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Stacking takes a turn.

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

Which brings us back to the matter of Superstition Crushing. This case arose out of the State of Arizona, but the litigation took place in the Arizona federal court. Again, the insurer (Travelers) won at the district court level on the issue of stacking (by way of a motion for summary judgment), but faced the prospect of arguing this issue in the Ninth Circuit Court of Appeals which encompasses both California and Arizona. This meant that Travelers had to deal with the precedent of Karen Kane and, by connection, A.B.S. Clothing.

On this go-round, the Ninth Circuit accepted the insurer's argument on the issue of stacking. Though there were a combination of factors which probably led to the Ninth Circuit's differentiation between the Superstition Crushing matter and the former Karen Kane case, Travelers was able to point out to the Ninth Circuit the trend in recent years to find against the "stacking" argument. The cases Travelers relied on very clearly demonstrated that in the years since A.B.S. Clothing was decided, the courts have, for the most part, adhered to the language of the policy and have provided the insured with that which was bargained for, one limit of liability for each fidelity loss it discovers. The cases cited to the court by Travelers included:

1. Wausau Business Insurance Co. v. U.S. Motels Management, Inc. (11)

In this case, the Colorado district court was considering an embezzlement loss over two consecutive policy periods under a commercial crime policy similar to that in the Superstition Crushing matter. In considering a "loss sustained during prior insurance" clause similar to the one contained in Superstition Crushing, the court stated:
   The intent of this provision could not
   be clearer. As to any loss extending
   beyond the policy period, the most
   plaintiff [insurer] agreed to pay was
   "the larger of the amount recoverable
   under this insurance or the prior
   insurance," in this case, the policy
   limits of $100,000 per occurrence. (12)

2. Diamond Transp. Sys. Inc. v. Travelers Indemnity Co. (13)

Herein, the insured sustained an embezzlement loss over three successive policy periods, with each policy period having a $250,000 limit of liability. The district court in Illinois held that the insured was entitled to but one limit of liability citing to language similar to that contained in the "loss sustained during prior insurance" clause in the Superstition Crushing matter. The court did this despite its holding that the coverage "which the parties maintained over the years occurred through a series of individual one year contracts, rather than a single, continuous bond," thereby effectively rejecting the A.B.S. Clothing analysis. (14)

3. Madison Materials, Inc. v. St. Paul Fire and Marine Insurance Co. (15)

In this matter, the Fifth Circuit held that a provision similar to the "loss sustained during prior insurance" clause in the Superstition Crushing rendered the insurer "only liable for one policy limit if a single occurrence spans multiple policy periods or is covered by a prior insurance policy." (16)

4. Reliance Insurance Co. v. Treasure Coast Travel Agency. Inc. (17)

The Policy in this case had a "cumulation" clause which stated:
   Regardless of the number of years
   this insurance remains in force or the
   number of premiums paid, no limit of
   insurance cumulates from year to year
   or period to period. (18)

The court held that the foregoing, when read in conjunction with a "loss sustained during prior insurance" clause similar to the one in the Superstition Crushing matter, restricted the insured's recovery to one limit of liability.

5. Reliance Insurance Co. v. IRP, Inc. (19)

As far as can be discerned, the exact same policy form at issue in Superstition Crushing was determined by this Pennsylvania state court to be unambiguous and provide but one limit of liability.

6. Shared Interest Management, Inc. v. CNA Financial Insurance Group (20)

This New York state court very simply stated that: "Unambiguous anti-stacking provisions ... of the Crime General Provisions Form would preclude ... double recovery sought by plaintiff:" (21)

7. Bethany Christian Church v. Preferred Risk Mutual Insurance Co. (22)

The district court in Texas held that a series of thefts by one employee were but "a single occurrence" under the policy and therefore found no ambiguity in the definition of "occurrence". (23)

By the time oral argument came around, Travelers had a few more cases to bring to the court's attention. Those cases included:

1. Pinebelt Automotive Inc. v. Royal Indemnity Co. (24)

In this case, the insured contended that the definition of "occurrence" was ambiguous and could mean that multiple acts of theft committed by the same employee constituted different occurrences for purpose of policy coverage. The district court in New Jersey disagreed and stated "[t]he court does not find the term 'occurrence' to be ambiguous as written in the policy." (25)

