the fidelity law journal

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The Fidelity

Law Journal

published by The Fidelity Law Association

Volume XVIII, November 2012

Cite as XVIII Fid. L.J. ___ (2012)

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The Fidelity Law Journal is published annually. Additional copies may be purchased by writing to: The Fidelity Law Association, c/o Wolff & Samson PC, One Boland Drive, West Orange, New Jersey 07052.

The opinions and views expressed in the articles in this Journal are solely of the authors and do not necessarily reflect the views of the Fidelity Law Association or its members, nor of the authors’ firms or companies. Publication should not be deemed an endorsement by the Fidelity Law Association or its members, or the authors’ firms or companies, of any views or positions contained herein. The articles herein are for general informational purposes only. None of the information in the articles constitutes legal advice, nor is it intended to create any attorney-client relationship between the reader and any of the authors. The reader should not act or rely upon the information in this Journal concerning the meaning, interpretation, or effect of any particular contractual language or the resolution of any particular demand, claim, or suit without seeking the advice of your own attorney.

The information in this Journal does not amend, or otherwise affect, the terms, conditions or coverages of any insurance policy or bond issued by any of the authors’ companies or any other insurance company. The information in this Journal is not a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Coverage depends upon the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law.

Copyright © 2012 Fidelity Law Association. All rights reserved. Printed in the USA. For additional information concerning the Fidelity Law Association or the Journal, please visit our website at http://www.fidelitylaw.org.

Information which is copyrighted by and proprietary to Insurance Services Office, Inc. (“ISO Material”) may be included in this publication. Use of the ISO Material is limited to ISO Participating Insurers and their Authorized Representatives. Use by ISO Participating Insurers is limited to use in those jurisdictions for which the insurer has an appropriate participation with ISO. Use of the ISO Material by Authorized Representatives is limited to use solely on behalf of one or more ISO Participating Insurers.

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Robert M. Konop is a Partner with Hinshaw & Culbertson LLP in Chicago, Illinois. 193

THE LOSS SUSTAINED POLICY AND MULTIPLE YEAR LOSSES: KEEPING IT SIMPLE

Robert M. Konop

I. INTRODUCTION

When an insured incurs a fidelity loss that has occurred over a span of years, the amount of recoverable loss may vary depending on whether the policy covering the loss is a Discovery or a Loss Sustained Policy. If the fidelity policy is a Discovery policy, the policy provides coverage for all loss occurring at any time, but that was discovered during the applicable policy period or extended period of discovery.1 Therefore, if an insured discovers that his employee has embezzled funds over a period of time, as long as the discovery took place during the policy period or within the extended discovery period, the policy would apply to all covered loss, without consideration for when the loss occurred.

Under a Loss Sustained Policy, coverage is provided for loss sustained through acts committed only during the policy period, as long as the loss was also discovered during the policy period or within the extended discovery period.2 In order to provide coverage for losses sustained prior to the effective Policy Period, the Loss Sustained Policy also includes a Loss Sustained During Prior Insurance Clause.3 Generally, this clause provides for recovery of loss sustained during a

1 See, e.g., Commercial Crime Policy (Discovery Form) CR 00 22 07

02 (© ISO Properties, Inc. 2001) Conditions E.1.f. 2 See, e.g., Commercial Crime Policy (Loss Sustained Form) CR 00 23

07 02 (© ISO Properties, Inc. 2001) [hereinafter 2001 Commercial Crime Policy] Condition E.1.p.

3 See, e.g., 2001 Commercial Crime Policy Condition E.1.q. [hereinafter Prior Insurance Clause].

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194 Fidelity Law Journal, Vol. XVIII, November 2012

prior policy, or policies, if certain requirements are met. The question we will address is how far back does a Prior Insurance Clause reach; how many prior policies’ losses are to be included in the coverage provided by the current policy?

The purpose of this article is to discuss the evolution of the Prior Insurance Clause’s coverage for losses sustained during multiple prior policies.4 In particular, this article will examine how courts initially interpreted the Prior Insurance Clause to apply almost indefinitely to losses sustained during multiple prior policies. It will then examine more recent cases interpreting the clause to apply to only the loss sustained under the policy immediately preceding the policy under which coverage is being sought. Finally, the article will address the Insurance Services Office, Inc. 2005 modifications to the Prior Insurance Clause and how those modifications will affect coverage for loss sustained during multiple prior policies.5

II. A BRIEF HISTORY OF FIDELITY INSURANCE COVERAGE6

In the early 1900s, employee dishonesty bonds or fidelity bonds were intended to cover an individual in a position that was susceptible to incurring loss and usually only covered loss resulting from embezzlement or larceny.7 For example, an early fidelity bond would provide coverage for a specific employee in a position of financial power

4 The authors recognize that there are numerous versions of the Prior

Insurance Clause in use. The authors’ reference to the Prior Insurance Clause hereinafter refers generically to the Prior Insurance Clause found in the 2001 Commercial Crime Policy Condition E.1.q., and similar clauses.

5 Commercial Crime Policy (Loss Sustained Form) CR 00 23 05 06 (© ISO Properties, Inc. 2005) [hereafter 2005 Commercial Crime Policy].

6 For a detailed history of the development of the Prior Insurance Clause in fidelity and commercial bonds, see John J. McDonald, Joel Weigert & Theresa Gooley, Application Of The Loss Under Prior Policy Provision, IX FID. L.J. 77 (2003). Robert A. Babcock, History of Fidelity Coverage in THE

COMMERCIAL BLANKET BOND ANNOTATED 1 (William F. Haug ed., 1985); and Carol A. Pisano & Robert Duke, Interpretation and Construction of the Commercial Crime Policy, in THE COMMERCIAL CRIME POLICY 1 (Randall I. Marmor & John Tomaine, eds. 2005).

7 McDonald, Weigert & Gooley, supra note 6, at 78.

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The Loss Sustained Policy and Multiple Year Losses 195

for the wrongful taking of funds. For reasons such as turnover, having a policy for every employee became too cumbersome, so new bonds began to evolve as financial institutions began to grow.

The next solution to cover employee dishonesty or commercial crime losses became the Schedule Bond. The Schedule Bond was broken up into either the Name Schedule Bond or the Position Schedule Bond.8 The Name Schedule Bond insured specific named individuals. The number of employees leaving and being hired by financial institutions, for various reasons, made this bond impractical, so the Position Schedule Bond evolved. The Position Schedule Bond insured the specific position rather than the named employee. If any employee quit and a new employee was hired in that position, the bond remained in effect because it provided coverage for employee dishonesty based on the position title and not on the name of the employee. Nonetheless, these policies proved to be incapable of providing coverage for the variety of employee dishonesty that started to occur within financial institutions.9

In 1915 the insurance industry implemented a solution to the variety of commercial crimes by introducing the Bankers Blanket Bond. The older bonds only covered losses that stemmed from larceny or embezzlement, but the Bankers Blanket Bond covered an extensive range of commercial crime. These policies were still only available to financial institutions, and it wasn’t until around 1926 that other types of companies were able to implement blanket coverage for their employees. Eventually, Commercial Blanket Bonds were developed to provide coverage for all employees at varying types of business.10 Commercial Blanket Bonds were the original form of the Commercial Crime Policies that are in place today.

