Dealing With The Non-Cumulation Clause: It May Not Mean What Some Insurers Say It Does!, Insurance Policyholder Advocate

A rather common clause found in excess liability policies since at least the early 1960's is the so-called "non-cumulation" clause. That clause often provides that: "If any loss is also covered in whole or in part under any other excess policy issued to the Assured prior to the inception date hereof the limit of liability ... shall be reduced by any amounts due to the Assured on account of such loss under such prior insurance." See e.g., Stonewall Ins. Co. v. E.I. du Pont de Nemours & Co., 996 A. 2d 1254, 1259 (Del. 2010). According to many insurers, this provision serves a bit like a deemer clause so as, arguably, to limit coverage available under multiple triggered policies. Under this argument, functionally, one limit (not multiple policy limits) is available for a common loss covered under those multiple policies. Before succumbing to its insurer's restrictive coverage position, an insured would be wise to consider its defense to such positions, a defense that may be supported by numerous separate and independent arguments.

As an initial matter, the drafting history of the non-cumulation clause makes it clear that the purpose of the provision was to prevent a policyholder from obtaining a double recovery in limited circumstances. For example, the London Market policy form L.R.D. 60 was drafted in 1960, prior to the development of coverage concepts such as continuous trigger (in which a single claim triggers multiple, consecutive policies spanning a period of years) or "all sums" allocation (in which a policyholder can "pick and choose" which policy year is responsible for providing coverage in full for a claim). Christopher French, The "Non-Cumulation Clause": An "Other Insurance" Clause by Another Name, 60 Kan. L. Rev. 387 (2011). The reason for drafting the provision was that the L.R.D. 60 form was an "occurrence" based form – a change from the previously used "accident" based form. The drafter, Leslie R. Dew, apparently wanted to make sure that the syndicates in the earlier years (using the accident form) would be required to pay before the syndicates in the later years (using the occurrence form). See id. In order to achieve this result, Mr. Dew drafteda "non-cumulation clause" which required that the claim be presented to and paid by the earlier syndicate before a claim could be required to be paid by a later syndicate. In other words, the claim was "due" from the earlier syndicate until it was presented to and paid by the earlier syndicate, in which event it was no longer "due" and therefore if there was anything left of the loss, it could be presented to the later syndicate under the L.R.D.60 because nothing was then "due" under an earlier policy. This was a problem that had to be solved because the same occurrence could trigger two policies, the one in effect at the time of the "cause" and the one in effect at the time the damage or injury took place. Thus, in drafting the non-cumulation clause it was not contemplated that the provision would be used in multiple trigger or "all sums" scenarios – and it certainly was not intended to apply in such circumstances.

Further, an equally common provision found in excess policies, or the umbrella policies to which they follow form, is a "broad as primary" endorsement. By its language and application, that provision may render the non-cumulation clause inoperative. The purpose of the broad as primary endorsement is to ensure that the umbrella policies (and those that follow form to them) provide comprehensive coverage parallel to that provided by the primary policies. See e.g., Housing Group v. California Ins. Guar. Ass'n., 47 Cal. App. 4th 528, 534 (Cal. Ct. App. 1996) ("[I]t is obvious that the whole point of the broad as primary endorsement was to expand the umbrella so that its coverage was as 'broad' as the primary's.") The "broad as primary" endorsement often unequivocally prescribes that the coverage granted by the umbrella policies will, with certain specific and duly noted exceptions listed in the endorsement, be no more restrictive than that provided by the underlying primary policies — in other words, these policies will provide coverage at least equal to that granted by the underlying primary policies. Thus, if primary policies do not contain a non-cumulation clause, then an excess insurer's attempt to enforce a non-cumulation clause in its policies must necessarily fail.

In addition, other policies issued to the insured over time by the same insurer who seeks to enforce its non-cumulation clause should also be reviewed with care because they too may further provide additional ways and means to avoid application of the non-cumulation clause. For example, a commonly used condition in primary policy forms issued by at least AIG companies over the years provides that if the insurer has issued other policies to the insured, the insured may elect to have the primary policy's terms and conditions apply instead of the other policies' terms and conditions. If there is no non-cumulation clause in the primary policies, then the insured may by contract elect not to have the non-cumulation clause apply and, instead, elect that more favorable provisions from the primary policies apply. Similarly, in another commonly found condition in forms issued over the years, the liberalization clause, primary policies further provide that the terms of other policies issued by the same insurer shall be interpreted and applied as liberally as the terms of the primary policy. Thus, where the insurer seeks to reduce its excess coverage to a single policy limit, such an interpretation of the non-cumulation clause undeniably makes the coverage provided by the excess policies more restrictive than that afforded by the underlying primary policies whose more liberal terms must be applied to the other policies issued by it.