2. Aldridge Elec., Inc. v. Fidelity & Deposit Co. of Maryland (26)

Herein, a district court in Illinois considered the insured's argument that the definition of the term "occurrence" was ambiguous and conducted a survey of cases from other states wherein that definition was explored in the context of employee dishonesty and fidelity insurance cases. After reviewing the law, the court held that, even though the dishonest employee had utilized two separate and distinct tactics to steal money from the insured, these separate events "constitute a 'series of related acts' as specified by the policy, and therefore constitute a single occurrence." (27)

3. United Ass'n Union Local #290 v. Federal Insurance Co. (28)

In this matter, the insured sought to recover triple its annual policy limits by making claim under three separate consecutive policies for an ongoing investment fraud perpetrated on the insured's ERISA program. In finding that the liability of the insurer was capped for "every loss" involving the dishonest investment advisor, the district court in Oregon held the insurer's interpretation of the term "occurrence" was the only logical choice and it required payment of but one limit of liability. (29)

Since that time, we have found at least one other case going the insurer's way on the stacking issue. (30)

That is not to say that the insured was without arguments. There are still some cases following the A.B.S. Clothing rule, and the insured cited those in its appellate brief. Though the insured relied heavily on Karen Kane, it is obviously derivative of A.B.S. Clothing and therefore cases upon which A.B.S. relied. Cases which have cited the A.B.S. Clothing ruling in finding an ambiguity which leads to stackable policy limits are, however, fewer: Glaser v. Hartford Casualty Insurance Co.; (31) and Spartan Iron & Metal Corp. v. Liberty Insurance Corp. (32)

Of course, Karen Kane had been decided under California law while Superstition Crushing matter was dependent on the law of the State of Arizona. Plaintiff argued aggressively that the law of the Ninth Circuit was the law of the Ninth Circuit and that it did not matter whether the case was from California or Arizona. The insured's logic was simple: The Ninth Circuit had found that a nearly identical policy provision was "ambiguous" on the issue of multiple limits and, therefore, it did not matter whether that policy was issued in California or another state within the Circuit. The plaintiff asserted that the policy could not be "ambiguous" in one state and absolutely clear when you crossed the border into another. This was a challenging argument, however, the Ninth Circuit in Superstition Crushing ultimately found that the case had to be decided by Arizona law and that Arizona law would not find the policy ambiguous.

Travelers' position was reinforced by the (then) recent Arizona Supreme Court case entitled Employers Mutual Casualty, Co. v. DGG & Car, Inc. (33) In this case, the Arizona Supreme Court dealt with a separate but related issue concerning fidelity coverage and a similar, but not identical, policy. In the Employers Mutual case, the insured was arguing that each theft engineered by an employee was a separate "occurrence" under the policy and that the insured was therefore entitled to a limit of liability for each of those separate thefts, even though they comprised one scheme and were attributable to one employee. (34) In Employers Mutual, the Arizona Supreme Court rejected the insured's argument and found that the series of thefts constituted but one act and one "occurrence" for purposes of fidelity coverage. (35) Though the insured in Superstition Crushing did not argue that each separate theft constituted a separate "occurrence," the insured did argue that there was but one "occurrence" and that there was no single limit of liability on an "occurrence," since an "occurrence" could take place over multiple policy periods.

Though the issues were different in Employers Mutual, the Arizona Supreme Court in that case did consider the ruling in A.B.S. Clothing which had been cited to the court by the insured. The insured in Employers Mutual argued that A.B.S. Clothing had already found the definition of "occurrence" to be ambiguous (as did a number of other cases), and therefore that definition could be read consistent with the insured's understanding of coverage. Significantly, the Arizona Supreme Court held that the definition of the term "occurrence" was not ambiguous and ruled in favor of the insurer's position. (Id.) In doing so, it implicitly, though not directly, rejected the California decision of A.B.S. Clothing. Though the Arizona Supreme Court in Employers Mutual effectively distinguished the A.B.S. Clothing case by stating that it was a California case and not binding in the courts of the State of Arizona, the language of the Employers Mutual decision to our mind questions and rejects the A.B.S. Clothing logic and findings.

Armed with the Employers Mutual case, Travelers argued to the Ninth Circuit that the highest pronouncement of the Arizona Supreme Court was contrary to A.B.S. Clothing and that the Arizona Supreme Court had refused to follow the A.B.S. Clothing ruling, albeit in a different context.

