The California Court of Appeal ruled that Pep Boys were owed two separate annual aggregate limits from two of their excess coverage insurers, but owed only one annual aggregate limit from another. The case is The Pep Boys Manny Moe & Jack of Cal. v. Old Republic Ins. Co., 316 Cal. Rptr. 3d 600 (Ct. App. 2023).
Background
Pep Boys operates more than 145 stores in California, selling automotive products. More than 500 people in California, and hundreds more in other states, filed claims against Pep Boys for exposure to asbestos from their products.
To cover their liabilities, Pep Boys purchased commercial general liability policies with coverage periods between February 1, 1981, and July 1, 1982. The first layer of coverage came from Protective National Insurance Company with a limit of up to $500,000 aggregate during each annual period. The policy period was originally February 1, 1981, to February 1, 1982, but it was extended to June 30, 1982, for an additional prorated premium. New England Reinsurance Corporation provided the first layer of umbrella coverage, with limits of $10,000 per occurrence and $10 million aggregate for each annual period.
The second layer of excess coverage was shared between Old Republic and American Excess. The Old Republic policy period was from February 1, 1981, to June 30, 1982, providing excess coverage up to $10 million per occurrence and $10 million aggregate for each annual period. Pep Boy’s reasoning for the 17-month policy was to align its insurance program with its fiscal year end accounting. The premium due was calculated by prorating the 12-month premium.
American Excess’s policy covered from February 1, 1981, to February 1, 1982, but was later extended through endorsement to July 1, 1982. The policy covered up to $5 million in excess of the underlying insurance. The third and final layer was from Fireman’s Fund, which covered up to $15 million per occurrence and $15 million aggregate for damages sustained during each annual period of the policy. The policy period covered from April 3, 1981, to July 1, 1982.
Trial Court & Appeal
Faced with asbestos claims from hundreds of people, Pep Boys sought coverage from its insurers. Protective agreed to pay two $500,000 payments–one for the period from February 1, 1981, to February 1, 1982, and another for the period from February 1, 1982, to June 30, 1982. New England argued that it only owed one aggregate annual limit and paid $10 million to Pep Boys. Old Republic, American Excess, and Fireman’s Fund also maintained that they only owed one aggregate limit for the entire term of the policy.
Pep Boys filed for declaratory judgment against the four insurers, arguing that the policies provided two annual limits–one for the first 12 month period and another for the remaining 5 month period. A settlement was reached with New England before the hearing. The trial court denied the motion, finding that the three other insurers only owed a single aggregate limit. Pep Boys appealed the decision.
The matter was then brought before the California Court of Appeal. To determine whether the insurers owed one or two aggregate limits, the court looked at the policy language of each policy. Each policy had different language, so they were analyzed individually.
Old Republic
Old Republic’s policy covered a 17-month term and stated it had a $10 million limit “in the aggregate for each annual period during the currency of this policy.” Old Republic claimed that “annual period” applied to the entire 17-month term of the policy, while Pep Boys claimed there were two annual periods, totalling a potential $20 million in coverage.
The court stated that a literal meaning of the policy cannot be applied to either claim. “Annual” means “covering the period of a year.” One party is asking to apply it to a 17-month period, while the other is asking to apply it to a 5-month period. The court found that neither interpretation is more reasonable than the other.
The court looked to evidence outside of the policy to determine the intent behind the policy. A letter from Pep Boys’ broker to Old Republic explained that the 17-month term was intended only to align coverage with the company’s fiscal year. There was no indication that Pep Boys wanted to reduce costs or alter their level of coverage. Because Pep Boys paid a prorated premium and did not intend to reduce its coverage, the court found that Pep Boys reasonably expected the same level of protection for the extended period. The court did not find the evidence conclusive, but stated that any ambiguity should be construed against Old Republic since they drafted the policy.
American Excess
The American Excess policy stated that the $5 million limit applied “with respect to loss excess of the Underlying Insurance which occurs during the term of this Certificate.” The court found that this language unambiguously meant the limit applied to the entire 17-month period of the policy. Unlike the Old Republic policy, there was no mention of an “annual period”. In this case, even if Pep Boys had a reasonable expectation of coverage, it did not matter since the policy language was clear and unambiguous.
Fireman’s Fund
The Fireman’s Fund policy stated that the $15 million aggregate limit was for “all damages sustained during each annual period of this policy.” Fireman argued that the policy was for a single 15-month period, while Pep Boys argued that there was an initial 12-month annual period and a second 3-month period. Like with the Old Republic policy, the court determined that “annual period” can’t be taken literally since it doesn’t apply to either party’s claim, and deemed the policy ambiguous.
The court again looked to extrinsic evidence and found that Pep Boys’ intent behind the Fireman policy was similar to that in the Old Republic policy. Pep Boys did not intend to reduce coverage and had a reasonable expectation that they were acquiring a separate aggregate limit. The court clarified that even without the extrinsic evidence, they would have ruled the same way since ambiguities are construed against the insurer.
Conclusion
The Court of Appeal reversed the trial court’s judgment in part, holding that Old Republic and Fireman’s Fund must each provide coverage for two annual aggregate limits, while American Excess’s single aggregate limit remained intact.
Editor’s Note: This case shows the importance of precise policy language and how costly the difference in a few words can be. American Excess owed only one aggregate limit because of precise language, while Old Republic and Fireman’s Fund each owed two annual aggregate limits, amounting to an extra $10 million and $15 million, respectively.