A. Superseded Suretyship Riders

The problem that needed to be addressed under the Commercial Blanket Bonds was that there was no continuity of coverage for losses sustained during a prior bond, when such bond expired and/or was

8 Id. at 78-79. 9 Id. at 79. 10 Id.

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modified, but was not discovered until a later bond was in effect. The Superseded Suretyship Rider was developed to provide such continuity where losses were incurred during one bond period but not discovered until a later bond period.11 Several examples of a Superseded Suretyship Rider are found in reported cases interpreting the Superseded Suretyship Rider. The first such example is found in Webster v. United States Fidelity & Guaranty Co.12 as a rider to a schedule bond:

This bond is a continuation of the fidelity bond issued effective the 14th day of May, 1924 in favor of First National Bank, Corinth, Mississippi on behalf of various employees now covered under the attached bond, and the surety agrees that in order to preserve the continuity of protection to the employer that the attached bond shall cover any loss or losses accruing under the prior bond, subject to the following conditions:

That the attached bond shall be construed to cover, subject to its terms, conditions and limitations, any loss or losses under said prior bond which shall be discovered before the expiration of the time limited in the attached bond for the discovery of loss thereunder and which would have been recoverable under the prior bond had it continued in force, and also under the attached bond, had such loss or losses occurred during the currency thereof.

That nothing herein contained shall be construed to render the surety liable under the attached bond for a larger amount on account of any loss or losses under said prior bond than would have been recoverable thereunder had it continued in force, or to increase the time for discovering, or making claim for loss under said prior bond beyond what would have been the time, had it continued in force.

11 Id. at 80. 12 153 So. 159 (Miss. 1934).

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That the aggregate liability of the surety under said prior bond and the attached bond, on account of, any loss or losses, whether sustained under said prior bond or under the attached bond or partly under each, shall in no event exceed the larger of the amounts carried under said prior bond and under the attached bond on the employee causing such loss or losses.13

The Superseded Suretyship Rider above specifically states that its purpose is to provide continuity of protection for loss accruing under the prior bond provided:

1. The loss is discovered before expiration of the discovery time of the current bond.

2. The prior loss would have been recoverable under the prior bond had it remained in force.

3. The prior loss would have been recoverable under the current bond.

4. The Rider does not increase the time for discovery of loss under the prior bond.

5. The aggregate liability under the prior bond and current bond shall not exceed the larger of the limits under the prior or current bond.

The Superseded Suretyship Rider in Webster arguably limits recovery for prior loss to only loss that would have been covered under the immediately preceding bond, as the Rider refers to “the prior bond” not “prior bonds.” However, the court’s interpretation of the Superseded Suretyship Rider did not directly address this issue. The Rider’s limitation provided as follows:

That nothing herein contained shall be construed to render the surety liable under the attached bond for a larger amount on account of any loss or losses under said

13 Id. at 160-61.

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prior bond than would have been recoverable thereunder had it continued in force, or to increase the time for discovering, or making claim for loss under said prior bond beyond what would have been the time, had it continued in force.14

Relying on the Rider’s limitation, the court held that, because the losses under the first bond were discovered beyond the first bond’s period of discovery and were thus not recoverable under the first bond, there was no coverage for those losses under the last bond.15

Another example of a Superseded Suretyship Rider can be found in Exchange Building Ass’n v. Indemnity Insurance Co.16 This Superseded Suretyship Rider provided in part as follows:

That the attached bond shall be construed to cover, subject to its terms, conditions and limitations, any loss under said prior bond . . . which would have been recoverable under said prior bond had it continued in force, and also under the attached bond had such loss occurred during the currency thereof.17

This Rider, like that in Webster, covered loss under “said prior bond.” As with the Rider in Webster, one could interpret the use of the singular “bond” to mean that the coverage under the current bond only covered losses sustained during the immediately prior bond. However, the court did not address this issue. The issue before the court was whether the prior bond’s $5,000 limit of liability would apply or the current bond’s $2,000 limit of liability would apply. The court found that, under another of the Rider’s terms the total recoverable amount was $2,000, the bond limit applicable during the current bond period.18

Some courts have determined that a Superseded Suretyship Rider is inherently ambiguous with regard to what is recoverable and,

14 Id. at 161. 15 Id. at 163. 16 12 A.2d 924 (Pa. 1940). 17 Id. at 925. 18 Id.

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therefore, expands the Rider’s coverage. In Hartford Accident & Indemnity Co. v. Swedish Methodist Aid Ass’n,19 the Superseded Suretyship Rider provided, in part as follows:

Whereas, said fidelity suretyship, as of the effective date of the attached bond, has been cancelled, or has been terminated by agreement, as is evidenced by the issuance and acceptance of the attached bond and this rider.

Now, therefore, it is hereby understood and agreed as follows:

First, that the attached bond shall be considered to cover, subject to its terms, conditions and limitations, any loss under said fidelity suretyship caused by any employee covered by said fidelity suretyship, which shall be discovered after the expiration of the period allowed under said fidelity suretyship in which claim may be presented after cancellation or termination, or if no such period after the statute of limitation, and before expiration of time limited in the attached bond for the discovery of loss or making claim thereunder, and which would have been recoverable under said fidelity suretyship had it continued in force, and also under the attached bond, had such loss occurred during the currency thereof.

Second, that nothing herein contained shall be construed to render the surety liable under the attached bond for a larger amount on account of such loss or losses under said fidelity suretyship than would have been recoverable thereunder had it continued in force, or to increase the time for discovering loss under said fidelity suretyship beyond that would have been the time had it continued in force, and as to that part of the loss under the attached bond shall not exceed the amount applicable to the employee causing the loss under the attached bond, and as to the whole loss shall not exceed the

19 92 F.2d 649 (7th Cir. 1937).

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amount applicable to the employee causing the loss under either the fidelity suretyship or the attached bond, whichever may be larger.20

The court found that the Rider was “confusing and contradictory” and, therefore, was ambiguous.21 As such, the policy was construed in favor of the insured.22 Construing the subsequent policy, which included the Rider, as a whole, the court also found the subsequent policy to be ambiguous and allowed for recovery of losses under the second bond that were not covered under the prior policy. The court’s decision ignored the Superseded Suretyship Clause’s requirement that the loss must have been recoverable under the prior bond, which it was not.23

The court did not address the question of whether the Rider extended to prior loss beyond the next immediate bond. However, the Rider’s language in this regard referred to the prior fidelity suretyship as being the bond that was cancelled as of the effective date of the current bond. This would at least imply that the coverage applies to only the loss under the next immediate prior bond. However, given the court’s finding of ambiguity and ignoring the mandate that the loss be recoverable under the prior bond, it is not likely that the court would have strictly construed this language as restricting coverage to only the prior bond.

The Superseded Suretyship Clause generally covered loss that would have been recoverable under an expired prior policy, subject to certain limitations. Although not uniform in their wording, the clauses generally contained the following requirements for coverage:

1. The insured incurred a loss during the prior bond.

2. The current bond superseded the prior bond.

3. The prior loss would have been recoverable under the prior bond had it remained in effect.

20 Id. at 651. 21 Id. 22 Id. at 652. 23 Id.

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4. The prior loss would have been recoverable under the current bond.

5. The prior loss is not recoverable under the prior bond because the bond or the discovery period has expired.

Similar coverage requirements were found in subsequent Loss Sustained Bonds under various labels.

