“Continuous trigger” cases typically implicate numerous carriers providing coverage over the applicable time period. When one triggered insurer denies coverage, other insurers may step in and fill this gap. The insured, however, may still be damaged by the wrongful denial, since the denial can adversely affect the rest of its insurance program. A damage claim based on this impact was recently accepted in an opinion by Judge Patel of the U.S. District Court for the Northern District of California in Flintkote Co. v. General Accident Assurance Co. of Canada (08.06.08). The Opinion paved the way for a $150 million settlement between the insured, Flintkote, and its insurer, Aviva Insurance Company of Canada, a few months ago.

Flintkote has been sued in hundreds of thousands of asbestos-related tort cases, many of which are still pending. Flintkote has over 200 liability policies issued by some 30 separate insurance companies for the period 1942-1985. It sought coverage from Aviva, successor to the original insurers which issued a primary layer general liability policy to Flintkote for the period 1958-1961. That policy had a $100,000 per occurrence per person limit, but it had no aggregate limit.

The Court held that under the “continuous trigger” theory, Aviva owed a duty to defend and indemnify under the policy as to past and pending claims, as well as future claims. Aviva’s liability for claims overlapped with other policies in effect during periods subsequent to Aviva’s policy period. Aviva refused to cover the claims, but other primary layer insurers stepped in to provide coverage. Eventually, those other insurers exhausted their coverage. Among other claims, Flintkote claimed that it was harmed by the premature exhaustion of this other coverage.

The Court adopted Flintkote’s “premature exhaustion” theory of damages, describing it as “a novel one that apparently has been neither adopted nor rejected by any court,” yet a basic theory of contract damages which followed from “straight-forward application of general principles of contract law.” As the Court explained, “Aviva breaches, additional insurance fills in the gap left by Aviva, the additional insurance is prematurely exhausted and is unavailable to pay on subsequent claims, and therefore, Flintkote is on the hook for liability that would have otherwise been covered and paid by its insurers.” Or, “In other words, when a policy with aggregate limits pays a past claim that it would not otherwise have paid but for Aviva’s breach, the limits of that policy are ‘prematurely exhausted.’ Flintkote is directly harmed insofar as it can no longer rely on the policy with an aggregate limit to cover future claims and is forced to pay the claim on its own.” The Court found Aviva liable for that damage.

While a straightforward application of the proximate cause rule, the “premature exhaustion” theory has interesting implications for future application. It effectively extends the insurer’s liability to sums due on claims that do not actually trigger its own policy. For example, some claims many involve a first exposure which post-dates the insurer’s policy, and would have been covered under later policies but for their premature exhaustion. It could also potentially render the insurer liable for defense costs for future claims arising after its own policy period. To the extent an insurer’s denial pushes claims into later periods, it could also cause damage in the form of the insured’s liability for deductibles, loss adjustment expense, retrospective premiums, or cost under fronting arrangements. It will be interesting to monitor the “premature exhaustion” theory as it finds application in other cases.