Furthermore, even if the foregoing terms are not found in underlying policies, an insured can effectively argue that applicable law precludes provisions such as non-cumulation clauses, as functional "other insurance" clauses, from providing a basis for reducing an insurer's obligations to the policyholder. "Other insurance" clauses, which purport to reduce the coverage available when other insurance exists to pay a claim, serve only to entitle an insurer potentially to contribution from other insurers, and not to limit the coverage initially provided to the policyholder. See Keene Corp. v. Ins. Co. of N. Am., 667 F. 2d 1034, 1050 (D.C. Cir. 1981) ('"[O]ther insurance' does not diminish the primary duty of the insurer whose coverage is triggered to indemnify the policyholder in full.")Thus, a non-cumulation provision functioning as a form of "other insurance" clause can only serve to re-spread the risk after the policyholder has been indemnified in full. Accordingly, because non-cumulation clauses only govern allocation between insurers after the policyholder has been reimbursed in full, the clause could not serve to limit the available coverage to which the insured is entitled in the first instance. A corollary argument is that in those jurisdictions that apply either a pro rata or all sums allocation scheme, application of a non-cumulation clause in the fashion sought by the insurer to restrict coverage available to the insured would eviscerate the foundation behind the allocation schemes adopted by the courts and, thus, must not be enforced as sought by the insurer. See Outboard Marine Corp. v. Liberty Mu. Ins. Co., 670 N. E. 2d 740, 750 (Ill. App. Ct. 1996) (finding that "[t]o apply the 'prior insurance' and 'non-cumulation of liability' clauses would give the insurers a double credit and would deprive the insured of the full value of its premium" and would be inequitable "because no excess insurer is concurrently liable with any other."); Spaulding Composites Co. v. Aetna Cas. & Sur. Co., 819 A. 2d 410, 422 (N.J. 2003) ("Once the court turns to pro rata allocation, it makes sense that the non-cumulation clause, which would allow the insurer to avoid its fair share of responsibility, drops out of the policy.")

Additionally, by its own terms, the non-cumulation clause would be inapplicable unless a prior issued policy first has been called upon to make payments and has been directed to make such payments so that payments are in fact "due" to the insured under those policies. Because in many jurisdictions the insured is entitled to select which of any triggered policies will provide indemnification for any given claim brought against it, the non-cumulation clause could not apply to any claim so long as the insured selects the later-issued policies to pay such claims before any earlier issued policy is selected to pay (and is directed to pay) any claims. See e.g., Keene, 667 F. 2d at 1050 (A policyholder may "collect from any insurer whose coverage is triggered the full amount of indemnity that is due, subject only to the provisions in the policies that govern the allocation of liability when more than one policy covers an injury."); Armstrong World Indus. Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 52 (1996) ("[A] policyholder may obtain full indemnification and defense from one insurer, leaving the targeted insurer to seek contribution from other insurers covering the same loss.")

Finally, numerous courts have found non-cumulation clauses ambiguous, at best, and construed them against the insurer. See e.g., Glaser v. Hartford Cas. Ins. Co., 364 F. Supp. 2d 529, 538 (D. Md. 2005); A.B.S. Clothing Collection, Inc. v. Home Ins. Co., 34 Cal. App. 4th 1470 (Cal. Ct. App. 1995); Cincinnati Ins. v. Hopkins Sporting Goods, 522 N. W. 2d 837, 838 (Iowa 1994). In addition, courts have refused to enforce non-cumulation clauses on the ground that they are unenforceable escape clauses, which are void as against public policy. See UTI Corp. v. Fireman's Fund Ins. Co., 896 F. Supp. 362, 378 (D. N. J. 1995) (finding non-cumulation clause was an unenforceable escape clause and that "it is 'unacceptable for an insurance company to provide no coverage under a policy for which it received premiums.'")

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