B. Later Forms of Superseded Suretyship Clauses

Insurers developed various forms of a Superseded Suretyship Clause to capture losses from a prior bond period. One such form of the Superseded Suretyship Clause that was used in the later twentieth century was denoted as a Retroactive Extension Clause. Such a clause was found in a bankers’ blanket bond issued by Continental Insurance in Traders State Bank, Glen Elder, Kansas v. Continental Insurance Co.24 The Retroactive Extension Clause in Traders State Bank covered prior losses that were

recoverable under coverage of any other insurance carried by the Insured . . . PROVIDED, . . . (a) the applicable coverage of this bond is substituted . . . for the coverage given by such other insurance and the Insured . . . carried such coverage continuously from the time such losses are sustained to the date and hour the coverage of this bond is substituted for . . . .25

The court found the clause’s purpose was as follows:

[T]o provide the bank with coverage, which it would not otherwise have had, for losses discovered but not sustained during the life of a “loss sustained” bond. The effect of this construction is to limit Continental’s liability for losses sustained during the life of the antecedent bond but discovered during the life of its bond to amounts that would have been recoverable under

24 448 F.2d 280 (10th Cir. 1971). 25 Id. at 284 n.1.

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the antecedent bond if it had been in effect at the time the losses were discovered.26

The court was not called upon to address the number of prior bonds to which the Retroactive Extension Clause applied. The clause in the Continental policy only required that the current bond had been substituted for prior coverage and that coverage was continuous from the time of loss. These requirements could reasonably be interpreted to allow for losses under multiple prior bonds to be covered under the current policy as long as coverage was continuous.

Coverage for losses sustained during a prior bond was provided by the following clause in a bond issued by Continental Insurance Company in Eddystone Fire Co. No. 1 v. Continental Insurance Co.:27

8. If this Bond is issued as a continuation of a bond previously issued by the Company to the Assured, it is understood . . . and agreed that in order that the change from such prior bond to this bond may not impair the Assured’s interests, this bond shall be construed to cover every loss within the period of the prior bond that would have been recoverable under the prior bond had the prior bond continued in force.28

The Eddystone court found that this language supported its conclusion that the three bonds issued by Continental were part of a continuous bond scheme, were not cumulative, and limited the insured’s recovery of a $10,495 loss incurred over the three-year term to the $5,000 limit of liability for each officer.29 Because the losses during the last bond and the bond immediately prior thereto exceeded $5,000, the court did not address whether the policy would have covered the loss in the next preceding policy.30

26 Id. at 284. 27 284 Pa. Super. 260 (1981). 28 Id. at 265. 29 Id. at 267. 30 Id.

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In Kaveney Realtor & Developer, Inc. v. Travelers Insurance Co.,31 the Travelers policy contained the following coverage for prior loss:

E. Extensions of Coverage

Such insurance as is afforded by this form also applies as described below, but unless otherwise specified these extensions do not increase the limit of liability.

1. Coverage A or B applies to:

. . . .

(e) Prior Fidelity or Forgery Insurance loss which would have been recoverable under prior fidelity or forgery insurance provided:

(1) There is no lapse in coverage between such prior insurance and insurance under this form; and

(2) Such loss would have been recoverable under this form had this form been in effect when the acts causing such loss occurred; and

(3) The time with which to discover loss under such

31 501 N.W.2d 335 (N.D. 1993).

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prior insurance had expired; . . . .32

The Travelers clause required that there be no lapse in coverage between the prior policy and the current policy. Thus, under this clause, an insured could arguably recover for loss incurred under multiple prior policies as long as there were no coverage gaps, assuming the other coverage requirements were met.

The Superseded Suretyship and the other similar clauses noted above used various wordings to describe the extent of coverage afforded to losses under prior policies. Some clauses could be interpreted to limit coverage to losses sustained in the policy immediately prior to the current policy, where others could be read more broadly to cover all loss sustained under multiple prior policies. The cases cited herein interpreting the clauses did not directly address the issue. Thus, it was in this environment of inconsistent wording and sparse judicial interpretation of the Superseded Suretyship Clause that the modern day Prior Insurance Clause developed.

C. The Prior Insurance Clause

Similar to the Superseded Suretyship Rider, the Prior Insurance Clause was developed to allow insureds, under a Loss Sustained Policy, a method to recoup losses sustained during prior policies. The Prior Insurance Clause found in the 2001 Commercial Crime Policy provides as follows:

q. Loss Sustained During Prior Insurance

(1) If you, or any predecessor in interest, sustained loss during the period of any prior insurance that you or the predecessor in interest could have recovered under that insurance except that the time within which to discover loss had expired, we will pay for it under this policy, provided:

32 Id. at 341.

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(a) This policy became effective at the time of cancellation or termination of the prior insurance; and

(b) The loss would have been covered by this policy had it been in effect when the acts or events causing the loss were committed or occurred.

(2) The insurance under this Condition is part of, not in addition to, the Limits of Insurance applying to this policy and is limited to the lesser of the amount recoverable under:

(a) This policy as of its effective date; or

(b) The prior insurance had it remained in effect.33

The Prior Insurance Clause’s key requirements are similar to those found in the Superseded Suretyship Riders: (1) loss was sustained through acts committed during the prior policy; (2) loss would have been recoverable under the prior policy but for the discovery time of the prior policy having expired; (3) the current policy became effective at the time of cancellation of the prior policy; and (4) the prior loss would have been covered under the current policy terms.

Requirement (3), the contiguous policies requirement, requiring that the current policy become effective at the time of cancellation of the prior policy, was thought by some authors to intend to restrict coverage under the subsequent policy to losses sustained during the next

33 2001 Commercial Crime Policy Condition E.1.q. (includes

copyrighted material of ISO reprinted with its permission).

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immediately preceding policy.34 However, early cases interpreting various Prior Insurance Clauses seemed to overlook this requirement.

III. EARLY CASES EXPANDING THE PRIOR INSURANCE

CLAUSE RETROACTIVITY

In Brigham Young University v. Lumberman’s Casualty Co.,35 Lumberman’s issued a bond with a limit of liability of $1,000,000 and deductible of $2,500 covering losses taking place and discovered during the period of the bond.36 The bond also contained the following Prior Insurance Clause, which the court referred to as a “retroactive extension” or “superseded suretyship” clause:

C. Loss Under Prior Bond or Policy. If the coverage of this Bond is substituted for any prior bond or policy of insurance carried by the Insured or by any predecessor in interest of the Insured, which prior bond or policy is terminated, canceled or allowed to expire as of the time of such substitution, the Underwriter agrees that this Bond applies to loss which is discovered as provided in Section 1 of the Conditions and Limitations and which would have been recoverable by the Insured or such predecessor under such prior bond or policy except for the fact that the time within which to discover loss thereunder had expired; provided:

(1) the indemnity afforded by this General Agreement C shall be a part of and not in addition to the amount of insurance afforded by this Bond;

(2) such loss would have been covered under this Bond had this Bond with its agreements, limitations and conditions as of the time of such substitution been in force when the acts or defaults causing such loss were committed; and

34 See McDonald, Weigert & Gooley, supra note 6, at 86. 35 965 F.2d 830 (10th Cir. 1992). 36 Id. at 831.

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(3) recovery under this Bond on account of such loss shall in no event exceed the amount which would have been recoverable under this Bond in the amount for which it is written as of the time of such substitution, had this Bond been in force when such acts or defaults were committed [i.e., $1,000,000], or the amount which would have been recoverable under such prior bond or policy had such prior bond or policy continued in force until the discovery of such loss, if the latter amount be smaller.37

