Boy I haven’t seen a case addressing a “stub” period for a while.  This is the (unofficial) name used to describe a policy on the risk for at least a full year and then part of a subsequent year.  Think of a policy on the risk for 15 months.  The first 12 months are one policy period.  The next 3 months are the “stub period.” 

Why does this matter?  The question sometimes arises whether the “stub” period is subject to its own limit of liability – the same as the prior 12 month period – or is simply tagged-on to the prior 12 month period.  In other words, the prior 12 month period is now longer, but subject to the same limits.

This issue previously came up a fair amount in the context of claims for asbestos bodily injury and hazardous waste, under decades-old policies, that were often-times issued for three year periods.  The policy would be cancelled early.  Say, after 28 months.  There are now 2 policy periods of 12 months each and a stub period of 4 months.  Does the 4 month stub period gets its own full limit or is the prior 12 month period now 16 months and subject to the same limit? 

The question was particularly acute in O’Reilly Auto Enterprises v. United States Fire Insurance Company, No. 17-3007 (W.D. Mo. Jan. 27, 2020) where the stub period was just 2 months.   

The court in O’Reilly addressed a few asbestos bodily injury coverage issues.  But I’ll discuss just the stub period here.  Admittedly, O’Reilly is not your typical stub period case, as the policy at issue specifically addresses the issue more than in other cases.  But it is still a worthwhile decision for anyone tackling a stub period.

The policy giving rise to the stub period dispute was issued by U.S. Fire from May 22, 1987 to May 22, 1990.  However, it was cancelled effective July 22, 1988.  Thus, it now had a 12 month period from May 22, 1987 to May 22, 1988 and a 2 month stub period from May 22, 1988 to July 22, 1988.

As you can imagine, U.S. Fire argued that the policy provides $2 million in limits.  The insured saw it differently, arguing that the policy was subject to two sets of $2 million limits.

Of significance, the policy contained the following limits of liability provision: “The limits of the insurance apply separately to each consecutive annual period and to any remaining period of less than 12 months, starting with the beginning of the policy period shown in the Declarations, unless the policy period is extended after issuance for an additional period of less than 12 months. In that case, the additional period will be deemed part of the last preceding period for purposes of determining the Limits of Insurance.”

Also relevant, the endorsement that cancelled the policy – Endorsement 29 -- provided as follows: “IT IS AGREED THAT THE EFFECTIVE DATE OF CANCELLATION IS AMENDED TO JULY 22, 1988.  IT IS FURTHER AGREED THAT THE TERMS AND CONDITIONS FOR THE POLICY PERIOD MAY 22, 1987 TO MAY 22, 1988 ARE EXTENDED TO JULY 22, 1988.”

Reading these provisions together, the court was left with two questions: “[D]oes Endorsement 29 result in a ‘remaining period of less than 12 months,’ which would provide a separate $2 million in coverage, or does it result in ‘an additional period of less than 12 months,’ which would provide no additional coverage?”

The court examined the circumstances, the little there was, surrounding the issuance of Endorsement 29.  That didn’t resolve the ambiguity.  So you don’t need me to tell you what the court’s decision was.