Insurance policies are traditionally sold for one year policy periods, or perhaps for three year policy periods. Occasionally, however, a policyholder gets a short-term extension of the policy period, for a period of a few weeks or a few months. For example, if an insurer notifies a policyholder that the insurer does not plan to renew coverage, the policyholder may ask for an extension of coverage for a few months to allow time to find new coverage. These short-term policy extensions are known as “stub policies.”
The additional coverage period is typically provided in an endorsement, which usually provides that in exchange for an additional premium, the policy period is amended to expire at a later date. Often, the endorsement provides: “All other terms and conditions remain the same.”
An interesting issue can arise if an occurrence takes place during this short extension of the policy period. For example, suppose the policy provided $1 million in coverage limits for a one-year policy period, and the endorsement provided for an additional three months of coverage. If an occurrence takes place during the three month extension, is the policyholder entitled to a full $1 million in coverage, or is the policyholder limited to a pro-rated amount of coverage, in this instance one fourth of the limit? Or is the stub endorsement merely an extension of the policy period, with no additional limits?
Most courts addressing this issue have concluded that stub policies provide another full limit of coverage for the additional time period. These courts reason that if the insurance company wanted to restrict the limits available for the extension period, the insurance company should have made that clear in the endorsement.(1) Because most endorsements simply provide that “all other terms and conditions remain the same,” most courts conclude that the limits are unrestricted, and another full limit applies to the extension period.
Courts also focus on the fact that the policyholder typically pays a pro-rated premium for the short extension of coverage. In exchange for the reduced premium, the insurer receives a reduction in the amount of time it is on the risk. The reduction in the time on the risk, however, does not reduce the limits of coverage the policyholder is entitled to receive.(2)
At least one court has concluded that the policyholder is entitled to only a pro-rated limit of coverage. The court concluded that because the policy period had been extended for only one month, the policyholder was entitled to only 1/12 of the limit of coverage.(3)
Policyholders and insurers can all learn valuable lessons from these court rulings. Insurance companies should be precise when drafting policy language. If the insurance company intends for the stub endorsement to provide no additional limits, or only pro-rated limits, the language in the stub endorsement should say so.
The lesson for policyholders is to be aware that stub policies may be extremely valuable. At the very least, the extension of coverage should provide an additional prorated limit of coverage. But most courts will find much more than that. Most will conclude that the short extension of time will provide an additional full year’s work of coverage limits. In one case, a two-week long extension in the policy period was worth an additional $10 million in coverage.(4)
(1) See, e.g., Cadet Manufacturing Co. v. American Ins. Co., 391 F. Supp. 2d 884 (W.D. Wash. 2005).
(2) See, e.g., Cadet Manufacturing Co. v. American Ins. Co., 391 F. Supp. 2d 884 (W.D. Wash. 2005).
(3) Sybron Transition Corp. v. Security Ins. of Hartford, 258 F. 3d 595 (7th Cir. 2001).
(4) United States Mineral Products v. American Ins. Co., 348 N.J. Super. 526 (2002)