The insured suffered a loss of valuable art over a ten-to-twelve year period resulting in a total monetary loss of $864,350. Lumberman’s policy was the last in a series of four policies written by various underwriters during the period of loss. The policies, their limits, deductibles, policy periods, and amount of incurred loss are set forth as follows:38

Insurer Limit Deductible Coverages Loss

Lumberman’s $1,000,000 $2,500 12/1/82 to present $9,250 Federal $1,000,000 $2,500 12/1/78 to 12/1/82 $17,200 Fidelity $500,000 $50,000 11/1/75 to 12/1/78 $116,038 Western $50,000 $0 9/19/68 to 11/1/75 $721,862

The insured sought recovery under Lumberman’s policy for its total loss, less the $2,500 deductible under the Lumberman’s policy. Lumberman’s paid $137,488, representing the amount of loss incurred during each of the four bonds, subject to each bond’s limits and deductibles:39

37 Id. at 833 (emphasis deleted). 38 Id. at 832. 39 Id. at 832-33.

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Covered Insurer Loss Limit Deductible Loss

Lumberman’s $9,250 $1,000,000 $2,500 $6,750 Federal $17,200 $1,000,000 $2,500 $14,700 Fidelity $116,038 $500,000 $50,000 $66,038 Western $721,862 $50,000 $0 $50,000 Lumberman’s Total Payment $137,488

The federal district court held that the amount the insurer owed the University was determined by applying the criteria and requirements of General Agreement C. above. According to the court, those requirements limited the recovery to the amounts that would have been recoverable under the prior policies but for the discovery period having expired, and, as such, the recovery was limited by the limits of liability and the deductibles of the prior policies. The overall limit of liability that applied for all loss was the limit of the Lumberman’s policy.40

Lumberman’s policy General Agreement C. contained the following precondition for coverage:

If the coverage of this bond is substituted for any prior bond . . . which bond . . . is terminated, cancelled or allowed to expire as of the time of such substitution the underwriter agrees that this Bond applies to loss which is discovered as provided in Section 1 of the Conditions and Limitations and which would have been recoverable by the Insured . . . under such prior bond or policy except for the fact that the time within which to discover loss thereunder had expired; . . .41

This precondition for coverage appears to be a contiguous policies requirement: it requires that, in order for coverage to apply to loss under a prior policy, such policy must have terminated at the time the current policy was substituted for the prior policy. This requirement would arguably limit coverage to losses recoverable under only the immediate prior bond. Had Lumberman’s made a successful argument that the loss

40 Id. at 834. 41 Id. at 833.

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under General Agreement C. only applied to loss under the next prior bond, that is, Federal’s bond, its total covered loss would have only been $21,450.

The bond issued by Cincinnati Insurance Company to Hopkins Sporting Goods in Cincinnati Insurance Co. v. Hopkins Sporting Goods, Inc.42 also contained a General Agreement C. that contained the same precondition for coverage contained in the Lumberman’s policy above and a Section 1. that limited discovery of loss to one year from the end of the policy.43 Hopkins discovered its loss in 1992.44 Cincinnati issued two policies to Hopkins, one for 1986 through 1989 and another for 1989 through 1992, each with a limit of liability of $15,000. Hopkins’ theft occurred during years 1987 through 1991 in the total amount of $157,000.45

Cincinnati argued that its total liability was the $15,000 limit for the policy effective from 1989 to 1992. The insured argued that it was entitled to coverage of up to $15,000 per year from 1987 through 1991. The court determined that the three-year policies were actually three successive one-year policies, each with a $15,000 limit of liability.46 The court accepted the insured’s argument that the one-year discovery limitation contained in Section 1. was “clouded” by General Agreement C.47 The court held, citing White Dairy v. St. Paul Fire & Marine Insurance Co.,48 that because of the ambiguity created by General Agreement C. the one-year discovery period of the prior policy was extended into the period of a new policy.49

42 522 N.W.2d 837 (Iowa 1994). 43 Id. at 838. 44 Id. at 839. 45 Id. 46 Id. at 840. 47 Id. at 839. The court did not discuss why Agreement C. “clouded”

the discovery limitation. 48 222 F. Supp. 1014, 1017-18 (N.D. Ala. 1963). 49 Cincinnati, 522 N.W. 2d at 839. The Iowa’s Supreme Court’s

reliance on the holding in the White Dairy case is questionable, as the policies in White Diary had three-year discovery periods. Coverage in White Dairy was found under each of three successive prior policies as none of the prior policy’s three-year discovery periods had expired.

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Thus, the Hopkins Sporting Goods holding, that coverage would apply to losses under several prior policies, was not based on its interpretation of General Agreement C.’s contiguous policies requirement, but on General Agreement C.’s purported extension of the one-year discovery limitation.50

The Mississippi Supreme Court in Universal Underwriters Insurance Corp. v. Buddy Jones Ford, Lincoln-Mercury, Inc.,51 applied the analysis of the Iowa Supreme Court in Hopkins Sporting Goods. In Buddy Jones, the insured’s bookkeeper embezzled funds from 1984 through 1988 in the total amount of $233,082.97.52 Universal had written five successive one-year policies covering Buddy Jones for employee dishonesty, each up to a limit of $10,000 subject to a $250 deductible.53 After first determining that the limit of liability applied to each act of embezzlement, the Buddy Jones court addressed the question of the effect of the discovery clause. The discovery clause was similar to that contained in the Cincinnati policy and provided as follows:

1. DISCOVERY—LOSS covered only if discovered not later than one-year from the end of the Coverage Part period. Subject to Condition 3.

Condition 3. is the policy’s “Loss Under Prior Bond or Policy” condition, and provides:

3. LOSS UNDER PRIOR BOND OR POLICY—If EMPLOYEE DISHONESTY replaces a bond or policy carried by YOU (or YOUR predecessor in interest) that is no longer in effect, WE will pay for LOSS (subject to Condition 1) if LOSS would have been covered by the prior bond or policy except that the LOSS was not discovered

50 Id. at 838. The court found General Agreement C. to provide a clear

incentive for the insured to purchase insurance from the same insurer. 51 734 So. 2d 173 (Miss. 1999). 52 Id. at 176. 53 Id. at 175.

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in the Discovery Period of the prior bond or policy. Provided, however:

(a) This extension is part of and not in addition to the limit stated in the declarations for EMPLOYEE DISHONESTY;

(b) the LOSS would have been covered had this insurance been if effect when the act or event causing the LOSS took place:

(c) LOSS recovery is limited to the least of the following:

(1) the amount recoverable at the time coverage was replaced by this insurance had it been in force at the time the act or event took place;

(2) The amount recoverable if the prior bond or policy had continued in force until the discovery of the LOSS.54

The Buddy Jones court found, relying on the Hopkins Sporting Goods analysis, that the discovery limitation in Section 1. was ambiguous. The court concluded that “[t]he extension of coverage provision, construed in favor of Jones Ford, continuously extends the discovery clause through each successive policy period, since Jones Ford continued to purchase coverage with Universal throughout the entire period the acts of embezzlement occurred.”55 Thus, by extending the discovery through all prior policies, the court concluded that all loss covered by the Universal policies would be recoverable under Condition 3.

