February 7, 2007

The First Circuit has just held that an insurer whose liability policy was cancelled by an insured is nonetheless on the hook for the full annual amount of coverage.

In 1967, Employers Surplus Lines Insurance Co. issued an excess umbrella liability policy to Georgia-Pacific Corp. that provided a $10 million annual aggregate limit and a $10 million per-occurrence limit. Three months after the policy was issued, Georgia-Pacific found a cheaper policy from the Insurance Company of the State of Pennsylvania and cancelled the Employers policy. Only one-quarter of the annual premium was paid.

Decades later, Georgia-Pacific presented Employers' successor, OneBeacon Insurance Co., with $10 million of asbestos product-liability losses. OneBeacon maintained that its liability was capped at $2.5 million because the policy was in effect for only one-quarter of the year.

The District Court granted summary judgment to Georgia-Pacific and the First Circuit affirmed, holding that nowhere did the insurance contract contemplate proration of the annual aggregate limit. Preseumably the contract could have been cancelled after one day in force, and the full amount of asbestos liability would have been incurred.

Watch for limits or (if they are disallowed by state insurance regulators) steep cancellation penalties in the future.