Stacking takes a turn.

• Author: DiBiase, David T.
• Position: Homeowners' insurance coverage

This article originally appeared in the June 2010 Fidelity and Surety Committee Newsletter.

As anyone who has been in the legal profession for a good amount of time knows, the courts sometimes giveth and the courts many times taketh away. The insurance industry is experiencing a giveback trend by several recent court decisions which have declined to "stack" limits of fidelity/crime policies. The most recent example is Superstition Crushing, LLC v. Travelers Casualty and Surety Company. (1) In this case, the court declined to follow a California Court of Appeals decision which allowed "stacking" A.B.S. Clothing Collection, Inc. v. Home Insurance Co. (2) For several years, courts saw the A.B.S. decision as the beacon; that beacon has dimmed, however, and the more recent and thoughtful rulings have trended away from stacking and instead affirmed non-stacking clauses in fidelity/crime policies.

A.B.S. Clothing and Karen Kane

As of 1995, there was no discernible trend on the issue of stacking in such policies. Some cases had held that the insured was entitled to a "limit of liability" for each year (or policy period) that the policy existed. This analysis potentially converted a one-year $50,000 limit policy issued for five consecutive years into a $250,000 limit of liability for losses over that period. (3)

Other cases held, correctly, that the intent of the policy was to limit losses to one limit of liability regardless of the number of years that coverage was in existence. That is, each year (or policy period) that the insured purchased a new policy for $50,000 in coverage, all other "limits" were gone along with the terms of those previous policies. (4)

One of the factors used by insureds and courts to counter this latter argument was the provision in the policy extending coverage for losses occurring during the a prior policy period, but discovered during the current policy, in certain circumstances--the so-called "loss sustained during prior insurance" clause. The insureds took the opportunity of what was in essence a coverage extension to argue for multiple limits over different policy periods; that is, what was drafted by the industry to make sure the insureds sustained continuous coverage, was used to enlarge coverage in ways not contemplated. A.B.S. Clothing was one of the great offending cases in this regard.

In the underlying state court action, the A.B.S. Clothing trial court found in favor of the insurer and held that but one limit of liability was in play. The appellate court, however, in a 2-to-1 decision that included a written dissent, reversed and found the issue of multiple limits turned on whether there was either "continuous" or "consecutive" coverage. The A.B.S. Clothing court stated that if the policy was a "continuous" policy, i.e., there was but one policy during the several years that Home insured A.B.S., then there would be but one limit available. (5) If, however, there were a series of consecutive but distinct policies issued to the insured over the course of the relationship with the insurer, then each policy was bound to its own language and its own terms and limits of liability. (6) Therefore, in a loss occurring, for example, over five separate policy periods, potentially five separate policies would be in play and the argument was open to an insured that each policy limit (depending on the loss during that policy period), would be answerable. (7)

In this regard, A.B.S. Clothing was but one of a number of cases holding that the intent to cap a loss to one stated limit was not the "clear and unambiguous" intent of the policy. (8) In most of these cases, the courts had focused on the definition of the term "occurrence" in order to find ambiguity in the intent and meaning of the policy. Various courts held that the definition of occurrence to include "all loss ... whether the result of a single act or a series of acts" without reference to any policy period or temporal boundary could mean an act or series of acts occurring during one policy period, or it could mean an act or series of acts spread out over multiple policy periods.

A.B.S. Clothing found this as well. (9) Shortly after the A.B.S. Clothing case, yet another stacking claim involving fidelity bonds was brought before the federal court of appeals for the Ninth Circuit in California by way of the case of Karen Kane v. Reliance Insurance Company. (10) The district court in the Karen Kane case found, like the lower court in the A.B.S. Clothing case, in favor of the insurer on the stacking issue. This despite the fact that the A.B.S. Clothing decision was on the books at that time. However, when the case got to the Ninth Circuit Court of Appeals, the fact that the A.B.S. Clothing decision existed and was the highest pronouncement on the "stacking" issue by a California court somewhat tied the hands of the federal appellate judges. The Ninth Circuit ended up adopting the A.B.S. Clothing ruling and held that the district court had gotten it wrong in limiting the insured to but one policy limit of liability. Though the Ninth Circuit correctly found that, based upon the requirement that "discovery" of the loss take place within one year from the termination of a policy, no more than two yearly policies could be in play on any given claim, the court nevertheless allowed at least the "double" stacking of liability limits under fidelity policies. Therefore, practitioners in California had not only the A.B.S. Clothing case to deal with in the state courts, but also the Karen Kane case should the matter end up in federal court.

Superstition Crushing

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