The result of the above decisions was to extend coverage under the current policy to losses sustained during prior policies, as long as there was continuous coverage. The Brigham Young, Hopkins Sporting

54 Id. at 178-79. 55 Id. at 179.

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Goods, and Buddy Jones courts arrived at their conclusions with no discussion of the effect of the Prior Insurance Clause’s contiguous policies requirement. As a result, it was common practice for insurers relying on these early decisions, and the rationale of the Superseded Suretyship Clause, to apply the Prior Insurance Clause to cover loss under multiple prior policies, as long as there was no gap in coverage. However, later cases analyzing multiple year losses under the Prior Insurance Clause took notice of the contiguous policies requirement and construed it to limit the insured’s recovery.

IV. RECENT CASE LAW UNDER THE PRIOR

INSURANCE CLAUSE

In Winthrop and Weinstine v. Travelers Casualty and Surety Co,.56 the insured law firm was continuously insured by United States Fidelity and Guaranty Company57 under an employee dishonesty policy from February 1, 1990, through January 31, 1994.58 That policy contained three policy periods with the first two being yearly policies and the third policy period being two years. On February 1, 1994, the USF&G policy terminated and was replaced by a policy from Aetna Casualty and Surety Company.59 On September 28, 1994, Winthrop discovered that an employee had stolen money from the firm. Ultimately it was determined that the thefts had occurred since 1990.60 Travelers agreed to provide coverage for loss sustained on or after February 1, 1994, the effective date of its policy.61 Winthrop argued that Travelers was liable under the Aetna policy’s Loss Sustained During Prior Insurance Condition that provided as a pre-condition of coverage that: “(1) This insurance became effective at the time of cancellation or termination of the prior insurance.”62 The court rejected Winthrop’s assertion that losses sustained during USF&G policies in effect from February 1, 1990, to February 1, 1991 and February 1, 1991, to

56 187 F.3d 871 (8th Cir. 1999). 57 Hereinafter USF&G. 58 Winthrop, 187 F.3d at 872. 59 Id. at 872-73 [hereinafter Aetna (now Travelers)]. 60 Id. at 873. 61 Id. at 874. 62 Id. at 875-76.

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February 1, 1992, would be covered under Aetna’s Prior Insurance Clause because “[t]he Travelers insurance did not ‘go into effect until after the third policy period;’ therefore, the Travelers insurance did not become ‘effective at the time of cancellation or termination of the prior insurance,’ as the Travelers policy required.”63

It is interesting to note that the extended discovery argument adopted by the Hopkins Sporting Goods and Buddy Jones courts was not asserted by the insured in Winthrop. The Winthrop court’s decision regarding the limited retroactive application of the Prior Insurance Clause relied solely on the Clause’s contiguous policies requirement that the current policy must become effective when the prior policy was cancelled.

In 2008 several courts, following the analysis employed by the Winthrop court, also held that the Prior Insurance Clause only covered losses sustained during the immediate preceding policy.

In American Auto Guardian, Inc. v. Acuity Mutual Insurance Co.,64 the insured’s Vice President embezzled $434,911.56 over five policy periods.65 General Casualty was the insurer on the first two policies, and Acuity was the insurer on the last three years.66 All of the policies contained an Optional Coverage. The Optional Coverage was, in essence, a Prior Insurance Clause which provided in part as follows:

h. If you (or any predecessor in interest) sustained loss or damage during the period of any prior insurance that you could have recovered under that insurance except that the time within which to discover loss or damage had expired, we will pay for it under this Optional Coverage, provided:

63 Id. at 876, (quoting with approval the holding by the district court). 64 548 F. Supp. 2d 624 (N.D. Ill. 2008). 65 Id. at 626. 66 Id.

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(1) This Optional Coverage became effective at the time of cancellation or termination of the prior insurance . . . .67

The insured sought recovery for the entire loss by arguing that the Prior Insurance Clauses of each policy could be strung together to recover loss under each policy’s next prior policy.68 The court rejected the insured’s argument, stating as follows:

Of course Acuity Policy 2 contains its own prior loss provision, but any losses recoverable under that provision did not occur during Acuity Policy 2’s effective period. Only losses that actually occurred during the term of Acuity Policy 2 are made recoverable by Acuity Policy 3’s prior loss provision. It would be anomalous for Acuity Policy 2’s discovery period provision to bar (as it does) the recovery of losses that occurred during its own term but were discovered more than a year later, and then in the next breath, by way of its prior loss provision, to make recoverable losses that occurred even earlier (say during the term of Acuity Policy 1, to say nothing of the periods covered by the even earlier General Casualty policies). American’s effort to extend recovery backward by cobbling together prior loss provisions calls for a wholly illogical reading of the policies.69

The district court also specifically rejected the discovery extension analysis of the Hopkins Sporting Goods and Buddy Jones courts that was asserted by the insured stating that “this court disagrees with the notion that the coexistence of the discovery period provision and the prior loss provision in the policy creates a recipe for ambiguity.”70

67 Id. at 629. 68 Id. 69 Id. at 629-30. 70 Id. at 630.

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The district court then cited to the Winthrop court’s holding as being consistent with its reading of the policy language.71

In the next case decided in 2008, Adolf Jewelers, Inc. v. Jewelers Mutual Insurance Co.,72 the insured sought recovery for a $684,774.76 loss, as a result of a multi-year embezzlement by its security guard.73 The policies issued by Jewelers Mutual Insurance Company74 to Adolf Jewelers were yearly policies, commencing in 1999 with coverage limits of $200,000 prior to September 2006, and $500,000 for the policy in effect for September 2006, to September 2007.75 The loss was discovered in June 2007. JMIC paid the $200,000 limit of liability for losses prior to September 2006, and $125,000 for the loss after September 2006.76 The insured sought payment for losses prior to September 2005 under JMIC’s Supplemental Coverage Provision. That Supplemental Coverage included the following restrictive provision similar to the contiguous policies requirement in the Prior Insurance Clause: “This Supplemental Coverage applies only if the Employee Dishonesty Coverage replaces prior dishonesty coverage and became effective on the expiration or termination date of the prior coverage.”77

The insured claimed that the above provision should not limit its recovery to loss sustained during the immediately preceding policy, as to do so would make the Supplemental Coverage worthless.78 The court rejected the insured’s interpretation of the provision and agreed with JMIC’s interpretation that the Supplemental Coverage only applies to loss under prior coverage if it replaces the prior coverage and became effective on the termination or expiration date of such prior coverage, which inherently limits coverage to only one prior policy.79 The court held as follows: “The court finds that the Supplemental Coverage does not apply to policy periods other than the immediately preceding policy

71 Id. 72 614 F. Supp. 2d 648 (E.D. Va. 2008). 73 Id. at 650. 74 Hereinafter JMIC. 75 Id. 76 Id. at 650-51. 77 Id. at 656. 78 Id. at 657. 79 Id.