The Superstition Crushing appellate panel agreed and held on the issue of the definition of "occurrence" as follows:
   The policy defines an "occurrence"
   as "all loss caused by, or involving,
   one or more 'employees', whether

   the result of a single act or series of
   acts." Examining the structure of
   the policies, we conclude that a new
   policy year does not trigger the
   beginning of a new "occurrence" as
   Superstition claims. Rather, the
   term "occurrence" unambiguously
   can span more than one policy
   period. (36)

Though not specifically rejecting the A.B.S. Clothing analysis, the Superstition Crushing panel agreed in its ruling that the A.B.S. Clothing analysis of the term "occurrence" was not persuasive and, because Karen Kane interpreted California law, it was not binding on a case arising out of the law of the State of Arizona. (37) The insured's argument that what was ambiguous in one state must be ambiguous in another state (and that the Ninth Circuit had already ruled that there was an ambiguity), went without discussion in the Superstition Crushing opinion. However, the court in Superstition Crushing did note that the Employers Mutual case provided support for the fact that Arizona had found different from California on the issue of ambiguity:
   The fact that one employee was guilty
   of multiple embezzlements does not
   mean that there were multiple
   occurrences, because all of her
   embezzlements were part of a single
   "series of acts." Here, there was only
   one occurrence, a series of
   embezzlements by one employee.
   Thus, this interpretation is supported
   by the policy language as a whole, as
   well as by Arizona case law. (38)

It is worthy of note that one final factor weighing in Travelers' favor in the Superstition Crushing case was the prefatory language now contained in the policy forms which make clear that the only exception to the limitation on coverage for losses incurred during the current policy, are those rights given under the "loss sustained during prior insurance" condition, which itself very clearly caps recovery to one limit of liability. In both A.B.S. Clothing and Karen Kane the insured was able to argue that because an insurer provided coverage for prior policy period thefts so long as they were discovered during the current policy period, it must be the intent of the policy that the limits of liability for each of those previous policy periods should also be in play. Travelers pointed out to the Ninth Circuit that the policies in both Karen Kane and A.B.S. Clothing did not, apparently, have the prefatory language in the provision limiting coverage to losses sustained during the policy period which existed in the Superstition Crushing matter. The policy issued to the insured in Superstition Crushing (which is the standard current form) states as follows:
   Subject to the loss sustained
   during prior insurance condition,
   we will pay only for loss that you
   sustain through acts committed or
   events occurring during the policy
   period. (Emphasis added.)

In the "loss sustained during prior insurance" clause in the Superstition Crushing matter, the insurer extended coverage to previous policy period losses discovered by the insured during the current policy period, but clearly stated that this additional coverage was "part of, not in addition to, the limits of insurance applying to this insurance ..." (39) As a consequence, the open-ended nature of the limit of liability for an "occurrence" was closed off by this complimentary language, which language did not appear in the citation to the contract language in either Karen Kane or A.B.S. Clothing. Though this disparity was raised and discussed extensively during the oral argument, the Ninth Circuit in its decision in Superstition Crushing made no mention of this fact in attempting to distinguish A.B.S. Clothing and/or Karen Kane. Again, the Ninth Circuit in Superstition Crushing took the route of least resistance by simply stating that Karen Kane was not controlling. As the court said "we must apply Arizona law. Karen Kane applied California law." (40)

It no doubt assisted Travelers that an amicus curiae brief was filed by the Surety Association of America.


We point out in closing that the Superstition Crushing case is not a published opinion, however, it was the subject of a Petition for Rehearing by the plaintiff/insured which was denied. Though the case is not citable in many courts as precedential authority, the decision does point out the logical and legal inconsistencies of the A.B.S. Clothing decision, and by incorporation, those of the later Karen Kane case. Certainly, the non-publication of the Superstition Crushing case does not limit its use in any analysis on the issue of stacking of coverages and provides good support for the anti-stacking position in any claims handling decision.

(1) 360 Fed.Appx. 844 (9th Cir. 2009).

(2) 34 Cal.App.4th 1470, 41 Cal.Rptr.2d 166 (1995).

(3) See, e.g., White Dairy Co. v. St. Paul Fire and Marine Ins. Co., 222 F. Supp. 1014 (N.D. Ala. 1963); Penalosa Co'op Exch. v. Farmland Mut. Ins., 789 P.2d 1196 (Kan. Ct. App. 1990); Cincinnati Ins. v. Hopkins Sporting Goods, 522 N.W. 2d 837 (Iowa Sup. Ct. 1994); City of Miami Springs v. Travelers Indem. Co., 365 So.2d 1030 (Fla. Dist. Ct. App. 1978); Great American Indem. Co. v. State, 229 S.W.2d 850 (Tex. Civ. App. 1950).

