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Vol. 3, Iss. 4
March 5, 2014

 

 


Last year I addressed the Indiana Court of Appeals’s April 2013 decision in Hammerstone v. Indiana Insurance Company, holding that products coverage was owed under a policy that contained an exclusion for the “Products–Completed Operations Hazard.” How can this be?, you ask. Because the declarations page provided a products/completed operations aggregate limit of $2,000,000. The court found this to be an ambiguity and concluded that the policy offered products coverage.

That decision served as a strong warning to insurers that, if they do not intend to provide coverage for products liability, then it is critical that they not include a Products Aggregate limit on their Dec Page. That seems simple enough.

Another court – this time a supreme court -- just issued the same warning to insurers in Scentry Biologicals, Inc. v. Mid-Continent Casualty Co., No. DA 13-0415 (Mont. Feb. 28, 2014). Given the significant financial consequences of this policy issuance error, and seeming ease to prevent it, it is worth addressing the Supreme Court of Montana’s decision in Scentry Biologicals and repeating the warning.

Scentry is the manufacturer of NoMate, a pest control product designed to protect various agricultural crops from destructive insects by thwarting their mating activities. Applewood Orchards used NoMate on its apple crop in spring and summer 2006 for protection against codling moths. Applewood subsequently discovered significant moth damage. Applewood pursued a tort action against Scentry and the product’s distributor. Coverage was sought from Mid–Continent, Scentry’s general liability insurer, for both Scentry and the distributor.

Putting aside a host of issues – trial and settlement and additional insureds and a lower court opinion and other coverage issues -- because they are not relevant to the point to be made, the case went to the Montana Supreme Court on several issues, including the following one.

Mid–Continent argued that Scentry did not establish the existence of Products–Completed Operations coverage in the lower court because the first page of its 2–page Dec Sheet indicated that Scentry paid no separate premium for Products–Completed Operations coverage. Thus, Mid–Continent maintained that Scentry had no coverage for products. Scentry countered that the second page of the Dec Sheet expressly indicated a $2 million limit of insurance for “products-completed operations aggregate.” The trial court found that Scentry’s policy from Mid–Continent provided $2 million in both CGL and Products–Completed Operations.

The Supreme Court of Montana agreed. The court set out a visual representation of the Dec Sheet to show the discrepancy between there being no products premium and a products aggregate limit. The Montana high court concluded that the lower court got it right when it held that the Mid–Continent policy provided Products–Completed Operations coverage to Scentry: “Although page one of the Mid-Continent policy does not reflect the payment of a premium for PCOH coverage, page two of the declarations specifically provides limits of insurance in the sum of $2 million for ‘Products–Completed Operations Aggregate Limit.’ It is well-established that ambiguities in an insurance policy are construed against the insurer.”

While I did not study every aspect of the case, as it was not relevant for the purpose intended, it appears that the erroneous inclusion of a Products–Completed Operations aggregate limit on the Dec Sheet cost the insurer in excess of $1 million in products coverage for which it alleged that it received no premium and had no intention to provide.

I’m not sure how this happens. Perhaps because products coverage is so prevalent on a CGL policy that some insurers pre-fill a products aggregate limit on the Dec Page. But, if that’s not the case, then, perhaps, because of the prevalence of products coverage, a products exclusion gets lost at the time of preparing the Dec Page. Either way, or some other way, it is an administrative error with large potential consequences that seems like it should be preventable.

As I concluded in the April 24, 2013 issue of Coverage Opinions, Hammerstone, and now Scentry Biologicals, demonstrate a huge risk for insurers that is inherent in their business. An insurer accepts a few thousand dollars from a party in exchange for the possibility of having to turn around and pay that party several million dollars. But the insurer knows this going in. It accepts this seemingly odd arrangement because it has concluded that the event that is required to cause such mismatched exchange of capital has a low probability of taking place. But, as Hammerstone and Scentry Biologicals demonstrate, with this arrangement also comes the risk that the insurer will have to write a big check, in exchange for a small one, that was never in the cards. All that was needed for this wildly bad deal to take place for Indiana Insurance and Mid-Continent were a few unintended key strokes.

 
 
 
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