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period, therefore Plaintiff cannot collect any further loss under the Supplemental Coverage policy.”80

The United States District Court of Rhode Island in Armbrust International Ltd. v. Travelers Casualty and Surety Co. of America,81 provided additional support for a strict interpretation of the Prior Insurance Clause’s contiguous policies requirement. Armbrust was insured by St. Paul Fire and Marine Insurance Company82 under two successive one-year policies from October 20, 2001, to October 20, 2003.83 Those policies included protection against employee theft with limits of liability of $25,000. Armbrust also had a Loss Sustained Policy from Travelers Casualty and Surety Company of America84 insuring against employee dishonesty, effective from February 25, 2003, to March 12, 2004. That policy had a Prior Insurance Clause that included the following requirement: “(a) This Coverage Part became effective at the time of cancellation or termination of the prior insurance.”85

Armbrust incurred losses as a result of its employee’s embezzlement from May 2000 to May 2003 in the total amount of $323,203.86 However, only $1,144.05 of the total loss was incurred during Travelers’ policy period. Because Travelers’ policy contained a $25,000 deductible, Travelers denied owing any amount to Armbrust.87 Armbrust argued that the entire loss was covered under the Travelers Prior Insurance Clause.88 The court analyzed the insured’s request for coverage under the Travelers Prior Insurance Clause and found that the Travelers policy overlapped with that of the St. Paul policy. As such, the court held as follows:

This overlap means that the Travelers policy did not become effective at the time of termination or

80 Id. 81 No. CA 04-212 ML, 2006 WL 1207659 (D.R.I. May 1, 2006). 82 Hereinafter St. Paul. 83 Id. at *2. 84 Hereinafter Travelers. 85 Id. at *10. 86 Id. at *2. 87 Id. at *5. 88 Id. at *6.

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cancellation of St. Paul policy 2, as the third factor requires. Because the Travelers policy ran concurrently with St. Paul policy 2, and the language of the “Prior Insurance” provision clearly requires that the prior insurance terminate or cancel before the current policy becomes effective, Plaintiffs are not covered under the “Prior Insurance” provision.89

The Armbrust court’s interpretation of the Prior Insurance Clause’s coverage, as applying to loss only incurred during the next immediately preceding policy, is consistent with the strict interpretation of the Prior Insurance Clause of the Winthrop, Acuity, and Adolf Jewelers courts. Thus, in Armbrust, even though the St. Paul and Travelers policies were seamless, the St. Paul policy did not terminate when the Travelers policy became effective and, therefore, the court found any loss occurring during the St. Paul policy did not meet the Travelers Prior Insurance Clause’s contiguous policies requirement and would not be covered by the Travelers policy.

These recent cases indicate a more recent trend by the courts to strictly interpret the Prior Insurance Clause’s contiguous policies requirement. The effect of these holdings conflicts with the results in the Brigham Young, Hopkins Sporting Goods, and Buddy Jones cases, which extended recovery to losses incurred during multiple prior policies, although doing so on other grounds. The effect of this issue alone, on the amount of recoverable losses by an insured, can be significant.90 While the courts were wrestling with the issue of the retroactivity of the Prior Insurance Clause, ISO revised the Commercial Crime Policy in 2005, which became effective in 2006.91

89 Id. at *10. 90 Other coverage issues will also affect the amount of recoverable loss.

See McDonald, Weigert & Gooley, supra note 6, for a thorough discussion of these other coverage issues.

91 2005 Commercial Crime Policy.

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V. 2005 COMMERCIAL CRIME POLICY

The 2005 Commercial Crime Policy sought to clarify the industry’s intent with regard to loss calculation under a Loss Sustained Commercial Crime Policy as the result of several court decisions involving employee theft losses over more than one policy period.92 As part of that effort, ISO redrafted the Loss Covered Under This Policy And Prior Insurance Issued By Us and the Prior Insurance Clauses of the 2001 Commercial Crime Policy Conditions, and created two separate Conditions, E.1.o Loss Sustained During Prior Insurance Issued By Us Or Any Affiliate and E.1.p. Loss Sustained During Prior Insurance Not Issued By Us Or Any Affiliate.93

These two Conditions address loss sustained during prior insurance issued by the same insurer, and loss sustained during prior insurance issued by a different insurer, respectively. The Prior Insurance Clause of the 2001 Commercial Crime Policy did not distinguish between prior loss sustained during insurance issued by the same or different insurers as it applied to, “loss during the period of any prior insurance.” Under Condition E.1.o., there is no requirement that the prior insurance’s period of time to discover loss has expired, whereas this requirement is retained under E.1.p. for prior losses under a policy issued by another insurer. Further, neither E.1.o. or E.1.p. retained the requirement that the prior loss could have been recoverable under the prior insurance. Instead the 2005 Conditions describe which policy’s limit and deductible apply. Both Conditions have retained the contiguous policies requirement—“[t]his policy became effective at the time of cancellation of the prior insurance”—that was narrowly construed by the Winthrop, Adolf Jewelers, and Acuity courts to only apply to loss sustained during the next immediately preceding policy. However, the 2005 Commercial Crime Policy’s Condition’s descriptions of how loss is to be settled, and in particular the loss settlement examples contained in E.1.o.(4), evidence an intent by the drafters to capture losses sustained during prior policies as long as the insured had continuous coverage. That intent also apparently applies to E.1.p. as described in the

92 See ISO Crime and Fidelity Forms Filing CR-2005-OMF05, at 18-

20. 93 See Appendix A.

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Description Of Changes To Commercial Crime Coverage Form and Commercial Crime Policy submitted by the Insurance Services Office, Inc. with its filing:

In paragraph (3), the insurance provided under this Condition addresses two loss scenarios involving prior insurance issued by a different insurer:

• Part (a) addresses long-term losses where the loss started under the term of a different insurer’s coverage and continues through more than one policy period of the current insurer where the loss eventually is discovered. In such an event, both this Condition and Condition E.1.k. (Condition E.1.o. in the Commercial Crime Policy) ‘Loss Sustained During Prior Insurance Issued By Us Or Any Affiliate’ could be involved to respond to a loss. In such an event, the amount recoverable under this Condition becomes part of, not in addition to the amount recoverable under Condition E.1.k. (Condition E.1.o. in the Commercial Crime Policy).

• Part (b) addresses long-term losses where the loss started under the term of a different insurer’s coverage and continued into the succeeding policy issued by a different insurer where the loss is then discovered. In such an event, the amount recoverable is limited to the lesser of the current policy or the prior cancelled insurance had it remained in effect.94

There are currently no cases interpreting either Condition E.1.o. or Condition E.1.p. The Conditions’ descriptions of how loss is to be settled thereunder will likely give the courts a framework for applying the Conditions to more complex fact scenarios.

94 Id. at 20.

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VI. DETERMINING THE NUMBER OF APPLICABLE POLICIES

Essential to the determination of whether a Prior Insurance Clause would be applicable to a multi-year loss is the determination of the number of separate prior policies that are involved. Insurers often issue policies that are denominated as either effective over a several year period or as continuous, but having a yearly policy period. Jurisdictions differ as to whether so-called continuous policies are in fact one policy or a series of separate individual policies.95 For example, in State of Louisiana v. Aetna Casualty and Surety Co.,96 the Court of Appeals for the State of Louisiana held that, where the intention of the parties was to continue the same policy for a new period, the contract is a continuous one.97 Illustrative of the contrary view is Massachusetts Bonding & Insurance Co. v. Julius Seidel Lumber Co.,98 wherein the federal appellate court held that a policy that is renewed each year is separate individual policies and not one continuous policy.99

Whether a particular jurisdiction views a policy renewed by the same insurer as one continuous policy or separate policies could affect the amount of multi-year loss that an insured would recover under a Prior Insurance Clause.100 A simple example will illustrate the point. Assume that Insurer A issues a three-year Commercial Crime Policy renewable yearly to ABC Corporation beginning January 1, 2009, and terminating December 31, 2011, with limits of liability of $500,000 and a $10,000 deductible.101 The Insured’s employee embezzled $250,000 in year

95 Generally, for an analysis of the law with regard to whether policies

written over multiple years by the same insurer are considered continuous or separate policies, see Extent of Liability on Fidelity Bond Renewed From Year to Year, 7 A.L.R. 2d 946 (1949).

