the end of the policy period.

When the "progressive injury" limitation is compared to the "non-cumulation of occurrence limits" provision, a legitimate question is why both of these provisions are necessary in one CGL coverage form. It is actually overkill and something producers will have to explain. Fortunately, not all insurers are incorporating either one of those provisions, but given the traditional practice of insurers copying one another's provisions, that may change.

The shell game

Apart from adding language to insurance policy forms to reduce coverage, or simply denying covered claims, there is another situation that does not happen too often. It is when an insurer denies coverage and attempts to change the policy provisions to its advantage.

A case in point is Park Terrace, LLC v. Transportation Insurance Company, et al., No 2010AP2432 (Ct. App. Dist. 1, Wisc. 2011). The named insured was a developer of condominiums that purchased a builders risk policy consisting of two coverages: (1) direct physical loss or damage, and (2) loss of income from possible delays following direct physical loss or damage.

Following policy renewal, a fire caused major damage to one of the condominium buildings. Pursuant to the policy, the insurer paid $450,000 to repair the property and an additional $30,000 for other covered costs. When the named insured submitted a claim seeking loss of income coverage caused by the delay from the fire, the insurer denied the claim.

The insurer asserted that the renewal policy did not include loss of income coverage, but rather only "soft costs," which was more limited coverage for such items as interest and taxes. Interestingly, what came to light was that the renewal policy contained a loss of income endorsement; but after the loss, the insurer unilaterally removed the loss of income endorsement and replaced it with the more limited soft costs endorsement.

The insurer took the position that soft costs was the agreed-upon coverage, and that the loss of income endorsements in both the first and renewal policies had been included by accident.

An additional complication was that the loss of income endorsement of the first policy indicated business income coverage. The renewal policy, on the other hand, as originally issued had an income endorsement that indicated rental income coverage, which was not requested. (It, in fact, would have been inappropriate.)

The circuit court rejected the insurer's version of events and credited, in part, the evidence to the contrary, such as the producer's testimony. He testified that the developer's representative told him that the type of coverage desired was for "lost profits." He also testified that he believed the insurer's underwriter knew exactly the coverage being sought and was going to provide it.

The circuit court concluded that the policy, as altered by the insurer, had to be reformed to include the loss of income endorsement. The jury also awarded contract damages of $370,000, bad faith damages of $3 million, punitive damages of $4 million and an award of $1 million in attorneys' fees. The jury also found the producer, who was brought into this action by the named insured, not negligent in procuring the policies.

For legal reasons that are not discussed here, the appeals court affirmed the reformation and breach of contract claims. But the appeals court reversed the circuit court's ruling on bad faith, punitive damages, and the award for attorneys' fees.


The fact that this article may appear to be taking a dim view of the actions of insurers should not be taken to mean that insureds and their legal counsel are without blame. Based on some of the arguments made by insureds, particularly their legal representatives, one is reminded of the 1994 movie titled "Dumb and Dumber." Some of the arguments before judges are something to wonder about.

The important point here is that the producer often is caught in the middle of these arguments. When they get to that stage, producers can expect to be named as defendants. That is the reality. So, producers need to be prepared.

Unfortunately, unlike in years past, producers cannot avoid selecting insurers that will try some of the shenanigans that are taking place currently, not to speak of the changing claims philosophy of some insurers.

Maintaining solid underwriting practices is the key—that is, flexibility, the development of competitive forms, the willingness to work with producers in writing the kind of coverage that applicants need, and not adding the kind of provisions that "whittle" on coverage.

The author

Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.


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