It’s a big enough umbrella, but it’s always me that ends up getting wet.” – Sting (1981)
Here’s a second umbrella” – Montana Supreme Court (2016)

Although the terms are often used interchangeably, there are several key differences between umbrella and excess coverage. One such distinction is that an umbrella policy can apply to multiple underlying policies. This makes it essential to clearly delineate and define the policy’s aggregate limit of liability— the maximum amount of money a carrier will pay above all underlying coverage. If a carrier does not establish a hard ceiling, it might soon find itself flooded in unwanted liability.

In Westchester Surplus Lines Ins. Co. v. Keller Transport, Inc., No. DA 14-0278 (Mont. Jan. 12, 2016), the Montana Supreme Court examined the scope of a carrier’s “general aggregate limit of liability.” A trucking company and its lessor were both insured under a commercial transportation policy issued by Carolina Casualty. The policy provided two distinct coverages: commercial automobile and commercial general liability coverage. The CGL limits of liability were $1 million per “occurrence” and $1 million in the “aggregate,” while the auto coverage limit was $1 million per “occurrence.” Westchester issued an umbrella policy with a $4 million limit per “occurrence” and a $4 million “general aggregate” limit of liability. The policy did not define the term “general aggregate.”

One of the insureds’ trucks overturned and spilled 6,380 gallons of gasoline on several homeowners’ properties. Carolina Casualty began making payments for clean-up expenses and litigation costs and soon exhausted its auto policy limits. The homeowners sued the insureds, and Westchester accepted coverage under the umbrella policy. Once Westchester exhausted its own $4 million limits with litigation and clean-up costs, Carolina Casualty resumed its defense. Carolina Casualty then filed a coverage suit to determine its obligations under the remaining CGL policy. The homeowners not only argued that Carolina Casualty owed $1 million under its CGL policy, but also alleged that Westchester owed an additional $4 million in umbrella coverage despite paying out its $4 million general aggregate limits.

For Westchester, the case turned on its definition (or lack thereof) for “general aggregate” limit of liability. Westchester argued that the term is commonly used in policies and means the maximum that applies to all underlying insurance.

The insureds took a different approach. They relied on the umbrella’s follow-form language, which states that coverage will apply “in like manner” to the underlying insurance coverage. Their argument was novel. First, they noted that the automobile coverage referenced “occurrences” and did not say anything about an aggregate limit. Second, they pointed out that the CGL policy referred to an aggregate limit, while the auto policy did not.

If the umbrella insurance was going to apply “in like manner” to the underlying policies, they reasoned, the umbrella’s $4 million “aggregate” limit must apply to the CGL policy and the umbrella policy’s $4 million “occurrence” limit must apply to the auto policy.

Unfortunately for Westchester, the trial court agreed. Westchester was ordered to pay an additional $4 million in coverage after already exhausting its $4 million aggregate limit. The Montana Supreme Court affirmed the decision. Both courts agreed that the “fundamental interpretational problem is caused by Westchester’s failure to define the term ‘general aggregate’ in a policy that provides excess coverage for an underlying policy with more than one coverage and more than one stated limit.” This undefined term, combined with the policy’s follow-form language, thus rendered the policy ambiguous, the Court held.

By relying on “common industry usage” instead of defining the term, Westchester exposed itself to twice as much coverage than it bargained for as a result of a perceived “ambiguity.” While such results are sometimes impossible to avoid given the lengths some courts will go to stretch policy language in favor of coverage, the case is nevertheless a stark reminder of the attention that must be paid to carefully defining such critical policy terms as the general aggregate limit.