Vermont Says ‘Non-Cumulation’ Provisions Not Allowed

The Vermont Department of Financial Regulation (DFR) has issued a bulletin alerting carriers that “non-cumulation” clauses in occurrence-based liability policies are not allowed under Vermont law.

DFR Commissioner Susan L. Donegan said the Vermont Insurance Division has recently seen an increase in the use of non-cumulation policy provisions and endorsements in liability policy filings.

“The purpose of this bulletin is to remind insurers of the Division’s position that such clauses or endorsements in occurrence-based liability policies are not permissible under Vermont law and, therefore, will not be approved,” Donegan said.

Non-cumulation provisions or endorsements seek to limit an insurer’s liability when multiple policies issued by the same company or its affiliates apply to a loss that occurs continuously over successive policy periods.

A typical non-cumulation clause stipulates that if a single claim or several “related” claims — for example, a pollution loss — are filed against an insured for damages occurring over successive policy years, the insurer’s maximum limit of liability under all policies issued to the insured would not exceed the highest limit applicable under any one policy form.

Regulators said such non-cumulation clauses are “problematic” because they are inconsistent with the nature of the coverage granted in an occurrence-based liability policy.

Regulators also said that, despite repeated requests from the Insurance Division, insurers have not been able to demonstrate an actuarial basis for the pricing of policies with non-cumulation clauses or to show that the reduction in coverage is appropriately reflected in the policy cost.

Insurers, however, will still be allowed to use “known loss” exclusions that bar coverage of losses that were known to the policyholder at the time a new or renewal policy is written.