Insurers Ordered to Pay Policy Limits Twice for a Single Policy Term

In a cautionary tale for insurers everywhere, a California court recently ordered two excess carriers to pay their policy limits twice for a single policy term.  Why?  Because in the policies at issue, the policy limits paid per “annual period” but the policy periods exceeded twelve months.  This simple discrepancy may end up doubling the insurers’ losses.

In The Pep Boys Manny Moe & Jack of California v. Old Republic Ins. Co., 2023 WL 8947123, -- Cal. Rptr. 3d -- (Cal. Ct. App. Dec. 28, 2023), the California Court of Appeals considered excess policies issued by Old Republic and Fireman’s Fund.  Each insurer had issued a policy with an atypical policy period: seventeen months and fifteen months, respectively.  Crucially, each policy defined its limits as paying during “the annual period” while the policy was in force.  In litigation, the insured argued that each policy was in force longer than one year, and thus each policy covered two “annual periods.”  The insurers argued that the policies were issued with an intent to pay no more than once per policy term regardless of the calendar year.  Siding with the insured, the court found the language “annual period” ambiguous and noted that periods of seventeen months and fifteen months are neither one nor two “annual periods,” rather than being somewhere in between.  The court construed that ambiguity against the carriers and held that each policy would pay its limits twice, i.e. once for each “annual period” that the policy was in force. 

Notably, another insurer in Pep Boys – American Excess – also had a policy term exceeding one year.  But, the court held it need only pay its policy limits once.  American Excess policy stated that its limits pay at most once per policy “term,” rather than per “annual period.”  Because the policy indisputably had a single “term,” it need only pay a single time.

The Pep Boys case punctuates the extreme caution that insurers must exercise when issuing policies with atypical provisions, particularly as to policy periods or policy limits.  Where policy limit language does not match the policy period, any disparity could create an ambiguity that a court could construe against the insurer as the drafter.

Retaining experienced counsel to review insurance policies and assist in investigating coverage disputes can help avoid the needless costs.  If you would like to speak to an attorney about a coverage matter, or if you have questions about the content of this update, please contact Seslee Smith, Ryan Burke, or Nathan Miles.