Vermont Issues Bulletin on ‘Non-Cumulation’ Policy Provisions

The Vermont Department of Financial Regulation (DFR) has issued a bulletin reminding carriers that “non-cumulation” policy provisions and endorsements in occurrence-based liability policies are not permissible under Vermont law.

DFR Commissioner Susan L. Donegan said in the Insurance Bulletin No. 189 that the Vermont Insurance Division has recently seen an increase in the use of non­-cumulation policy provisions and endorsements in liability policy filings.

“The purpose of this bulletin is to remind insurers of the Division’s position that such clauses or endorsements in occurrence-based liability policies are not permissible under Vermont law and, therefore, will not be approved,” Donegan said.

According to the bulletin, non-cumulation provisions or endorsements attempt to limit an insurer’s liability when multiple policies issued by the same company or its affiliates apply to an injury that causes continuous damage over successive policy periods.

A typical non-cumulation clause provides that if a single claim or several “related” claims — for example, a pollution loss — has been filed against the insured for damages occurring over a number of policy years, the insurer’s maximum limit of liability under all policies issued to the insured would not exceed the highest limit applicable under any one policy form.

For example, an insured who purchased commercial liability policies with a $1 million annual limit from the same company for a period of five years and who experiences a $5 million pollution loss starting in year one and continuing through year five would be limited to a recovery of $1 million. In this case, the insured would be prohibited from aggregating the annual policy limits to cover the entire loss, even though the loss occurred continuously throughout the five-year period.

Non-Cumulation Clauses

Regulators said non-cumulation provisions in an occurrence-based commercial liability policy are problematic for two reasons.

• First, although non-cumulation language significantly reduces the amount of coverage available for a catastrophic event like a pollution loss, insurers have been unable — despite repeated requests from the Insurance Division — to demonstrate an actuarial basis for the pricing of policies with non-cumulation clauses or to show that the reduction in coverage is appropriately reflected in the policy cost.

Citing Section 4685(d) of Title 8 V.S.A., the bulletin said it is the Insurance Division’s position that policy provisions which lack actuarial justification and limit coverage without a corresponding reduction in premium are “unfairly discriminatory.”

• Second, non-cumulation provisions are inconsistent with the nature of the coverage granted in an occurrence policy. An occurrence policy provides indemnification for liability incµred as a result of accidents or injuries that take place during the term of the contract, which is typically one year.

The bulletin said a non-cumulation provision makes only one annual policy limit applicable to a continuous trigger loss, even if the loss occurred continuously over several successive policy periods.

The bulletin also said Section 3542(2) of Title 8 V.S.A. prohibits policy language that is inconsistent or misleading with respect to the general grant of coverage contained in the insurance contract.

In addition to the lack of actuarial justification, non-cumulation clauses are inconsistent with the coverage expectations of policyholders who purchase occurrence-based commercial liability policies. Such clauses are misleading to consumers who lack the technical knowledge to understand that policy limits can be aggregated if they move their liability coverage to a new, non-affiliated insurer each year.

DFR added that the Insurance Division recognizes it would be unfair to require an insurer to pay for losses that were known to the policyholder at the time a new or renewal policy is written. DFR said that for this reason, regulators will continue to approve “known loss” exclusions that bar coverage of losses that are known before policy’s inception or renewal date.