(4) See, e.g., Columbia Hosp. v. United States Fidelity & Guaranty Co., 188 F.2d 654 (D.C. Cir. 1951); Santa Fe General Office Credit Union v. Gilberts, 299 N.E. 2d 65 (Ill. App. Ct. 1973); State ex rel. Juste v. Aetna Casualty & Surety Co., 417 So. 2d 404 (La. Ct. App. 1983); Kavaney Realtor v. Travelers Ins., 501 N.W.2d 335 (N.D. 1993).

(5) A.B.S. Clothing, 34 Cal.App.4th at 1476.

(6) Id. at 1478.

(7) It is important to note that even the A.B.S. Clothing court limited coverage to the limit of liability of the policy which had expired, but in whose "tail" the loss was discovered, plus the limit of liability of the policy in effect when the loss was discovered. Under this analysis, the maximum liability of an insurer issuing several continuous policies was two limits.

(8) Id.

(9) Id. at 1484.

(10) 202 F.3d 1180 (9th Cir. 2000).

(11) 341 F. Supp.2d 1180 (D. Colo. 2004).

(12) Id. at 1184.

(13) 817 F. Supp. 710 (N.D. Ill. 1983).

(14) Id. at 711.

(15) 523 F.3d 541 (5th Cir. 2008).

(16) Id. at 545.

(17) 660 So.2d 1136 (Fla. Dist. Ct. App. 1995).

(18) Id. at 1137.

(19) 904 A.2d 912 (Pa. Super. Ct. 2006).

(20) 283 A.D.2d 136 (N.Y. App. Div. 2001).

(21) Id. at 140.

(22) 942 F. Supp. 330 (S.D.Tex. 1996).

(23) Id. at 335.

(24) No. 06-5995, 2008 WL 4682582 (D. N.J., Oct. 21, 2008).

(25) Id. at *5.

(26) No. 04 C 4021,2008 WL 4287639 (N.D. Ill., Sept. 10, 2008).

(27) Id. at *6.

(28) No. 07-1521, 2008 WL 3523271 (D. Or., August 11, 2008).

(29) Id. at *5.

(30) See Beckley Mechanical, Inc. v. Erie Ins. Property & Casualty Co., No. 09-1549, 2010 WL 1452616 (4th Cir., April 13, 2010). The Fourth Circuit Court of Appeals upheld the district court ruling that the term "occurrence" was not ambiguous. All acts related to one employee were considered "one occurrence" for purposes of coverage and the insured was entitled to but one limit of liability. Id. at *1.

(31) 364 F. Supp.2d 529 (D.Md. 2005).

(32) 6 Fed.Appx. 176 (4th Cir. 2001).

(33) 218 Ar. 262, 183 P.3d 513 (2008).

(34) Id. at 515.

(35) Id. at 517.

(36) Superstition Crushing, 360 Fed.Appx. at 845.

(37) Id. at 847.

(38) Id. at 846 (citing Employers Mutual).

(39) Id.

(40) Id. at 847.

David T. DiBiase is a Managing Partner at Anderson, McPharlin & Conners LLP in Los Angeles, California. Since joining the firm in 1974, Mr. DiBiase has worked in several insurance defense specialties, including fidelity claims and litigation; attorneys professional liability and other errors and omissions defense; directors and officers insurance coverage and defense, and insurance claims practices (bad faith) litigation; real property title insurance and general business litigation. He has presented papers to the Fidelity & Surety Law Committee of the American Bar Association, the International Association of Defense Counsel, the National Bond Claims Association, and the Surety Claims Institute. He is a former chair of the Fidelity and Surety Law Committee of TIPS of the American Bar Association.

Gary J. Valeriano is a Senior Partner at Anderson, McPharlin & Conners LLP in Los Angeles, California. Since joining the firm, Mr. Valeriano has specialized in handling claims and litigation with an emphasis on fidelity and related commercial/financial institution matters', including directors and officers errors and omissions. He has served as an Adjunct Professor of Law at Loyola University School of Law (1985-1987), has lectured on issues involving fidelity insurance, and has authored or coauthored several papers on the topic.
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Title Annotation:homeowners' insurance policy coverage
Author:DiBiase, David T.; Valeriano, Gary J.
Publication:Defense Counsel Journal
Date:Oct 1, 2010
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