96 417 So. 2d 404 (La. 1982). 97 Id. at 406. 98 279 F.2d 861 (8th Cir. 1960); see also, e.g., A.B.S. Clothing

Collection, Inc. v. Home Ins. Co., 34 Cal. App. 4th 1470, 1483-84 (1995); and American Auto Guardian, Inc., 548 F. Supp. 2d at 627-28.

99 Id. at 869. 100 We assume the Prior Insurance Clause is similar to that of the 2001

Commercial Crime Policy. 101 For this hypothetical we assume the policies are all identical one-

year renewable policies and contain a definition of “occurrence” that includes all

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2009, $50,000 in 2010, and $25,000 in 2011. The loss is discovered on February 1, 2012. The policies all have a one-year extended discovery tail. If the policies are considered as one continuous policy, the insured could recover all loss sustained during the three years less the 2011 policy deductible, or $315,000. If the policies are determined to be successive one-year policies, the amount of recoverable loss would be determined under the Prior Insurance Clause. Under the interpretation of the Prior Insurance Clause in Brigham Young, the recoverable loss would be calculated as follows:

2009 $250,000 loss — $10,000 deductible = $240,000 2010 $50,000 loss — $10,000 deductible = $ 40,000 2011 $25,000 loss — $10,000 deductible = $ 15,000 Total $295,000

However, under the interpretation of the Prior Insurance Clause in Winthrop, Acuity, and Adolf Jewelers, the insured could only recover the loss sustained during the current policy ($25,000) and the next preceding policy ($50,000), less the current policy deductible ($10,000) for a total recovery of $65,000.102

VII. CALCULATION OF RECOVERABLE

LOSS: KEEPING IT SIMPLE

Our discussion of the evolution of the Prior Insurance Clause’s coverage for loss sustained during prior insurance has revealed that the interpretation of the language employed in the clause can lead to significantly different results. The following loss examples illustrate the varying results obtained when applying the analyses employed by the Brigham Young and Acuity courts, and the 2005 Commercial Crime Policy to losses sustained over a four-year period. For purposes of the examples, all other requirements of the relevant Prior Insurance Clause have been met.

loss caused by or involving one or more “employees” whether the result of a single act or a series of acts.

102 In Adolf Jewelers the insurer did not apply the deductible of the prior policy, stating it did not do so to show good faith. The Winthrop and Acuity courts did not address the deductible issue.

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SAME INSURER

Brigham Young

Covered Insurer Limit of Liability Deductible Loss Loss

A - current $1,000,000 $50,000 $200,000 $150,000 A $1,000,000 $50,000 $100,000 $50,000 A $500,000 $25,000 $600,000 $500,000 A $250,000 $25,000 $200,000 $175,000 Total $875,000

Acuity


A - current $1,000,000 $50,000 $200,000 $150,000 A $1,000,000 $50,000 $100,000 $100,000 103 A $500,000 $25,000 $600,000 $0 A $500,000 $25,000 $200,000 $0 Total $250,000

2005 Commercial Crime Policy


A - current $1,000,000 $50,000 $200,000 $150,000 A $1,000,000 $50,000 $100,000 $100,000 A $500,000 $25,000 $600,000 $500,000 A $500,000 $25,000 $200,000 $200,000 Total $950,000

103 We have not reduced the loss by the prior policy’s deductible as the

courts did not address the application of the deductible in the prior policy.

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DIFFERENT INSURERS

Brigham Young


A - current $1,000,000 $50,000 $200,000 $150,000 B $1,000,000 $50,000 $100,000 $50,000 C $500,000 $25,000 $600,000 $500,000 D $250,000 $25,000 $200,000 $175,000 Total $875,000

Acuity


A - current $1,000,000 $50,000 $200,000 $150,000 B $1,000,000 $50,000 $100,000 $100,000 104 C $500,000 $25,000 $600,000 $0 D $500,000 $25,000 $200,000 $0 Total $250,000

2005 Commercial Crime Policy


A - current $1,000,000 $50,000 $200,000 $150,000 B $1,000,000 $50,000 $100,000 $100,000 C $500,000 $25,000 $600,000 $250,000 D $500,000 $25,000 $200,000 $0 Total $500,000

Under the Brigham Young and Acuity analyses, the amount of covered loss was not affected by whether the prior policies were written by the same insurer or different insurers. This is a result of the fact that

104 Id.

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the Prior Insurance Clauses in those cases did not differentiate between prior loss sustained under policies written by the same or different insurers. Under the 2005 Commercial Crime Policy the amount of covered loss is dependent on whether the prior insurer is the same as or different from the current insurer. Where the current insurer is the same as the prior insurer, the overall limit of liability and deductibles are that of the current insurer. Where the prior insurer is a different insurer, the limit of liability for the entire loss is the lesser of the limits of liability for the policies in effect during the period of loss. The deductible, however, remains to be that of the current insurer. The resulting covered loss in the examples above, where the prior insurers are different from the current insurer, is $450,000 less than had the prior insurance been the same or the current insurer.

VIII. CONCLUSION

The purpose of a Loss Sustained Policy’s Prior Insurance Clause and the many variants thereof has been to cover loss sustained during a prior policy or policies. The extent to which the Prior Insurance Clause covers such prior loss is dependant on the specific wording of the policy as well as the courts’ interpretation of the clause’s wording. Early policies using the Superseded Suretyship Rider or Retroactive Extension Clauses addressed the retroactivity of the clause in different ways. The intent of these clauses appeared to be that, subject to limits of liability, deductibles, and coverage limitations, the clauses would cover losses sustained during multiple prior policies as long as there was no gap in coverage. This intent is evident in the early decisions interpreting the modern Prior Insurance Clauses. However, these early decisions extended coverage for loss sustained during prior insurance by finding that the discovery limitation was ambiguous. Thus, the early cases did not reach the issue of whether coverage for the prior insurance’s loss must be contiguous with the current policy. Eventually, when courts were faced with interpreting the contiguous policies requirement, the courts determined that coverage only applied to losses sustained during the policy next immediately preceding the current policy. This interpretation significantly limited the insurer’s exposure for prior loss under a Loss Sustained Bond.

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In 2005, ISO developed a new set of Prior Insurance Clauses that address coverage for loss sustained during prior policies under two separate Prior Insurance Clauses. One clause addresses coverage where the prior insurance was written by the same insurer as the current insurer, and the other clause addresses coverage where the prior insurance was written by a different insurer. These clauses not only describe the loss settlement methodology but, in the first such clause, gives examples of how the prior loss is to be settled. The intent of these more recent Prior Insurance Clauses appears to be to cover loss sustained during prior multiple policies as long as there is continuity of coverage, subject to applicable deductibles, limits of liability, and coverage.

Thus, we have seen coverage under the Prior Insurance Clause come full circle from the early decisions, covering loss sustained during multiple prior policies, to the later decisions strictly interpreting the Prior Insurance Clause to include only loss sustained in the next immediate policy, and more recently to the 2005 Commercial Crime Policy’s return to covering loss sustained during multiple prior policies. It would appear that the expression “the more things change, the more they stay the same” might be appropriate to the evolution of the Prior Insurance Clause.

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APPENDIX A

E.1.o. Loss Sustained During Prior Insurance Issued By Us Or Any Affiliate

(1) Loss Sustained Partly During This Policy And Partly During Prior Insurance

If you ‘discover’ loss during the Policy Period shown in the Declarations, resulting directly from an ‘occurrence’ taking place:

(a) Partly during the Policy Period shown in the Declarations; and

(b) Partly during the Policy Periods(s) of any prior cancelled insurance that we or any affiliate issued to you or any predecessor in interest;

and this policy became effective at the time of cancellation of the prior insurance, we will first settle the amount of loss that you sustained during this Policy Period. We will then settle the remaining amount of loss that you sustained during the Policy Period(s) of the prior insurance.

(2) Loss Sustained Entirely During Prior Insurance

If you ‘discover’ loss during the Policy Period shown in the Declarations, resulting directly from an ‘occurrence’ taking place entirely during the Policy Period(s) of any prior cancelled insurance that we or any affiliate issued to you or any predecessor in interest, we will pay for the loss, provided:

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(a) This policy became effective at the time of cancellation of the prior insurance; and

(b) The loss would have been covered under this policy had it been in effect at the time of the ‘occurrence.’

We will first settle the amount of loss that you sustained during the most recent prior insurance. We will then settle any remaining amount of loss that you sustained during the Policy Periods(s) of any other prior insurance.

(3) In settling loss subject to this Condition:

(a) The most we will pay for the entire loss is the highest single Limit of Insurance applicable during the period of loss, whether such limit was written under this policy or was written under the prior insurance issued by us.

(b) We will apply the applicable Deductible Amount shown in the Declarations to the amount of loss sustained under this policy. If no loss was sustained under this policy, we will apply the Deductible Amount shown in the Declarations to the amount of loss sustained under the most recent prior insurance.

If the Deductible Amount is larger than the amount of loss sustained under this policy, or the most recent prior insurance, we will apply the remaining Deductible Amount to the remaining amount of loss sustained during the prior insurance.

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We will not apply any other Deductible Amount that may have been applicable to the loss.

. . . .

(4) The following examples demonstrate how we will settle losses subject to this Condition E.1.o.:

EXAMPLE NO. 1:

The insured sustained a covered loss of $10,000 resulting directly from an ‘occurrence’ taking place during the terms of Policy A and Policy B.

POLICY A

The current policy. Written at a Limit of Insurance of $50,000 and a Deductible Amount of $5,000.

POLICY B

Issued prior to Policy A. Written at a Limit of Insurance of $50,000 and a Deductible Amount of $5,000.

The amount of loss sustained under Policy A is $2,500 and under Policy B is $7,500.

The highest single Limit of Insurance applicable to this entire loss is $50,000 written under Policy A. The Policy A Deductible Amount of $5,000 applies. The loss is settled as follows:

1. The amount of loss sustained under Policy A ($2,500) is settled first. The amount we will pay is nil ($0.00) because the amount of loss is less than

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the Deductible Amount (i.e., $2,500 loss - $5,000 deductible = $0.00).

2. The remaining amount of loss sustained under Policy B ($7,500) is settled next. The amount recoverable is $5,000 after the remaining Deductible Amount from Policy A of $2,500 is applied to the loss (i.e., $7,500 loss - $2,500 deductible = $5,000).

The most we will pay for this loss is $5,000.

EXAMPLE NO. 2:

The insured sustained a covered loss of $250,000 resulting directly from an ‘occurrence’ taking place during the terms of Policy A and Policy B.

POLICY A

The current policy. Written at a Limit of Insurance of $125,000 and a Deductible Amount of $10,000.

POLICY B


The amount of loss sustained under Policy A is $175,000 and under Policy B is $75,000.

The highest single Limit of Insurance applicable to this entire loss is $150,000 written under Policy B. The Policy A Deductible Amount of $10,000 applies. The loss is settled as follows:

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1. The amount of loss sustained under Policy A ($175,000) is settled first. The amount we will pay is the Policy A Limit of $125,000 because $175,000 loss - $10,000 deductible = $165,000 which is greater than the $125,000 policy limit.

2. The remaining amount of loss sustained under Policy B ($75,000) is settled next. The amount we will pay is $25,000 (i.e., $150,000 Policy B limit - $125,000 paid under Policy A = $25,000).

The most we will pay for this loss is $150,000.

EXAMPLE NO. 3:

The insured sustained a covered loss of $2,000,000 resulting directly from an ‘occurrence’ taking place during the terms of Policies A, B, C and D.

POLICY A

The current policy. Written at a Limit of Insurance of $1,000,000 and a Deductible Amount of $100,000.

POLICY B


POLICY C

Issued prior to Policy B. Written at a Limit of Insurance of $500,000 and a Deductible Amount of $50,000.

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POLICY D

Issued prior to Policy C. Written at a Limit of Insurance of $500,000 and a Deductible Amount of $50,000.

The amount of loss sustained under Policy A is $350,000, under Policy B is $250,000, under Policy C is $600,000 and under Policy D is $800,000.

The highest single Limit of Insurance applicable to this entire loss is $1,000,000 written under Policy A. The Policy A Deductible Amount of $100,000 applies. The loss is settled as follows:

1. The amount of loss sustained under Policy A ($350,000) is settled first. The amount we will pay is $250,000 (i.e., $350,000 loss - $100,000 deductible = $250,000).

2. The amount of loss sustained under Policy B ($250,000) is settled next. The amount we will pay is $250,000 (no deductible is applied).

3. The amount of loss sustained under Policy C ($600,000) is settled next. The amount we will pay is $500,000, the policy limit (no deductible is applied).

4. We will not make any further payment under Policy D as the maximum amount payable under the highest single Limit of Insurance applying to the loss of $1,000,000 under Policy A has been satisfied.

The most we will pay for this loss is $1,000,000.

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E.1.p. Loss Sustained During Prior Insurance Not Issued By Us Or Any Affiliate

(1) If you ‘discover’ loss during the Policy Period shown in the Declarations, resulting directly from an ‘occurrence’ taking place during the Policy Period of any prior cancelled insurance that was issued to you or a predecessor in interest by another company, and the period of time to discover loss under that insurance had expired, we will pay for the loss under this policy, provided:

(a) This policy became effective at the time of cancellation of the prior insurance; and

(b) The loss would have been covered under this policy had it been in effect at the time of the ‘occurrence.’

(2) In settling loss subject to this Condition:

(a) The most we will pay for the entire loss is the lesser of the Limits of Insurance applicable during the period of loss, whether such limit was written under this policy or was written under the prior cancelled insurance.

(b) We will apply the applicable Deductible Amount shown in the Declarations to the amount of loss sustained under the prior cancelled insurance.

(3) The insurance provided under this Condition is subject to the following:

(a) If loss covered under this Condition is also partially covered under Condition

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E.1.o., the amount recoverable under this Condition is part of, not in addition to, the amount recoverable under Condition E.1.o.

(b) For loss covered under this Condition that is not subject to Paragraph (3)(a), the amount recoverable under this Condition is part of, not in addition to, the Limit of Insurance applicable to the loss covered under this policy and is limited to the lesser of the amount recoverable under:

(i) This policy as of its effective date; or

(ii) The prior cancelled insurance had it remained in effect.105

105 [Includes copyrighted material of the ISO reprinted with its

permission.].

the fidelity law journal

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